Fitch downgrades seven UK societies' subordinated notes
Share
Fitch has downgraded the lower tier 2 subordinated notes and permanent interest bearing shares of seven building societies, including Nationwide, Yorkshire and Skipton.
LT2 debt issued by the affected societies has generally been downgraded by one notch and PIBS by two notches. The Rating Watch Negative on the LT2 debt of Chelsea Building Society and LT2 debt and PIBS of Principality Building Society have been maintained.
Nationwide has had its LT2 subordinated notes downgraded to ‘A’ from ‘A+’ and PIBS downgraded to ‘A-’ from ‘A+’, while Chelsea has had its LT2 subordinated notes downgraded to ‘BBB-’ from ‘BBB’, RWN maintained.
Skipton has had its LT2 subordinated notes downgraded to ‘BBB’ from ‘BBB+’ AND PIBS downgraded to ‘BBB-’ from ‘BBB+, with Yorkshire having its LT2 debt downgraded to ‘BBB’ from ‘BBB+’, with its PIBS downgraded to ‘BBB-’ from ‘BBB+’
Fitch says the downgrades reflect the risk that building societies would exchange or convert their LT2 debt and PIBS into more equity-like instruments, following the introduction of profit participating deferred shares in June 2009, which were designed to provide societies with a tool by which to create regulatory core tier 1 capital.
This is because building societies, given their mutual status, are unable to raise common equity which, together with retained earnings, is the main constituent of regulatory core tier 1 capital, placing them at a structural disadvantage to most banks in terms of their access to capital.
Fitch believes such instruments are more likely to be issued in exchange for existing capital securities, as was the case with West Bromwich Building Society, rated IDR ‘BBB-‘/Negative Outlook, in August 2009) than directly into the market because of their dilutive impact on the membership status of the society and an unattractive risk/reward profile.
The downgrade of these societies’ LT2 debt by one notch now leaves them two notches below the IDRs and senior debt, reflecting the risk of conversion/exchange into PPDS that UK building societies face because of their mutual status. It is possible that LT2 debt and PIBS could be rated further below the IDR of the issuer if Fitch believes that the risk of non-performance in the instrument is greater.
If you enjoyed this article, sign up here to receive daily email updates from Mortgage Strategy and Follow @mortgagestrat
