Moody's requests comment on proposed guidelines for rating preferred stock, hybrids

By Angela McDaniels

Seattle, Nov. 20 - Moody's Investors Service said it is requesting comments on its proposed guidelines for rating non-cumulative preferred stock and hybrid securities with non-cumulative-like features. If adopted, the new guidelines could affect roughly 300 securities.

The proposal would revise existing notching guidelines to capture the incremental risk given that issuers may omit payments without necessarily triggering bankruptcy or reorganization, according to an agency news release.

"Moody's has traditionally defined credit risk in terms of failure to meet an explicit promise to pay. By factoring in omission risk, we are looking beyond the explicit promise of the contract to investor expectations," Jerome Fons, managing director for credit policy, said in the release.

He said most investors purchase preferred stock and hybrid securities with an expectation that payments will be made on schedule. The risk that issuers may omit payments on these securities without consequences poses an additional risk that is addressed under the revision proposed by Moody's.

The proposed guidelines recommend rating non-cumulative preferred stock and hybrid securities with non-cumulative-like features one notch lower than dictated by existing notching practices.

To identify those hybrid securities with non-cumulative features, the request for comment relies on the classification system developed by Moody's new instruments committee. In particular, hybrid securities classified by Moody's as either "strong" or "moderate," with respect to "no ongoing payments," would be subject to the revised notching guidelines.

An exception is being considered for certain hybrid securities featuring an alternative coupon settlement mechanism in which settlement is immediate or within one year, the agency said.

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

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