By Aimee Donnellan
LONDON, Feb 13 (IFR) - A lack of harmonisation andtransparency is the greatest risk for investors in AdditionalTier 1 bonds in 2014, according to Moody's.
In a research note published on Thursday, the rating agencysaid that investors will have to trawl through each bond'sindividual documentation to ensure they are fully aware of theassociated credit risks.
"It's very difficult to predict the riskiness of theseinstruments," said Johannes Wassenberg, managing director,banking at Moody's.
"We have gained comfort from low trigger CoCos and we dothink the market is evolving, but until we see a greaterharmonisation of structures and more transparency aroundregulatory decisions, we won't be rating higher-trigger Cocos."
Moody's considers the Basel III 5.125% common equity tier 1(CET1) trigger to be "close enough" to the point of nonviability (PONV) that it can adequately capture its risk bynotching from the Adjusted Baseline Credit Assessment (BCA).That is used as a proxy to determine PONV.
The rating agency does not, however, rate securities wherethe principal loss absorption trigger is above PONV - whichwould include the AT1 issues sold by Barclays and BBVA lastyear.
NEW APPROACH
Moody's is the only rating agency yet to opine on the riskprofile of these instruments, but it is weighing up thepossibility of rating "high trigger" deals at some point.
This could involve additional considerations such asdistance to the trigger breach - welcome news to bankers andinvestors who believe that a higher 7% trigger level will becomethe norm.
Such an approach would probably also benefit regulators whoare keen for troubled banks to be recapitalised without the helpof taxpayer money.
Looking at some of the AT1 bonds that have been sold so far,though, Moody's misgivings are understandable.
AT1 bonds have been around for less than a year and of thefew banks like BBVA, Banco Popular Espanol, Barclays, SocieteGenerale and Credit Agricole that have sold these bonds, nonehave gone for the exact same structure - even when they havebeen governed by the same regulator.
The problem, bankers say, is that no two lenders areidentical or have the same requirements. That makes any kind ofharmonisation very difficult.
This view is shared by Moody's analysts, who say the reasonfor not providing ratings is not because of the more aggressiveelements of AT1 bonds.
"The coupon deferrals aren't the main concern because wecurrently rate instruments that have this feature. Our worry isthat these are untested instruments that are designed to absorblosses and it is still so uncertain how regulators will treatthese instruments in a crisis," said Wassenberg.
One factor that could influence the rating agency's decisionis the introduction of a single supervisor.
"(That) may lead to a more common European approach toAdditional Tier 1 bonds which might make these instruments moretransparent," said Wassenberg.
Barclays (BARC)