PrefBlog

Moody’s Investors Service has announced that it has:

downgraded its ratings on certain Canadian bank hybrid securities, in line with its revised Guidelines for Rating Bank Hybrids and Subordinated Debt published in November 2009. Moody’s downgraded the Canadian banks’ non-cumulative perpetual preferred securities and Innovative Tier 1 and Tier 2A Instruments, with the exception of the Bank of Montreal’s (BMO’s), for which the downgrade occurred in a previous rating action. This concludes the review for possible downgrade that began on November 19, 2009. All other ratings and outlooks for the Canadian banks and their subsidiaries remain unchanged.
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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 holders of bank subordinated capital as well as the senior creditors. The systemic support for these instruments has not been forthcoming in many cases. The revised methodology largely removes previous assumptions of systemic support, resulting in today’s rating action. In addition, the revised methodology generally widens the notching on a bank hybrid’s rating that is based on the instrument’s features.
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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. Moody’s rating action removes systemic support from Canadian bank hybrids and, where applicable, adds an additional rating notch for those instruments with non-cumulative coupon payments.
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RBC’s non-cumulative, perpetual preferred shares were downgraded to A2 from Aa2. These securities have a preferred claim in liquidation and their coupon payments are non-cumulative. Two notches of the downgrade reflect the removal of systemic support, while Moody’s added an additional notch to the downgrade to reflect the non-cumulative coupon payments. Thus, per Moody’s revised methodology for bank hybrids, the rating for these securities is three notches lower than the Adjusted BCA.
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TD’s non-cumulative, perpetual preferred shares were downgraded to A2 from Aa2. Please see the RBC section (non-cumulative preferred shares) for the rationale.
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Scotiabank’s non-cumulative, perpetual preferred shares were downgraded to A3 from Aa3. Please see the RBC section for the rationale.
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NBC’s non-cumulative, perpetual preferred shares were downgraded to Baa1 from A1. Please see the RBC section (non-cumulative preferred shares) for the rationale.
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CIBC’s non-cumulative, perpetual preferred shares were downgraded to Baa1 from A1. Please see the RBC section (non-cumulative preferred shares) for the rationale.
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Of note, Moody’s downgraded the long-term ratings of the Bank of Montreal (BMO) and all its subsidiaries on January 22, 2010. As part of this action, Moody’s completed the review for downgrade of BMO’s hybrid capital instruments. Moody’s downgraded BMO’s preferred stock securities (which include non-cumulative preferred shares and other hybrid capital instruments) four notches to Baa1 from Aa3. The first notch reflected the downgrade of BMO’s unsupported/stand-alone BFSR. The next three notches of the downgrade were a consequence of implementing Moody’s revised methodology for rating bank hybrid securities.

Please visit www.moodys.com to access the following documents for additional information:

Moody’s Special Comment: Canadian Bank Subordinated Capital Ratings — June 2009

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

By way of comparison, Moody’s does not rate MFC, rates SLF preferreds at Baa2 and does not rate GWO, IAG or ELF.

Related posts on PrefBlog are Moody’s Downgrades BMO Prefs 4 Notches to Baa1 and Moody’s May Massacre Hybrid Ratings.

Financial 15 Split II Corp. has announced:

its regular monthly distribution of $0.04375 for each Preferred share ($0.525 annually). Distributions are payable March 10, 2010 to shareholders on record as at February 26, 2010. There will not be a distribution paid to Financial 15 II Class A Shares for February 26, 2010 as per the Prospectus which states no regular monthly dividends or other distributions will be paid on the Class A Shares in any month as long as the net asset value per unit is equal to or less than $15.00. The net asset value as of February 12, 2010 was $14.78.

The capital unit dividend was also suspended from November 2008 to July 2009, inclusive.

FFN.PR.A was last mentioned on PrefBlog when it was upgraded to Pfd-3(low) by DBRS. FFN.PR.A is tracked by HIMIPref™, but is relegate to the Scraps index on credit concerns.

I don’t usually highly rating agency confirmations, but this press release, DBRS Confirms Ratings on Industrial Alliance at “A”, Pfd-2 (high) was sufficiently meaty to warrant wider exposure.

DBRS has today confirmed its ratings on Industrial Alliance Insurance and Financial Services Inc. (IAG or the Company) and its related entities. All ratings have a Stable trend. The ratings reflect the Company’s consistently profitable operations and its sustainable and expanding market presence in the Canadian life insurance and wealth management industries, where it serves the financial planning and protection needs of individuals and groups. The Company’s market position is complemented by a conservative risk culture which has limited IAG’s earnings exposure to equity and credit market volatility through the recent credit/economic crisis.

Capitalization has become more aggressive, in line with that of the industry, with a total debt ratio of 32% at the end of 2009, increasing to 33.2% pro forma a $200 million preferred and common share issue in mid-February. Within the last two years, Canadian life insurance companies have been increasing their financial leverage to better maximize return on equity, while also optimizing regulatory capital in a low interest rate environment. The Company’s adjusted debt ratio, which gives some equity treatment to preferred shares, was 22.6% at year-end, falling to 22% following the February issues, which is within DBRS’s tolerance for the current credit rating. However, the Company’s use of hybrid capital instruments such as preferred shares has increased over the past two years, significantly reducing its fixed-charge coverage ratio, which has fallen from double digits in the pre-2008 period to 6.0 times in 2009, notwithstanding the return to normal profitability. The Company’s regulatory capital ratio, at 208% at the end of 2009, is currently above the top end of the Company’s targeted range of 175% to 200% and will rise further to 226%, pro forma the recent preferred and common share issues. The recent share issues have substantially improved IAG’s financial flexibility should it be required to augment its required capital or to fund another in a long line of acquisitions.

Given the existing conservative actuarial reserves and recent favourable experience in terms of interest rate and equity markets, there were no major net reserve adjustments required in 2009 as a result of changing actuarial assumptions or adverse experience. However, because the Company is more focused on the Canadian individual life insurance market than its peers, including its relatively strong market presence in the universal life market, it remains more exposed to the adverse impact of lower interest rates than its more diversified peers. Similarly, the Company retains a larger on-balance-sheet equity exposure to hedge the long-term liabilities under its life insurance products. A severe economic slowdown resulting in prolonged lower interest rates and equity markets would more seriously affect the Company than its peers, all other things being equal. To mitigate some of this risk, the Company remains very conservative in setting its policy reserves, including a recent reduction in the ultimate reinvestment rate assumption to 20 basis points below the Canadian Institute of Actuaries prescribed standard and relatively high reserves against equity market deterioration. In addition, the Company retains a higher proportion of mortality risk than its peers, rather than reinsuring it, since the long-term improvement in mortality ultimately accrues to the Company’s benefit, given its relatively large block of individual insurance.

The Company’s steady diversification of revenues and income across both product lines and geographical markets, combined with a conservative risk culture, has helped it to return to attractive levels of profitability before many of its larger competitors.

IAG has two Straight issues outstanding, IAG.PR.A and IAG.PR.E; and one FixedReset, IAG.PR.C. They are currently marketting a new issue of 5.90% Straights.