Moody’s has discussed Rating considerations for contingent capital securities, which has made its way (via Info-Prod Research (Middle East)) to iStockAnalyst under the title Moody’s Publishes Rating Considerations for Bank Contingent Capital Securities:
Moody’s Investors Service said today in anew report that it would rate a contingent capital security that mayconvert into common equity only if it can reasonably assess when thesecurity’s conversion would likely occur. The rating on a bank’scontingent capital security, if it were to be rated, would likely be non-investment-grade, regardless of the bank’s financial strength.
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“We will consider rating bank contingent capital securities that convertinto common equity, but only if their triggers are objective andmeasurable,” said Senior Vice President Barbara Havlicek. In determining whether a trigger is “objective and measurable,” Moody’sanalysis will focus on the definition of the trigger. For financial statement-based triggers, the analysis will include consideration of theaccounting principles used in the preparation of financial statements,the timing and intervals at which the trigger levels are beingdetermined, and the securities laws in a given jurisdiction that couldimpact the quality of financial reporting. Moody’s will not rate any contingent capital security where conversion into common equity is at the option of the issuing bank or is tied to the breach of triggers that are unrelated to the financial health of thebank. Moody’s will also not rate any contingent capital security thatuses a credit rating in a conversion trigger. Additionally, at this time, Moody’s will not rate contingent capital securities where conversion into common equity is subject to thediscretion of regulators or the breach of regulatory capital triggers.
As I’ve said before, using regulatory capital triggers is thoroughly insane. What if the prescribed calculation changes? What if the regulatory minimum rises above the trigger point?
.However, in the future, if clear regulatory rule sets develop that would significantly enhance the predictability of a triggering event, Moody’s may then assign a rating. Any rating Moody’s assigns to a contingent capital security would be no higher than the rating on the issuing bank’s non-cumulative preferredsecurities. The rating on the contingent capital security would also likely be non-investment-grade, regardless of the bank’s financial strength.
[…] DBRS has published its classification of triggers; Moody’s has announced it will not rate contingent capital with a trigger based on regulatory discretion; quite reasonably, they imply that all else being equal, greater certainty will imply a higher […]