Moody's Contemplates Downgrading Bank Prefs / IT1C / Sub-Debt

Moody’s has announced:

In Canada, proposed changes to the methodology used by Moody’s Investors Service to rate bank subordinated capital (i.e., subordinated debt, preferred shares, and other hybrid securities) could lead to ratings being lowered by an average of two to three notches on $65 billion of rated instruments.
Neither bank financial strength nor deposit ratings would change as a result of implementing Moody’s bank subordinated capital ratings proposal, the rating agency said. “These potential rating actions do not reflect on the underlying financial strength of the Canadian banking system, which Moody’s views as one of the soundest globally,” said Moody’s Senior Vice President, Peter Routledge. “Rather, they would capture the risk that subordinated capital generally does not benefit from systemic support and take into consideration the risk posed by each instrument’s features.”

Before the current financial crisis, Moody’s had assumed that any support provided by national governments and central banks to shore up a troubled bank and restore investor confidence would not just benefit the bank’s senior creditors but, at least to some extent, investors in its subordinated capital.

The rating agency notes that with recent government interventions oustide Canada, investors in certain types of subordinated capital have been left to absorb losses. In some cases, support packages have been contingent upon the banks’ suspension of coupon payments on these instruments as a means to preserve capital.

In other words, this is the same rationale as that used by DBRS when it mass-downgraded bank preferreds and IT1C.

2 Responses to “Moody's Contemplates Downgrading Bank Prefs / IT1C / Sub-Debt”

  1. […] this year Moody’s, DBRS and S&P downgraded bank hybrids on fears that exactly this would happen: that banks […]

  2. […] There does not appear to be a press release or notice on the Moody’s website yet … all I found was a July 28 press release saying that they expected to finalized the methodology in September, which was part of the same story reported on PrefBlog in June. […]

Leave a Reply

You must be logged in to post a comment.