Debt sold by Citigroup Inc, Goldman Sachs Group Inc and JPMorgan Chase & Co is among the $450 billion of securities that Moody’s Investors Service said it may downgrade.
Some 775 hybrid and subordinated notes issued by 170 “bank families” in 36 countries are on review after Moody’s altered the assumptions it uses to rate the debt, according to an emailed statement from the New York-based risk assessor. Half the hybrids may have their ratings lowered by three to four grades, 40 per cent may be cut by one or two grades and the rest may be lowered five steps or more, Moody’s said.
“The key concern is whether the ratings downgrades trigger investment mandate breaches which could force investors to sell,” said Ben Byrne, a credit analyst at Nomura Australia in Sydney. “We think the majority of the selling has already occurred, given that hybrids have been trading at prices lower than their current ratings suggest are appropriate.”
The reviews come after financial institutions lost more than $1.6 trillion amid the worst global recession since World War II. Moody’s, Standard & Poor’s and Fitch Ratings were criticised by investors and lawmakers including US Senate Banking Committee Chairman Christopher Dodd.
The senator said the companies wrongly assigned top rankings to US subprime-mortgage bonds that sparked a global credit crisis when their value collapsed.
Moody’s has stopped assuming holders of hybrids, which mingle characteristics of debt and equity, would benefit from government support for troubled lenders after the global financial crisis proved that wasn’t the case, the ratings company said.
