Approximately GBP20 billion of securities affected
London, 11 February 2010 -- Moody's Investors Service concluded its review on the ratings of certain
UK hybrid securities, in line with its revised "Guidelines
for Rating Bank Hybrids and Subordinated Debt" published in November
2009. This resulted primarily in a number of downgrades for hybrid
securities ratings of UK banks, thus concluding the review for possible
downgrade that began on November 18th, 2009. A full list
of the individual securities affected can be accessed through this link:
http://v3.moodys.com/page/viewresearchdoc.aspx?docid=PBC_123179
Prior to the global financial crisis, Moody's had incorporated into
its ratings an assumption that support provided by national governments
and central banks to shore up a troubled bank would, to some extent,
benefit the subordinated debt holders as well as the senior creditors.
Contrary to this expectation -- and to the past behavior of most
governments - the systemic support for these instruments has not
been forthcoming in many cases during this crisis. In the UK this
change in assumptions was already reflected in the removal of systemic
support from subordinated and hybrid instruments from UK bank ratings
in April 2009. This followed the introduction of the 2009 Banking
Act in February 2009, which provided broad powers for allowing losses
to be absorbed by hybrid debt holders through a good bank/ bad bank structure.
The revised hybrid ratings guidelines that were published in November
2009 further widen the possible notching on a hybrid's rating that
is based on the instrument's features.
RATING ACTION IN DETAIL
The starting point in Moody's revised approach to rating hybrid
securities is the Adjusted Baseline Credit Assessment (Adjusted BCA).
The Adjusted BCA reflects the bank's standalone credit strength,
including parental and/or cooperative support, if applicable.
The Adjusted BCA excludes systemic support.
The characteristics of UK junior subordinated debt instruments and non-cumulative
preference shares are as follows:
• The junior subordinated debt is perpetual, ranks subordinated
to senior debt in liquidation and allows the issuer to optionally defer
coupon payments subject to a dividend pusher language. There is
also mandatory deferral tied to the breach of solvency triggers,
which is considered a "weak" trigger as it is unlikely to
occur outside of a winding up of the institution. Any deferred
interest is cumulative. For the UK, unless stated otherwise,
junior subordinated debt instruments are rated at the Adjusted BCA level
minus two notches. The additional notch reflects the junior subordinated
claim as well as the risk of a missed coupon payment and the timeliness
of payments, even if accumulated coupons are repaid.
• The loss absorption for non-cumulative preferred securities
while the issuer remains a going concern primarily stems from the non-cumulative
coupon skip feature, which is mandatory upon breach of minimum regulatory
capital requirements or generally upon regulatory intervention,
or at the option of the issuer if no dividends are paid. Together
with their deeply subordinated claim in liquidation, this means
that, unless stated otherwise, these instruments are rated
to the standard Adjusted BCA minus three notches. Similar to junior
subordinated debt, these instruments are also exposed to principal
losses in a going concern scenario, which is captured in the three
notches.
• Similar to preference shares above, Permanent Interest Bearing
Shares (PIBS) in this rating action are perpetual non-cumulative
instruments issued by building societies and are at the bottom of the
capital structure. Their coupon skip mechanism is mandatory with
respect to regulatory capital adequacy requirements and optional if interest
or dividend payments on share investments have not been made. Their
loss absorption is similar to non-cumulative preference shares
for banks explained above; therefore they are also rated at Adjusted
BCA minus three notches.
The rating actions on each UK banks and building societies are detailed
below:
1) Barclays Bank Plc
The Adjusted BCA for Barclays Bank is A3, which is the same level
as its unadjusted BCA.
The following securities issued by Barclays Bank were affected by this
rating action:
• Junior subordinated debt and junior subordinated EMTN programme
ratings (Upper Tier 2) downgraded to Baa2 from Baa1
• Non-cumulative preferred securities downgraded to Baa3 from
Baa2
The outlook for all the affected instruments is negative, in line
with the negative outlook for Barclays Bank's C BFSR and corresponding
A3 BCA.
2) HSBC Holdings Plc
The Adjusted BCA for HSBC Holdings Plc is Aa3, which is the same
level as its unadjusted BCA.
