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Australian bank subordinated debt downgraded

by William Arnold | Sep 10, 2013

Last week, Moody’s downgraded its ratings on subordinated debt (Lower Tier 2 and selected Upper Tier 2) issued by Australian banks. The downgrades were not a surprise and had no impact on the instruments’ pricing. The subordinated debt ratings were previously on review and Moody's is now in line with S&P, essentially removing systemic support uplift from subordinated debt ratings. After the downgrade, Moody's subordinated debt ratings will be 1 notch higher than S&P's in most cases, in line the agencies’ senior unsecured ratings.

Moody’s said "its approach globally (on subordinated bank debt) is now to assume, as a starting point, that no government support would be extended to the subordinated debt holders of a distressed bank, except where particular circumstances justify”. In the case of Australian banks, Moody's concluded that Basel II compliant subordinated debt ratings should appropriately be positioned in line with its regular “global approach”. Moody's also said that "We recognise that Australian bank supervisors have, in the past, acted in a manner to support all bank creditors" and that "the Australian bank regulator does not have the explicit legal power to selectively impose losses on bank creditors outside of liquidation”. "However, the global financial crisis has demonstrated that support can be provided selectively, and bank recapitalisation costs shared with subordinated creditors without triggering any contagion, as was previously feared”.