PrefBlog

Standard & Poor’s has announced:

• CIBC has received confirmation from its regulators establishing two rated hybrid issues as nonviable contingent capital (NVCC) instruments.
• We’re lowering our ratings on the two CIBC hybrids to ‘BBB+’ from ‘A-‘, reflecting contingent capital triggers as detailed in our contingent capital criteria (see “Related Criteria And Research”).
• We are affirming our ‘A+/A-1’ counterparty credit ratings on CIBC, and the outlook remains stable.

“The rating action reflects our view that the level of the trigger and the details of the mechanisms for the conversion of NVCCs are critical,” said Standard & Poor’s credit analyst John Bartko. The Canadian regulator’s (Office of the Superintendent of Financial Institutions, or OSFI) confirmation of treatment of these issues as NVCCs required CIBC to renounce its rights to convert the issues into common shares, except in circumstances considered a trigger event under the OSFI’s NVCC Advisory. The formal designation of these preferred shares as NVCC instruments, in conjunction with relevant OSFI guidance, establishes clear expectations as to circumstances in which the issuer would convert these issues to equity.

“In our opinion, because the conversion would occur at the point of nonviability, and not early enough to preempt nonviability, the formal designation of these instruments as NVCC does not in itself reduce the issuer’s default risk,” said Mr. Bartko. “Instruments with this conversion feature are rated one notch below hybrids that do not have the feature because the instruments would, at nonviability, have a lower ranking in the capital structure. If the issuer moves closer to the trigger point, we could lower the rating further to reflect the increased risk relative to other junior instruments in the issuer’s capital structure.”

The third CM issue to receive NVCC status was CM.PR.G (as reported in August), which is not mentioned in the release. I suspect that this is simply a careless oversight which will soon be corrected. There is also no indication as yet as to whether the downgrade will affect the “National Scale” rating of P-1(low).

I’ve been complaining for a long time – most recently in August – about OSFI’s prediliction for a “low-trigger” conversion rule, which they have never deigned to explain, arrogant idiots that they are. Now the low-trigger is having an observable effect. Thank you OSFI!

Update, 2011-9-17: S&P has updated their on-line rating summaries; the downgrade has not affected the P-1(low) rating on the courser “National Scale”.

This entry was posted on Friday, September 16th, 2011 at 2:27 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.