Moody’s Seen Playing Catch-Up With Plans to Change CoCo Ratings

Moody’s Investors Service is seeking to grade a wider range of bank capital securities to catch up with competitors rating bonds designed to absorb losses in a crisis.

Moody’s is asking investors to comment on a proposed framework for grading high-trigger contingent capital bonds, the second time it has sought to revise the way it rates CoCos. The New York-based company changed its methodology last year to allow it to rate certain types of CoCos after saying in 2010 it probably wouldn’t rate the securities at all.

CoCos, which are designed to impose losses on holders rather than taxpayers, convert to equity or are written off if the issuing bank’s capital falls below a preset amount. European regulators last year agreed the terms on how the most-junior Tier 1 securities should be structured, prompting issuance in that market to soar to more than $30 billion, with Moody’s rating about one-sixth of that volume, according to data compiled by Bloomberg.

“Moody’s are playing catch-up, they’re behind the curve on this,” said Mark Holman, chief executive officer of TwentyFour Asset Management LLP in London, which oversees about $3.9 billion of fixed-income assets. “Not rating these is costing them money.”

CoCo bonds typically take losses when capital as a percentage of risk-weighted assets falls to 5.125 percent or 7 percent for high-trigger notes. Additional Tier 1 bonds, the fastest-growing and riskiest segment of the market, can also suspend coupon payments if capital buffers are breached before triggers are reached.

Moody’s spokeswoman Kirsten Knight wasn’t immediately able to comment on the proposed methodology changes.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net Jennifer Joan Lee, Michael Shanahan

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