By Andrew Willis
Credit rating agencies continue to apply lessons learned in the credit crunch, with Moody’s (NYSE:MCO) now reviewing $450 billion (U.S.) of bank financings after realizing governments won’t back the paper.
Moody’s announced late Wednesday it would review, and likely downgrade, 775 different issues of hybrid securities and subordinated debt at 170 banks around the world. Canadian banks will be among those being scrutinized.
The credit rating agency woke up to the fact that “some recent government interventions in troubled banks have not helped, and have even been to the detriment of, the holders of these types of securities.”
Going in to the credit crisis of 2008, Moody’s said it assumed government support for troubled banks would benefit hybrid and subordinated debt holders. Instead, investors and the rating agency found out that “in some cases, support packages have been contingent upon a bank's suspension of coupon payments on theseinstruments as a means to preserve capital.”
The credit rating agency anticipates that its review will take several months, and “40% of the potentially affected hybrid ratings could be lowered by one to two notches, 50% could be lowered three to four notches, and the remainder could be lowered by five or more notches.”
While these are substantial downgrades, the news from Moody's was expected, and changed perceptions of the risk that come with hybrid securities are already baked into the price of new issues.