Downgrade hybrid bonds
Banks face hit from bond downgrades
By Jennifer Hughes
Published: November 17 2009 18:25 | Last updated: November 17 2009 18:41
Many banks are facing possible multi-notch downgrades to their hybrid bonds following a change in the methodology used by Moody’s Investors Services.
The ratings agency on Tuesday confirmed a new system would take account of a wider range of factors and said it would announce within two days which hybrids would be put on review for downgrade.
In June,
when the changes were first proposed, Moody’s said it expected the changes would leave only a quarter of all hybrids with their ratings intact. Two-fifths would see a downgrade of between one and two notches, and a further quarter would be weakened by three or four notches.
Hybrids have characteristics of equity and debt and were designed to act as a cushion between senior bondholders and shareholders. Their structures had until now allowed the rating agencies to consider them mostly debt while allowing bank regulators to consider them as part of a bank’s equity-based capital cushion and able to absorb losses.
The ratings shift comes as bankers, investors and regulators are deliberating over a new generation of hybrids that might better meet these requirements. Earlier this month, Lloyds Banking Group offered to exchange some of its existing hybrids for
a new contingent convertible product, known as a CoCo bond.
Moody’s system had previously allowed its analysts to assume that any official support given to a bank would also cover subordinated debt. But several subordinated instruments have been allowed to suffer losses during the crisis after regulators and other policymakers made it clear they expected the bondholders to share the pain felt by equity holders in bailed-out banks.
The new system will also take into account country-specific factors such as legislative changes.
As a result, UK bank debt is likely to suffer bigger downgrades because of new laws that, since February, have allowed the government to alter bond terms. In May, it did this on subordinated notes issued by
Bradford & Bingley, the nationalised mortgage lender, by skipping coupon payments.
“This [legislation] could mean UK banks see a relatively harsher treatment of Lower tier two debt than banks in other jurisdictions,” said Gary Jenkins at Evolution Securities.
The new methodology will also result in wider notching between different instruments depending on their exact features, Moody’s said on Tuesday.
Wider ”notching” will also be applied among hybrids, with various issues rated differently depending on certain features,
The news had little effect on current market prices as investors waited to see exactly what would happen to the instruments they hold. Observers said bonds had been generally trading independently of ratings for some time as the effects of the crisis and government actions were felt.
“These existing instruments already traded to a point that reflects the economic liability and not the ratings,” said Sandeep Agarwal, head of financial institutions in the debt capital markets team at Credit Suisse.
Figurati, io avevo già messo BA tra i buoni, tra quelle con cui posso dormire sonni tranquilli...:zzz:
quali perp consigliate in ottica ante e post call cassettista ? ringrazio x eventl aiuto.
(a meno che non ti riferissi all'età :nonno:
perchè mi avevi già chiesto un parere un mese fa. 
