Oct. 21 (Bloomberg) -- Investors in about $21 billion of hybrid securities issued by Australian banks may risk ratings downgrades because of a new way of assessment, according to Moody’s Investors Service.
The ratings company will release its new method of evaluating hybrid capital by the end of November, after considering responses to a consultation paper in June, it said yesterday. Hybrid securities mingle characteristics of debt and equity.
The new system will reflect a move by regulators to treat hybrid securities as equity-like, making them more vulnerable to losses, the report said. In Australia, the resulting downgrades, which could be of as much as four rungs, may affect A$22.6 billion ($21 billion) of hybrid securities issued by banks and their New Zealand units, Moody’s senior vice-president Patrick Winsbury said in a telephone interview from Sydney today.
Governments around the globe have stepped in to protect depositors and holders of debt securities after the worst global recession since World War II triggered financial company losses of more than $1.6 trillion. Moody’s noted that they haven’t extended the same protection to investors in hybrids.
“What has happened during the crisis is that we’ve seen examples in a number of markets where regulators have started to impose loss on holders of hybrid securities outside of bankruptcy,” Winsbury said. “Obviously, since we’re rating the probability that payments will be made in full and on time, that has a material impact on how we should be viewing these securities.”
Previous Assumptions
“Previously, Moody’s assumption was that at a time of financial distress, the systemic support extended to senior creditors would, at least to some extent, also be extended to hybrid investors,” the ratings company said in a June report. “It is these assumptions that have been challenged in the current market crisis.”
Moody’s anticipates that 40 percent of hybrid ratings would be cut by one to two ratings grades; 25 percent by three or four grades; and 10 percent by five grades or more, the paper said. A quarter would be unchanged.
“We do not expect the overall impact to be large as there is no change to the level of support given to the hybrids,” Commonwealth Bank of Australia spokesman Steve Batten said in a telephone interview from Sydney today. “Most professional investors will already be aware of the proposed changes.”
Commonwealth Bank sold A$2 billion of Perls V hybrid securities on Oct. 15.
Standard & Poor’s spokeswoman Sharon Beach said in a phone interview from Melbourne that she wasn’t aware of any changes to the company’s hybrid ratings criteria, though such criteria are “always under review.”
S&P already assesses the standalone profile of issuers when it has less confidence that the government will provide support, according to its guidelines for hybrid ratings released in September 2008.
To contact the reporter on this story: Sarah McDonald in Sydney at [email protected].
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