Approximately $450 Billion of hybrid and subordinated debt affected
New York, November 18, 2009 -- Moody's Investors Service has placed under review for possible downgrade the ratings of 775 hybrid and subordinated debt securities issued by 170 bank families in 36 countries following a change to its rating methodology for these instruments. A detailed list of ratings affected is available on the company's website at
http://v3.moodys.com/page/viewresearchdoc.aspx?docid=PBC_121275.
The reviews follow the rating agency's announcement that it has changed the way in which it rates these securities to take into account the fact that some recent government interventions in troubled banks have not helped, and have even been to the detriment of, the holders of these types of securities. For example, in some cases, support packages have been contingent upon a bank's suspension of coupon payments on these instruments as a means to preserve capital.
Prior to the 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 senior creditors.
The new methodology also better captures the potential for losses that can occur in restructurings outside liquidation, such as through coupon suspension, principal write-downs, good bank/bad bank structures, and distressed exchanges. These risks can be exacerbated by the hybrid's features. Therefore, the review of individual securities will take into account various structural features of the instruments. These include whether or not coupon payments can be skipped and under what circumstances, and whether such missed payments are cumulative or non-cumulative.
Moody's anticipates that 40% of the potentially affected hybrid ratings could be lowered by one to two notches, 50% could be lowered three to four notches, and the remainder could be lowered by five or more notches.
As the likely extent and form of government support -- or intervention— is an important part of the analysis, the reviews will incorporate policy differences between countries and the relationships of individual banks with the government. While it is clear that governments and regulators, to the extent contractually and legally possible, may support coupon skips and/or principal write-downs for hybrids issued by troubled banks, the timing of such actions is uncertain, depending on country-specific considerations.
As a result, ratings on one class of securities, junior subordinated debt, are likely to continue to benefit from the uplift of government support -- at least in the near term. This is especially the case for banks in countries such as Japan, where a previous banking crisis has led to a well-defined resolution process and where junior subordinated debt has been supported during a time of financial distress. It is also the case in certain emerging markets, where banks are an important part of the economic development of the country and therefore likely to benefit from high levels of government support.
For banks in the countries or regions particularly hard hit by the crisis, which have enjoyed extraordinary levels of support, we expect junior subordinated debt ratings to be anchored closer to the intrinsic financial strength of the bank as government support gradually diminishes.
The rating agency expects to complete the reviews of individual ratings over the next three months and will announce the outcome of each review as it is completed. Banks with ratings already under review may be excluded from this review, and the changes to their hybrid ratings will be made at the same time the reviews on their other ratings are resolved.
"Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt" is available on moodys.com. In conjunction with the new methodology, the rating agency has also published a Frequently Asked Questions to address some of the issues that were raised during the comment period.
Moody's will be holding teleconferences about the methodology on Thursday 19 November at 12pm Hong Kong/ 1pm Tokyo/ 3pm Sydney time for the Asian markets and at 10am EST/ 3pm GMT for the Americas and Europe. For more information or to register, go to
www.moodys.com/events.