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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.

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