{"id":7614,"date":"2009-08-21T19:45:42","date_gmt":"2009-08-21T23:45:42","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=7614"},"modified":"2009-08-21T19:45:42","modified_gmt":"2009-08-21T23:45:42","slug":"dbrs-updates-debtequity-weighting-for-non-financial-preferreds","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=7614","title":{"rendered":"DBRS Updates Debt\/Equity Weighting for Non-Financial Preferreds"},"content":{"rendered":"

DBRS has announced<\/a> that it:<\/p>\n

has today released its updated criteria \u201cPreferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions)\u201d. The publication of this updated criteria is part of DBRS\u2019s ongoing efforts to provide greater transparency as to how DBRS assesses the \u201cequity weighting\u201d that is given to a hybrid or preferred security in terms of adjusting certain key ratios. This update has not resulted in any outstanding rating or rating trend changes.<\/p>\n

The criteria includes discussion on: (1) the four factors DBRS considers in assessing equity weighting, (2) an overview of the base requirements that must be dealt with before any equity weighting is considered, (3) a list of High, Medium and Low considerations employed in the assessment, (4) an outline of the six categories of equity weighting used by DBRS, and (5) comments related to ratings on the instruments themselves.<\/p><\/blockquote>\n

The published methodology<\/a> seeks to formalize a methodology for adjusting debt\/equity ratios, etc., when preferreds and other hybrids are in the capital structure.<\/p>\n

(1) Exceptional \u2013 Potential to receive equity treatment of 100% It is exceptionally diffi cult for a security to totally replicate the strengths of common equity and receive completely equal status. Practically, however, DBRS would consider certain preferred share securities to be very close to common equity based on consideration of the four key factors. While common equity is still preferable, the gap is narrow enough that it is not necessary to differentiate these preferred shares from 100% equity treatment under limited circumstances. All things being equal, DBRS views preferred shares as preferable to a debt hybrid.
\nEXAMPLES
\n\u2022 Perpetual Non-Cumulative Preferred Shares
\n\u2022 Preferred Shares with mandatory conversion to Common Equity < three years\n\u2022 Traditional Preferred Shares where no call\/redemption concerns exist
…<\/b>
(4) Medium \u2013 Potential for equity treatment of 50%. Equity treatment at this level is very common for debt hybrids as there is more fl exibility in the P, L, S and I considerations, so the Hybrid is viewed as equally debt- and equity-like. Some hybrid instruments that only just miss meeting the standards necessary for 65% will by defi nition be relegated to this 50% level for equity treatment.
\nEXAMPLES
\n\u2022 30-year Subordinate Debt with the ability to defer payments for at least fi ve years, a best-efforts capital replacement covenant, the ability to repay principal with a fi xed amount of common shares and written goals to use best efforts to sell common equity to deal with any deferred interest.
\n\u2022 Five-year Subordinate Debt with a mandatory conversion to common equity at maturity and the ability to either defer or pay interest in common equity through the life of the instrument.
\n\u2022 50-year Subordinate Debt with the ability to repay interest and principal with common equity and a
\nbest-efforts capital replacement covenant.
…<\/b>
Relationship between rating and equity weighting There is no direct correlation between the rating of a hybrid instrument and the level of equity weighting that it is assigned. This is because DBRS views the embedded terms within a hybrid as non-credit risks and does not penalize the rating of the hybrid for such. By defi nition, hybrids are instruments that combine certain characteristics of debt and equity, yet these characteristics do not normally cause any change in the likelihood of default. Investors should be aware that these covenants could lead to a variety of scenarios that have an impact on performance and add risk outside of credit, but DBRS does not see these considerations as part of credit risk and, as such, DBRS ratings are not affected by hybrid covenants and provide no opinion on them. As such, hybrids and preferred share instruments will be rated based on notching from the Issuer Rating (or if none, the senior debt rating) of the Company. Notching reflects ranking, subordination and default considerations.<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"

DBRS has announced that it: has today released its updated criteria \u201cPreferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions)\u201d. The publication of this updated criteria is part of DBRS\u2019s ongoing efforts to …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[16],"tags":[],"class_list":["post-7614","post","type-post","status-publish","format-standard","hentry","category-miscellaneous-news"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/7614","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=7614"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/7614\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=7614"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=7614"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=7614"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}