Banks led by Royal Bank of Scotland Group Plc and Dresdner Kleinwort derided Moody's Investors Service for raising Iceland's three largest lenders above ABN Amro Bank NV in its rankings, and then signaling an about-face.
Moody's Investors Service on March 9 delayed extending its new rankings to France, Italy and Spain while the New York-based firm considers „refinements” to ratings already assigned in the US, Canada and parts of Europe. Top Aaa scores for Kaupthing Bank hf, Glitnir Banki hf and Landsbanki Islands hf are at odds with the judgment of bondholders, who demand five times higher yield premiums to lend to the Icelandic banks than to ABN Amro.
„Moody's integrity is being damaged perhaps irrevocably” by its „crushingly embarrassing rethink,” Royal Bank of Scotland Group Plc analyst Tom Jenkins in London said in a research note. Dresdner Kleinwort analyst Nigel Myer in London said the „volte face” followed „pressure and ridicule.” „There's a lot of angry people out there,” said Simon Adamson, analyst at CreditSights Inc. in London, which last week dropped Moody's bank ratings from its bond research, calling them „worthless.” „They're trying to get themselves out of the hole they've dug. This has implications for the market, it has real effects.” Moody's is rolling out new bank ratings region by region that take greater account of the support a bank might receive from the government in a crisis. The criteria ranked ABN Amro as Aa1 on February 23, and JPMorgan Chase Bank NA as Aaa March 2.
„I burst out laughing when I heard Kaupthing was Aaa,” said Richard Thomas, an analyst at Merrill Lynch in London. „It's amazing their checks and balances and feedback from the market failed.” Eighty-five percent of respondents in a Merrill Lynch survey last week said Moody's had „lost credibility” because of the new criteria. Benedikt Sigurdsson, a spokesman at Kaupthing in Rekjavik, declined to comment. Bjarni Armannsson, CEO of Glitnir Bank, didn't immediately return calls. „It's like they're telling us the medicine they've sold us for 20 years doesn't work, the new one has unpleasant side-effects and they're going to cook something up in a few days - but it'll be OK,” said Ben Ashby, an analyst at JPMorgan Chase & Co. in London. „How can you have faith in something like that?”
Moody's in its statement said the rethink may affect „a select number of recently upgraded banks,” without being more specific. „What we're trying to do is have the ratings reflect the credit risk,” said Laura Levenstein, senior managing director for Moody's financial institutions group. „It's an overlay of qualitative assessment where the support levels are very high.” The prospect of the Icelandic banks losing their Aaa ratings within two weeks of receiving them is causing „volatility” in their bonds, UniCredit SpA analyst Alexander Plenk in Munich said in a note to investors. The cost of credit-default swaps to protect €10 million ($13 million) of Kaupthing bonds jumped €5,000 today to €35,500, according to Deutsche Bank AG. The contracts used to speculate on the risk of holding Glitnir's debt rose €5,000 to €26,500 and on Landsbanki they rose €4,000 to €26,500.
It's the second time in a month that Moody's has backed off from proposed rating changes because of opposition from banks. Merrill Lynch and Royal Bank of Scotland criticized the firm for confusing bondholders with a proposal to cut ratings on as many as 300 hybrid securities that it then scrapped. Reaction to the idea had been „largely negative,” Moody's said in a statement last month. „Right now there's a low level of trust in Moody's, that's undeniable,” said Jenkins at Royal Bank of Scotland. „There is scope to regain some credibility but this is going to stay on their record for quite some time.” Moody's shares fell as much as 2.1% to $63.46 and were trading at $63.65 as of 10:10 a.m. in New York. „They spent 18 months working on this and two weeks later they have to refine it,” said Myer at Dresdner. „After all that work, we're ending up with a system they're going to spend seven days bodging together.” (Bloomberg)