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What was that again? Moody’s thought hybrids were govt bonds

Posted by fairval on November 17, 2009

Something for our  ‘What was that Again?’ series. This time from the world of rating analysts.

Came across this press release by Moody’s on their proposed new rating method for hybrids. Look at the highlighted portion. Moody’s forgot hydrids had a downside. (I am sure S&P made the same mistakes, so the idea is not to single out Moody’s here).

Sydney, November 17, 2009 — Moody’s Investors Service has published its revised methodology on the way it rates the hybrid securities and subordinated debt instruments issued by banks. The new methodology is in line with changes proposed by the rating agency earlier this year and largely removes previous assumptions of systemic support for these securities. In addition, the ratings will differentiate among hybrid instruments based on certain features that affect the risk to investors.

The ratings of securities potentially affected by this methodology change will be placed under review for possible downgrade and announced via a separate press release within the next two days.

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 and preferred securities.

“In some cases, government bank interventions throughout the crisis have not benefited, and have even hurt the holders of those instruments,” says Moody’s Senior Vice President Barbara Havlicek. “By analyzing the lessons learned from these cases, our ratings will now better capture this risk.”

In addition, support packages have been contingent upon the bank’s suspension of coupon payments on these instruments as a means to preserve capital. Certain types of hybrids have been more at risk for these government and regulatory actions than others because of their features — for example, those that allow for coupon payments to be skipped and on a non-cumulative basis (i.e. they do not need to be repaid in the future).

“While there is uncertainty as to how the various types of hybrids will absorb losses in a given situation, it is clear that hybrids are highly susceptible to losses due to their unique equity-like features,” Moody’s Havlicek says. “Going forward, we expect governments and regulators to focus on the equity-like features of hybrids and, to the extent contractually and legally possible, support coupon skips and/or principal write-downs for hybrids issued by troubled banks.”


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