Moody's rates Sovereign convert Ba1

Moody's Investors Service said it assigned a Ba1 rating to a $700 million issuance of convertible contingent trust preferred securities issued by Sovereign Capital Trust IV, which is a subsidiary of Sovereign Bancorp (senior debt rated Baa3).

The $700 million issuance of convertible contingent trust preferred securities consists of two parts: a 30-year trust preferred component for $445 million and a warrant for a fixed number of shares valued at $255 million.

Moody's said that in its view, the initial accounting treatment mirrors the economic value of this instrument. Moody's recognizes the equity value of the warrant because the premium received on the warrant immediately becomes equity, thereby providing a cushion for creditors in bankruptcy.

The rating agency added that the trust preferred component is a debt-like instrument that accretes over time to the full value of the originally issued amount. This obviously increases the fixed obligation which will be captured in the calculation of leverage ratios. Nevertheless, at issuance, the trust preferred portion receives Basket A treatment (100% debt) and the warrant piece receives Basket E treatment (100% equity credit).

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