Moody's warns on Additional Tier 1 risks

By Aimee Donnellan

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 (LSE: BARC.L - news) and BBVA (Amsterdam: BBV.AS - news) last year.

NEW APPROACH

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 the norm.

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 (TLO: ACA.TI - news) 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.