Magazine article American Banker

Fitch Alters Rating System for Preferred Securities

Magazine article American Banker

Fitch Alters Rating System for Preferred Securities

Article excerpt

The deluge of trust-preferred securities issuance has prompted Fitch Investors Service to change its method for rating preferred debt.

To "eliminate investor confusion," the agency said in a press release that it plans to rate all preferred stock securities on the same scale as investment grade and speculative bonds.

Previously, the agency had three separate scales: two for debt securities and one for preferred securities; now it will only use two. The preferred securities could be rated on the same scale as subordinated debt or just one notch lower than senior debt of the same issuer. Previously, preferred stock was rated two notches lower than senior debt.

The change is "pretty powerful," said Robert Grossman, executive vice president in Fitch's asset-backed securities area. "We are eliminating a system that we have had for a long time."

A recent flood of trust securities issuance by banks taking advantage of a tax deduction and raising regulatory capital prompted Fitch to reevaluate its scale system, said Scott O'Donnell, director of financial institutions.

"The risk that investors were taking with trust preferreds was minimal compared to subordinated debt," Mr. O'Donnell said.

Trust-preferred securities are similar to debt securities in that they offer a fixed dividend and a maturity date.

Fitch, however, has opted to view the trust preferred as more equity like.

The lines between debt and equity "have been blended with the lengthening of the maturity (30 years for many of the securities) and lack of the redemption feature," said Mr. …

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