12.02
Moody’s recently announced it has adopted a revised methodology for rating hybrid securities and subordinated debt instruments issued by banks. The new methodology essentially removes any systemic support uplift to the credit rating of bank tier 2 and tier 1 capital securities. As a result, hybrid securities issued by banks worldwide could be at risk of wider notching to senior debt ratings. Moody’s expects that ratings on 40% of hybrids will be lowered by 1 to 2 notches, 50% by 3 to 4 notches and the remaining 10% by 5 or more notches. RBC CM estimates that Great-West faces between $0.16 and $0.23 in EPS hits due to rating downgrades on hybrid securities by the end of Q1/10. RBC CM has lowered its Q1/10 EPS estimate by $0.20 to reflect the negative impact from downgrades, although a portion of it could be realized earlier. Excluded from RBC CM’s analysis are securities already in non-investment grade status as we assume that large provisions would already be in place, and any incremental downgrade impact would have a minimal impact on reserves.
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