Moody's clarifies proposed guidelines for rating preferred stock and hybrids

By Angela McDaniels

Seattle, Dec. 7 - Moody's Investors Service said it published a supplement to a November request for comment on its proposed guidelines for rating non-cumulative preferred stock and hybrid securities with non-cumulative-like features.

The supplement addresses a number of questions offered by market participants concerning the scope of a proposed change to Moody's treatment of some common deferral and settlement mechanisms for hybrid securities including preferred stock, according to an agency news release.

Both the request for comment and the supplement outline a proposal for rating non-cumulative preferred stock below cumulative preferred stock and a proposal by Moody's to apply a similar approach to the ratings of other types of hybrid securities with non-cumulative-like features.

"The new document clarifies that the proposal draws no distinction between financial institutions and corporate issuers, or between so-called tier I and tier II capital securities," Jerome Fons, Moody's managing director for credit policy, said in the release.

"The paper also explains that the proposal extends only to omission or deferral risk and does not represent a change in Moody's notching policy for subordination."

He said the document, "Supplemental Comments on Rating Preferred Stock and Hybrid Securities," cites examples of common hybrid settlement mechanisms and notes how these are typically categorized along the "No Ongoing Payment" ranking assigned by Moody's New Instrument Committee.

Instruments ranked as either "moderate" or "strong" with respect to "No Ongoing Payments" would be subject to the proposed notching guidelines. An exception is proposed for certain hybrid securities featuring an alternative coupon satisfaction mechanism in which settlement occurs within one year.

Comments may be submitted to cpc@moodys.com through Dec. 31.

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