Two local banks are facing downgrades by debt watcher Moody’s Investor Service, not because of the deterioration in their credit quality, but as a result of a recent change in the rating firm’s methodology when dealing with subordinated debt.
On Monday, Moody’s said it would review for a possible downgrade the long-term peso subordinated debt and long-term peso “backed” subordinated debt (originally issued by Allied Bank) of Philippine National Bank (PNB).
The rating of Rizal Commercial Banking Corp.’s (RCBC) long-term foreign currency subordinated debt was also placed on review.
“Moody’s highlights that the reviews of the banks’ subordinated debt ratings are not in any way related to any deterioration in the affected banks’ fundamental credit quality,” Moody’s said.
Subordinated debt is considered risky for investors because this is paid out only after all other kinds of debt are settled in the event that a bank is liquidated.
“The review takes place in the context of a methodology update that has changed the way Moody’s looks at the probability of support, which has led to several subordinated debt ratings in multiple banking systems being reviewed simultaneously,” it added.
Moody’s said it expects to complete its review within three months.
The firm said the change in its methodology in dealing with subordinated debt was driven by the conclusion that government policy to deal with ailing banks has evolved globally in a way that makes support for bank subordinated debt less probable than before.
“Government policy has evolved towards the adoption of ‘burden sharing’ principles, and gradually away from the automatic bailout of all creditors over the last few years,” said Stephen Long, managing director for Asia Pacific Financial Institutions at Moody’s.
“The willingness of governments and regulators to apply burden sharing principles and their ability to do so without causing contagion have been demonstrated in several recent cases where losses were effectively imposed on creditors along the entire credit hierarchy in order to recapitalize banks,” Long added.
With respect to Asia and particularly the Philippines, Moody’s said regulators had been reluctant to explicitly endorse the burden sharing principles and adopt special resolution powers.