Twelve GCC banks pending downgrade by Moody’s on the back of subordinated debt instruments (By IFN)

Twelve GCC banks pending downgrade by Moody’s on the back of subordinated debt instruments

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GLOBAL: Arab National Bank, Banque Saudi Fransi, Abu Dhabi Commercial Bank, Emirates NBD, First Gulf Bank, Mashreqbank, Commercial Bank of Qatar, Doha Bank, Qatar National Bank, Burgan Bank, Bank Muscat and BBK are currently on a downgrade review by Moody’s to assess the evolving risk profile their subordinated debt instruments. These banks, which have in the past issued Tier-2 instruments are now being scrutinized in terms of their compliance with the upcoming Basel III requirements. According to Moody’s, up to US$4 billion in securities are affected, while all other ratings and outlooks will remain unchanged. In its report, the ratings agency said: “The recent global and prudential trends towards imposing losses on junior creditors in the context of government support and the implementation of Basel III will require Tier-2 instruments to have ‘loss absorption’ features.” It also added that the rating review will “focus on the risk that local regulators and support providers may impose burden-sharing losses on holders of subordinated debt” and the outcome of the review will determine whether Moody’s will continue to fully incorporate government support into its assumptions for subordinated debt ratings. In December last year, Banque Saudi Fransi closed a SAR1.9 billion (US$506.6 million) Lower Tier-2 Sukuk, which was 2.2 times oversubscribed. Commenting on the structure, market experts said that Tier-2 capital under the upcoming Basel III requirements could pose as a challenge because it “combines market and credit risks.” Another academic also added that Tier-2 Sukuk is also “more tricky due to concerns relating to the subordination of debt” and that there are issues with its implementation that still need to be addressed.