The following securities issued by HSBC Holdings Plc were affected by
this rating action:
• Non-cumulative preferred securities (Tier 1) downgraded
to A3 from A1/A2
The outlook for all the affected instruments is negative, in line
with the negative outlook for HSBC Holdings Plc's Aa3 BCA
3) HSBC Bank Plc
The Adjusted BCA for HSBC Bank Plc is A1, which is one notch above
its unadjusted BCA of A2.
The following securities issued by HSBC Bank Plc were affected by this
rating action:
• Junior subordinated debt (Upper Tier 2) downgraded to A3 from A2,
• Non-cumulative preferred securities (Tier 1) downgraded
to Baa1
The outlook for all the affected instruments is negative, in line
with the negative outlook for HSBC Bank Plc's C+ BFSR and corresponding
A2 BCA
4) Nationwide Building Society
The Adjusted BCA for Nationwide is Baa2, which is the same level
as its unadjusted BCA.
The following securities issued by Nationwide were affected by this rating
action:
• PIBS rating was downgraded to Ba2 from Ba1.
The outlook for all the affected instruments is negative, in line
with the negative outlook for Nationwide Building Society's C-
BFSR and the corresponding Baa2 BCA.
5) Skipton Building Society
The Adjusted BCA for Skipton is Ba1, which is the same level as
its unadjusted BCA.
The following securities issued by Skipton were affected by this rating
action:
• PIBS rating was downgraded to B1 from Ba3
The outlook for all the affected instruments is negative, in line
with the negative outlook for Skipton Building Society's D+
BFSR and corresponding Ba1 BCA.
6) Coventry Building Society
The Adjusted BCA for Coventry is Baa2, which is the same level as
its unadjusted BCA.
The following securities issued by Coventry were affected by this rating
action:
• PIBS rating was downgraded to Ba2 from Ba1.
The outlook for all the affected instruments is negative, in line
with the negative outlook for Coventry Building Society's C-
BFSR and the corresponding Baa2 BCA.
7) Close Brothers Ltd
The Adjusted BCA for Close Brothers Ltd. is A2, which is
the same level as its unadjusted BCA.
The following securities issued by Close Brothers Ltd. were affected
by this rating action:
• The Junior subordinated EMTN programme rating (Upper Tier 2) was
downgraded to Baa1 from A3.
The outlook for all the affected instruments is negative, in line
with the negative outlook for Close Brothers Ltd. C+ BFSR
and corresponding A2 BCA.
8) The Co-operative Bank
The Adjusted BCA for The Co-operative Bank is Baa3, which
is the same level as its unadjusted BCA. The junior subordinated
debt (Upper Tier 2) of The Co-Operative Bank was upgraded to Ba2
from Ba3.
The upgrade reflects Moody's revised notching guidelines for hybrid securities
and in particular for junior subordinated debt with cumulative features
which is now generally positioned two notches below the adjusted BCA.
The outlook for all the affected instruments is stable, in line
with the stable outlook for The Co-Operative Bank's D+
BFSR and corresponding Baa3 BCA.
9) Clydesdale
The Adjusted BCA for Clydesdale is A2, which is the same level as
its unadjusted BCA
The junior subordinated EMTN programme rating (Upper Tier 2) was confirmed
at A3 (negative outlook) as the terms and conditions of the programme
mean that there is no optional deferral right. Therefore the risk
of this instrument is restricted to its subordinated ranking in liquidation.
10) ICICI Bank UK Plc
The Adjusted BCA for ICICI Bank is Baa2, which is three notches
above its unadjusted BCA, reflecting uplift from parental support
The following securities issued by ICICI Bank UK Plc were affected by
this rating action:
• Junior subordinated debt (Upper Tier 2) was upgraded to Ba1 from
Ba2. The upgrade reflects Moody's revised notching guidelines for
hybrid securities and in particular for junior subordinated debt with
cumulative features which is now generally positioned two notches below
the adjusted BCA.
The outlook for the affected rating class instruments is stable,
in line with the stable outlook for ICICI Bank UK Plc's D BFSR and
corresponding Baa2 BCA.
