Disclosure lacking on Moody's downgrade of bank hybrids

Moody's Investor's Service announced last Wednesday that it had concluded its review of Australian and New Zealand bank hybrid security ratings but the firm's media release made no mention of the rating actions taken, other than to refer interested readers to its website.

Unfortunately, unless you are a paying subscriber to Moody's, no further information was available there.

It seems that Moody's must have taken the view that these rating actions are of interest to retail investors - who have bought most of these issues - and therefore cannot be disclosed under the terms and conditions of its Australian wholesale financial services licence.

However, this does not help retail investors in New Zealand or any other interested party outside of Australia. And just how ASIC thinks Australian retail investors are being helped by being denied this information is anybody's guess.

It would also seem to run counter to the obligation that all rating agencies have, under their Code of Conduct Agreement with IOSCO, to promptly and publicly publish all rating actions. Perhaps an exemption has been obtained for rating actions of interest to Australian retail investors who must be kept in the dark (did anybody say like mushrooms etc.?).

The big banks (which were four of the five affected issuers) took the trouble to publicise these ratings actions for themselves.

With some further digging around we can advise that ratings on the hybrid securities of the big four banks,  have been lowered by three notches to 'A3' from 'Aa3'. This is one notch better than the originally flagged downgrade to 'Baa1'.

We noted in late October last year emerging reports of pending multiple notch downgrades to the ratings assigned to hybrid securities issued by the banks, stemming from a review of methodology initiated in June 2009.

The downgrades would apply to Tier 1 capital instruments such as the PERLS V securities, then just issued by the CBA.

The rationale for the downgrades was that Moody's did not expect the coupon deferral provisions of such securities to be exercised or enforced by regulators.  It was said at the time, that in the case of the CBA PERLS V hybrids, this would be likely to result in a downgrade to 'Baa1' from 'Aa3'.

As for Macquarie, the rating on its converting preference shares was lowered two notches to 'Baa3' - just investment grade. If the rating had gone any lower some institutional investors may have been forced to sell the shares.

ASIC is no doubt relying on the issuers' continuous disclosure obligations to address situations like this but we note that while the big four promptly announced the rating actions to the ASX, no mention was made on their websites. Macquarie did not make any announcement to the ASX.