Moody's downgrades sub-debt ratings of three top local banks
Trend of governments imposing losses on holders behind move
Moody’s Investors Service has downgraded the subordinated debt ratings of three banks after reassessing the likelihood of government support for this debt class.
“Our downgrade reflects the increasing international trend of imposing losses on holders of sub-debt securities (creditor ‘bail-in’) as a precondition for distress banks to receive government support,” Jean-Francois Tremblay, an associate managing director, said yesterday.
Two notches were removed of systemic support uplift previously incorporated in the banks’ subordinated debt ratings, concluding a review started on June 3.
The three listed banks are Bangkok Bank, Siam Commercial Bank and Kasikornbank.
Their senior obligation ratings and their standalone baseline credit assessments were not affected.
While the Bank of Thailand has in the past stepped in to assist ailing banks in a way that supported all creditors, the global financial crisis has demonstrated that support can be provided selectively, with the costs being shared with subordinated creditors of a bank, without triggering any contagion as was previously feared, he said.
Thailand has a modern and progressive approach to bank regulation. There is no explicit legal power allowing regulators to selectively impose losses on subordinated debt holders outside of a liquidation process, but the Financial Institution Business Act provides for an ailing bank to be placed under control by the regulatory authorities, with powers to wind it up and/or restructure the ailing bank’s operations.
“In our view, such recourse could be used to coerce sub-debt holders into a distressed exchange, if not for the outright imposition of losses on them outside of liquidation,” he said.
Thus Moody’s assumes that government support would be much less likely.
This rating action relates only to Moody’s view on the potential for systemic support for the banks’ junior securities, it noted.
It does not reflect any change in the banks’ intrinsic credit quality or in the support assumptions for issuer or senior debt ratings.