The junior subordinated and Tier 1 debt of RBS and Lloyds are unaffected
by this announcement, as we have already taken rating actions to
incorporate the expected coupon skip on certain instruments following
the European Commission requirement to defer coupons as a result of State
Aid received (May Pay securities), and have already applied the
revised methodology to instruments not expected to skip coupons due to
dividend pusher language (Must Pay or potential Must Pay securities).
The principal methodology used in these rating actions was Moody's
Guidelines for Rating Hybrid Securities and Subordinated Debt, published
in November 2009. Other methodologies and factors that may have
been considered in the process of rating this issuer can also be found
in the Rating Methodologies sub-directory on Moody's website.
The last rating action on Barclays Bank Plc was on 1 February 2009,
when Moody's downgraded Barclay's senior debt ratings to Aa3
(with stable outlook) and BFSR to C (with negative outlook).
Barclays is headquartered in London, UK. At 30 June 2009
it had total assets of GBP1,545billion.
The last rating actions on HSBC Holdings Plc and HSBC Bank plc were on
9 April 2009, when Moody's downgraded the subordinated debt
ratings of HSBC Holdings Plc to A1 from Aa3 and its hybrid securities
to A2 from A1 (with a negative outlook); in the same rating action
Moody's downgraded HSBC Bank Plc' subordinated debt rating
to A2 from Aa3, and hybrid debt to A3 from A1 (with a negative outlook).
HSBC Holdings is headquartered in London, UK. At 30 June
2009 it had total assets of US$2,422 billion.
The last rating action on Nationwide Building Society was on 14 April
2009, when Moody's downgraded Nationwide's senior debt
ratings to Aa3 (with stable outlook), and its BFSR to C-
(with negative outlook).
Nationwide Building Society is headquartered in UK. At 30 September
2009 it had total assets of US$318billion.
The last rating action on Skipton Building Society was on 14 April 2009,
when Moody's downgraded Skipton's senior debt ratings to Baa1
(with negative outlook), BFSR to D+ (with negative outlook)
and dated subordinated debt to Ba2.
Skipton Building Society is headquartered in UK. At 30 June 2009
it had total assets of US$25billion.
The last rating action on Coventry Building Society was on 14 April 2009,
when Moody's downgraded Coventry's senior debt ratings to
A3 (with negative outlook), and its BFSR to C- (with negative
outlook).
Coventry Building Society is headquartered in UK. At 31 December
2008 it had total assets of US$25billion.
The last rating action on Close Brothers was on 12 May 2009, when
Moody's changed Close Brother's Bank outlook to negative in
view of the increasing pressures on the bank's profitability and
capital, as a result of the credit crunch.
Close Brothers is headquartered in London. At 31 July 2009 it had
total assets of GBP4,005 billion.
The last rating action on The Co-Operative Bank was on 3 August
2009, when Moody's downgraded the bank's BFSR to D+,
following the merger with Britannia Building Society.
The Co-Operative Bank is headquartered in Manchester. At
10 January 2009 it had total assets of GBP14,964 billion.
The last rating action on Clydesdale Bank was on 12 May 2009, when
the bank's senior debt ratings were downgraded to A1 (with negative
outlook), BFSR was downgraded to C- (with stable outlook)
and subordinated debt ratings were downgraded to A3.
Clydesdale is headquartered in UK. At 30 September 2009 it had
total assets of US$68billion.
The last rating action on ICICI Bank UK Plc was on 3 November 2008,
when Moody's downgraded the bank's senior debt ratings to
Baa2 (with stable outlook), subordinated debt to Baa3 and junior
subordinated debt to Ba2.
ICICI Bank UK Plc is headquartered in London, UK. At 31 March
2009 it had total assets of US$7billion.
Please visit www.moodys.com to access the following documents
for additional information:
Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated
Debt -- November 17, 2009
Frequently Asked Questions: Moody's Guidelines for Rating Bank Hybrid
Securities and Subordinated Debt -- November 17, 2009
London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Elisabeth Rudman
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's concludes its review on hybrid securities ratings in UK
