Rating Preferred Stock and Hybrid Securities - ACT Response

In summary, our understanding is that the proposal involves combining existing notching guidelines, which address severity of loss in the event of a default, with incremental notching to reflect the fact that scheduled payments may be omitted without triggering a default by the issuer.

Although we recognise the potential for additional risk to investors if the issuer is able to omit payments without subsequent re-instatement, we would make the following observations.

• There is no obvious difference in market pricing between securities with or without this provision;
• Investors do not consider the increase in risk to be material;
• There is no impact on the likelihood of default; and
• The discussion paper makes clear that there is no discernable difference in recovery rates between preferred securities with or without this provision once those securities have defaulted.

In conclusion the ACT’s view is that the proposed notching adjustment for these securities would not be welcomed by market participants nor add to the efficient functioning of the bond markets.