Moody's Investors Service was blasted by Royal Bank of Scotland Group Plc, Dresdner Kleinwort and Societe Generale SA for new criteria that rank Iceland's three biggest banks as better credits than ABN Amro Bank NV.
The top Aaa ratings for Kaupthing Bank hf, Glitnir Banki hf and Landsbanki Islands hf are at odds with the bond market's assessment. Bondholders demand five times higher yield premiums to lend to the Icelandic banks than to ABN Amro, which gets a lower grade of Aa1 from Moody's. Last year, Kaupthing's €23 billion ($30 billion) of bonds lost as much as 11% in value after Fitch Ratings cut the country's credit outlook on concern economic growth and levels of borrowing were unsustainable. „The market will be stupefied,” Tom Jenkins, an analyst at Royal Bank of Scotland in London, said in an interview after publishing a note titled „Moody's Lose The Plot Completely” earlier yesterday. „Creating Aaa rated banks across the board essentially means that there is no risk in investing in financials, and that buying a senior Kaupthing bond, for example, is effectively risk-free. It isn't.” Moody's upgraded the Icelandic banks because of new guidelines that take account of support from governments or parent companies in times of crisis, in an approach termed joint default analysis.
„Buy it, hold it, don't worry about it - the government will bail 'em out - in other words, how to interpret Moody's Joint Default Analysis,” Suki Mann, an analyst at Societe Generale SA in London, wrote in a note yesterday. „It throws the concept of relative value out of the window, and begs the question as to the necessity of rating agencies.” The yield on Kaupthing's 150 million euros of 5.9% bonds with no set maturity fell by a record 22 basis points to 155 basis points over German government bonds, the lowest in a year, according to Royal Bank of Scotland. The spread on ABN Amro's €1 billion of 4.25% notes due 2016 is 27 basis points. Credit-default swaps, contracts based on bonds, also show Icelandic lenders as riskier. The contracts on Kaupthing's debt fell €12,000 to €22,500 yesterday, according to Lehman Brothers Holdings Inc. The price to protect against default by ABN Amro is only €6,000. Credit-default swaps on Glitnir Banki fell €9,000 to €17,500, and those on Landsbanki Islands fell €9,000 to €17,500, according to Lehman.
„There is a struggle in my mind to see the informational value of a Moody's rating of a large bank,” Nigel Myer, an analyst at Dresdner Kleinwort in London, said in an interview. „There's a danger that by removing the ability to meaningfully discriminate between banks, Moody's may actually become less useful to the market.” Moody's, one of three main credit rating companies along with Standard & Poor's and Fitch, now publishes a debt rating that measures how vulnerable a bank is to default, given the support from governments and holding companies. The bank financial strength rating assesses the institution as a standalone business. No major bank operating company has defaulted in Europe for the past half century because when a lender becomes financially stressed, governments typically step in to head off a collapse and resulting damage to the economy. „All of the rating agencies have an appalling record on defaults by banks,” said Antonio Carballo, a Moody's managing director in London responsible for bank ratings. „We're trying to fix a mistake.”
Investors need to look at both the debt rating and the financial strength rating to assess the risk of investing in a bank's bonds, Carballo said. „They cannot be split,” he said. „If you do that you're missing the point.” Kaupthing's financial strength rating is C, two steps lower than ABN Amro's B-. Moody's came in for criticism from banks including Merrill Lynch & Co. and Royal Bank of Scotland earlier this month after it proposed cutting ratings on hybrid securities and then scrapped the idea. Moody's had suggested downgrading as many as 300 hybrid bonds in November because the securities allow borrowers to cancel interest payments without defaulting, making them riskier than regular debt. New York-based Moody's said reaction to its idea had been „largely negative.”
Moody's rolled out its new ratings on February 23 for banks in central and eastern Europe, the Nordic region and in the Benelux countries. Moody's will review the ratings of 120 to 150 banks on a weekly basis for the next seven weeks, including North America, the company said in a statement last week. Hungarian lender OTP Bank Nyrt. in Budapest, which spent almost $3 billion expanding in eastern Europe, was upgraded to Aa1 from A1. Hungary is rated A2, four steps lower than the OTP. OTP's €300 million of 5.27% bonds due 2016 narrowed 14 basis points to 105 basis points over German government debt, according to Royal Bank of Canada. A basis point is 0.01 percentage point.
„This exceeded our expectations,” Glitnir CEO Bjarni Armannsson in Reykjavik said in a press release yesterday. It's „positive for Glitnir and the other Icelandic banks.” Because the bonds of Kaupthing and other Icelandic banks trade at a wider spread to government debt than credits with similar ratings, the new ratings will boost their attraction to so-called collateralized debt obligations, said Simon Adamson, an analyst at CreditSights Inc. in London. CDOs are pools of debt that repackage other debt securities, slicing them into sections with varying degrees of risk. Shares of Moody's Corp. fell as much as 5.8% to $63.51 and were at 63.70 as of 1:25 p.m. in New York. (Bloomberg)