Sydney, November 17, 2009 -- Moody's Investors Service has published its revised methodology on the way it rates the hybrid securities and subordinated debt instruments issued by banks. The new methodology is in line with changes proposed by the rating agency earlier this year and largely removes previous assumptions of systemic support for these securities. In addition, the ratings will differentiate among hybrid instruments based on certain features that affect the risk to investors. The ratings of securities potentially affected by this methodology change will be placed under review for possible downgrade and announced via a separate press release within the next two days.
Before the current financial crisis, Moody's had assumed that any support provided by national governments and central banks to shore up a troubled bank and restore investor confidence would not just benefit the bank's senior creditors but -- at least to some extent -- investors in its subordinated and preferred securities.
"In some cases, government bank interventions throughout the crisis have not benefited, and have even hurt the holders of those instruments," says Moody's Senior Vice President Barbara Havlicek. "By analyzing the lessons learned from these cases, our ratings will now better capture this risk."
In addition, support packages have been contingent upon the bank's suspension of coupon payments on these instruments as a means to preserve capital. Certain types of hybrids have been more at risk for these government and regulatory actions than others because of their features -- for example, those that allow for coupon payments to be skipped and on a non-cumulative basis (i.e. they do not need to be repaid in the future).
"While there is uncertainty as to how the various types of hybrids will absorb losses in a given situation, it is clear that hybrids are highly susceptible to losses due to their unique equity-like features," Moody's Havlicek says. "Going forward, we expect governments and regulators to focus on the equity-like features of hybrids and, to the extent contractually and legally possible, support coupon skips and/or principal write-downs for hybrids issued by troubled banks."
While Moody's revised methodology provides a broad framework for rating hybrid capital and subordinated debt, the analysis will be complemented by country-specific and case-specific credit considerations.
Moody's proposed changes to its rating methodology in a request for comment published June 17, 2009, and has since received a broad range of comments from investors, intermediaries, issuers and regulators.
"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.
Moody's says it is also looking at the need to revise the equity credit it attributes to hybrids in its capital calculations. As part of this review, greater equity credit may be given for deeply subordinated, non-cumulative instruments while less may be given for hybrids without these features. Moody's intends to issue a Request for Comment on this issue in the coming weeks.
Moody's revised methodology for rating bank hybrids is applicable globally, except for Mexico. This methodology will become applicable in Mexico on 30 November 2009, after a requirement to file new methodologies with local regulators for a period of ten days prior to their effective date has been satisfied.