Hybrid securities continue to be reviewed by both rating agencies and regulators.

Moody's Investors Service, New York, announced this week that “hybrid securities will continue to be rated according to existing rating guidelines, with no rating distinction made among cumulative, noncash cumulative and noncumulative obligations.”

The announcement comes even as regulators at the National Association of Insurance Commissioners, Kansas City, Mo., continue to examine work on a proposal being developed by the American Academy of Actuaries, Washington.

The Academy work looks at these instruments from the perspective of an insurer as an investor, not an issuer.

The draft includes questions that ask insurers, among other points, to describe how hybrid securities are managed and whether there are experience studies to “support or quantify the risk associated with each hybrid feature, both in terms of frequency and severity.”

Moody's said that hybrids with a “meaningful mandatory deferral trigger” will be rated one notch lower than indicated by existing guidelines and for no obligation of an investment-grade issuer to be rated more than two notches below the issuer's senior unsecured or issuer rating.

Unless otherwise stated, Moody's said no obligation of a speculative-rated individual issuer will be more than four notches below the issuer's senior rating.

Issuers with unsecured ratings or corporate family ratings of Ba2 or higher will receive the following treatment: senior subordinated, subordinated and junior subordinated debt will be rated one notch below senior unsecured debt; and preferred stock, two notches below senior unsecured debt.

Issuers with senior ratings below Ba2 will receive the following: two notches for subordinated debt; two or three notches for junior subordinated debt; and three or four notches for preferred stock.

Moody's said it proposed a new notching system in November 2006 which called for lowering ratings by one notch on noncumulative preferred stock and other hybrid securities ranked as either “moderate” or “strong” for “no ongoing payments” by Moody's New Instruments Committee.

“Negative” reaction such as a “lack of strong statistical evidence supporting greater notching for noncumulative securities” resulted in the rating agency deciding to keep its notching system “largely unchanged,” Moody's said.

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Hybrids Eyed By Raters And Regulators

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