Moody's lowers Singaporean banks' hybrid securities ratings

Moody's Investors Service downgraded its ratings on certain Singaporean banks' hybrid securities in line with its revised guidelines.

Moody's lowered the ratings of Singaporean banks' cumulative junior subordinated debt securities to A1 from Aa2.

Moody's also lowered the ratings of their non-cumulative preferred securities to A3 from Aa3. The banks affected by this rating change include DBS Bank (DBS), Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB).

This concludes the review for possible downgrade that began on 18 November 2009.

The rating outlook for the Singaporean banks remains negative, and all other ratings of the Singaporean banks, including lower Tier II subordinated debt, remain unchanged.

Prior to the global financial crisis, Moody's had incorporated into its ratings an assumption that support provided by national governments and central banks to shore up a troubled bank would, to some extent, benefit the subordinated debt holders as well as the senior creditors.

The systemic support for these instruments has not been forthcoming in many cases. The revised methodology largely removes previous assumptions of systemic support, resulting in today's rating action.

In addition, the revised methodology generally widens the notching on a hybrid's rating that is based on the instrument's features.

The starting point in Moody's revised approach to rating hybrid securities is the Adjusted Baseline Credit Assessment.

The Adjusted BCA reflects the bank's standalone credit strength, including parental and/or cooperative support, if applicable. The Adjusted BCA excludes systemic support.

The Adjusted BCA is Aa3 for DBS, OCBC and UOB. This is the same as the BCA since parental and cooperative support do not apply for these banks.

The following rating actions were taken on the hybrid securities of DBS, OCBC and UOB:

- Junior subordinated debt was downgraded to A1 from Aa2, which is one notch below the Adjusted BCA.

- Non-cumulative preferred securities were downgraded to A3 from Aa3, which is three notches below the Adjusted BCA.

The main features of the hybrid instruments typically issued by the above Moody's-rated Singaporean banks and the way Moody's rates them are as follows:

- Junior subordinated debt securities: The issuing banks may defer interest payments if (i) no dividends were declared or paid on any class of their share capital or Tier 1 capital securities in the preceding financial year, or (ii) the Board of Directors or shareholders vote and decide not to pay dividends to the aforementioned capital securities. Any deferred interest is cumulative. The instruments have a junior subordinated claim in liquidation and rank more senior only to Tier 1 securities and common equity. Moody's generally rates this kind of junior subordinated instruments one notch below an issuer's Adjusted BCA.

- Preferred securities: These are perpetual with a coupon skip mechanism. The issuing banks may skip dividend payments if (i) payment is prohibited under local banking regulations or other requirements of the banking regulator, (ii) payment results in a breach of their regulatory minimum capital requirements, or (iii) payment exceeds the bank's distributable reserves. Unpaid dividends are non-cumulative. In liquidation, these preferred securities rank senior only to common equity. Moody's now generally rates such preferred securities three notches below an issuer's Adjusted BCA, and has lowered these ratings accordingly.

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