PrefBlog

DBRS has announced that it:

has today downgraded three convertible Non-Cumulative Class A Preferred Shares, Series 26, 27 and 29 of Canadian Imperial Bank of Commerce (CIBC) to Pfd-2 from Pfd-1 (low). The Under Review with Negative Implications status has been removed and the trends are Stable. This action follows the release earlier today of the updated “DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities.”

DBRS had placed the Series 26, 27 and 29 preferred shares, which at the time were convertible to common equity at the issuer’s option, Under Review with Negative Implications on August 17, 2011. Subsequently, CIBC irrevocably passed control of the trigger to the Office of the Superintendent of Financial Institutions (OSFI) to be used only for a non-viability event under OSFI’s capital guidelines. As a result, OSFI confirmed the three series as non-viability contingent capital (NVCC) qualifying instruments.

Under the updated criteria, DBRS has determined that the OSFI NVCC trigger represents a very remote conversion probability and consequently DBRS has rated these instruments Pfd-2, which is the equivalent of four notches below CIBC’s intrinsic assessment of AA (low).

This action does not reflect any change in DBRS’s view of CIBC’s credit profile and is not related to any issuer-specific credit events.

Other rating actions taken today as a result of the criteria update are being published separately.

DBRS has published the DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities:

a) Notching for Preferred Securities Relative to Intrinsic Assessment

Preferred shares are equity instruments that typically pay fixed dividends or floating rate dividends linked to certain index rates. These instruments generally rank above common equity and below the various forms of sub-debt. As preferred dividends have to be approved by the Board of Directors for each payment period, preferred dividends can be halted without resulting in a default on a bank’s debt. Typically, such a halt in dividends has to be preceded by a halt in payment of dividends on common equity.

Certain hybrid instruments can be converted to preferred shares under certain conditions. Typically, these conditions are specified to occur when a bank is under significant stress and its capital position has weakened severely. DBRS treats these instruments like preferred shares in terms of notching.

As preferred shares are equity, various governments during the current crisis have acted to have banks that are under some stress exchange these instruments to bolster their common equity. In some cases, this step has been accomplished through voluntary exchanges. In other cases, banks have engaged in forced exchanges, which DBRS considers tantamount to default. In some cases, preferred shares have been wiped out. This process has helped to bolster these banks’ common equity and helped them avoid being put into receivership. Thus, while senior debt and even subordinated debt have continued to pay as agreed, preferred shares have been subject to greater risk of default. Accordingly, preferred shares and instruments that convert to preferreds are notched from the IA and the notching is wider than for sub debt. Reflecting this increased risk, preferreds are notched by three notches from a bank’s intrinsic assessment.

While the base notching as discussed above is the starting point for rating bank preferred shares, DBRS policy permits wider notching than this base notching to reflect any unique characteristics of individual banks. Various factors may be considered. Notching could be increased by a weaker capital structure, including a higher proportion of preferred shares. Actions taken to reduce or halt common dividends (recognizing that these actions are the first buffer) could also increase notching. Other unique stresses within the domestic financial system, such as expected actions by external parties (regulators, governments) could also add notches.

b) Higher Risk of Nonpayment or Loss on Bank Preferreds Compared to Corporate Preferreds

Compared to other corporate issuers, banks are highly leveraged and may face greater losses relative to the size of their capital bases. Banks therefore may more readily resort to actions to generate common equity; including halting preferred dividends combined with exchange offers. In some cases, regulators or government authorities may require banks to take adverse action against preferreds as a condition of receiving support. Differences in the regimes for resolving distressed banks are also a factor, as these regimes often differ from the bankruptcy laws governing distressed corporates, particularly in giving the resolution authority more powers during resolution. Such actions can include halting preferred dividends or forced exchanges for common shares and/or cash2. Given these differences, DBRS typically notches bank preferred share securities three notches rather than the two notches typically used for non-banking entities.

Due to the NVCC status, S&P downgraded CM.PR.D and CM.PR.E in 2011 (it does not rate CM.PR.G). The action of DBRS in placing the issues on Watch-Negative was reported on PrefBlog.

CM.PR.D, CM.PR.E and CM.PR.G are all tracked by HIMIPref™ all are included in the PerpetualPremium (not DeemedRetractible!) subindex.

This entry was posted on Monday, December 9th, 2013 at 9:05 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.