LONDON, Feb 13 (IFR) - A lack of harmonisation and
transparency is the greatest risk for investors in Additional
Tier 1 bonds in 2014, according to Moody's.
In a research note published on Thursday, the rating agency
said that investors will have to trawl through each bond's
individual documentation to ensure they are fully aware of the
associated credit risks.
"It's very difficult to predict the riskiness of these
instruments," said Johannes Wassenberg, managing director,
banking at Moody's.
"We have gained comfort from low trigger CoCos and we do
think the market is evolving, but until we see a greater
harmonisation of structures and more transparency around
regulatory decisions, we won't be rating higher-trigger Cocos."
Moody's considers the Basel III 5.125% common equity tier 1
(CET1) trigger to be "close enough" to the point of non
viability (PONV) that it can adequately capture its risk by
notching from the Adjusted Baseline Credit Assessment (BCA).
That is used as a proxy to determine PONV.
The rating agency does not, however, rate securities where
the principal loss absorption trigger is above PONV - which
would include the AT1 issues sold by Barclays and BBVA last
Moody's is the only rating agency yet to opine on the risk
profile of these instruments, but it is weighing up the
possibility of rating "high trigger" deals at some point.
This could involve additional considerations such as
distance to the trigger breach - welcome news to bankers and
investors who believe that a higher 7% trigger level will become
Such an approach would probably also benefit regulators who
are keen for troubled banks to be recapitalised without the help
of taxpayer money.
Looking at some of the AT1 bonds that have been sold so far,
though, Moody's misgivings are understandable.
AT1 bonds have been around for less than a year and of the
few banks like BBVA, Banco Popular Espanol, Barclays, Societe
Generale and Credit Agricole that have sold these bonds, none
have gone for the exact same structure - even when they have
been governed by the same regulator.
The problem, bankers say, is that no two lenders are
identical or have the same requirements. That makes any kind of
harmonisation very difficult.
This view is shared by Moody's analysts, who say the reason
for not providing ratings is not because of the more aggressive
elements of AT1 bonds.
"The coupon deferrals aren't the main concern because we
currently rate instruments that have this feature. Our worry is
that these are untested instruments that are designed to absorb
losses and it is still so uncertain how regulators will treat
these instruments in a crisis," said Wassenberg.
One factor that could influence the rating agency's decision
is the introduction of a single supervisor.
"(That) may lead to a more common European approach to
Additional Tier 1 bonds which might make these instruments more
transparent," said Wassenberg.