DBRS Morningstar: Use of Selective Default Across Financial Institutions Explained

This commentary discusses selective defaults (‘SD’) across financial institutions in DBRS Morningstar’s rating universe.

Key points include:

• This commentary provides examples of when we have applied ‘SD’ to a financial institution’s issuer rating. They are illustrative of cases when an institution has failed to meet certain obligations whilst continuing to meet other obligations in a timely manner.

• We apply this designation to the issuer ratings, even if we have not rated the specific securities or asset class that has defaulted. We believe this approach provides greater transparency to the market.

“In the case of Credit Suisse Group (CS), we did not rate the AT1 instruments,” said Vitaline Yeterian, Senior Vice President, European Financial Institutions at DBRS Morningstar. “However, we considered that CS had failed to satisfy a financial obligation on its AT1 instruments and consequently viewed this default as being 'Selective’. We expect CS to continue to meet its obligations on other securities and/ or classes of securities in a timely manner.”

“There have also been examples of selective defaults in sectors other than financial institutions but we note that the complexity of bank failures and the greater likelihood of some form of resolution procedure and/ or regulatory involvement, increases the probability of a selective default outcome for failed financial institutions,” said Elisabeth Rudman, Managing Director, Head of Global FIG at DBRS Morningstar.