Ratings On 16 Market-Linked Notes Issued By Commonwealth Bank of Australia Withdrawn

Stocks and Financial Services Press Releases Monday December 19, 2016 17:16
SYDNEY--19 Dec--S&P Global Ratings

SYDNEY (S&P Global Ratings) Dec. 19, 2016--As a result of a misapplication of the "Principles For Rating Debt Issues Based On Imputed Promises" criteria, S&P Global Ratings today withdrew its global scale and, when applicable, local scale issue ratings on 16 market-linked notes (MLNs) issued by Commonwealth Bank of Australia (CBA). The withdrawal of these issue ratings does not imply any change in the credit quality of the issuing bank, whose other rated debt issues are not affected by today's actions.

As indicated in our communication from Nov. 3, 2016, these rating actions come after review of rating market-linked securities that have provisions that could lead to the early redemption of the instruments at less than par value (see "FAQs On Early Redemption Features And Negative Interest Rates Are Added to Imputed Promises Criteria," published Nov. 3, 2016.) The update to our imputed promises criteria does not constitute a change to the criteria article methodology or its assumptions.

In the relevant FAQ (paragraphs 64-66 of the criteria article), we have clarified how we assess the impact of certain event triggers on market-linked securities that could lead to early redemption at less than par value. Early redemption features would not automatically cause an issue to be unratable if redemption is at par value. However, if early redemption is be at less than par--for example, if the redemption is at market or fair value or if certain costs/expenses can be deducted from a par redemption, the issue may be unratable, unless we view the redemption triggering event as remote. We generally consider the following triggering events, such as illegality (change in law), tax event (change in tax law), force majeure and technical reasons (such as calculation difficulty with or dissolution of the basis indices), to be remote as long as they are not being contemplated when the ratings are assigned. On the contrary, an example of a triggering event we do not generally consider remote is an increase in hedging costs. If such an increase triggers an early redemption, the issue would not be ratable if hedging costs are passed through or breakage/unwinding charges are deducted from par repayments.

If we were to determine that the principal on such a market-linked security might be repaid at less than par due to an early redemption event, the likelihood of which we consider to be neither remote nor assessable, we would not be able to rate that security under the imputed promises criteria.

We are withdrawing the 16 issue ratings today, because we consider their early redemption features may be at less than par and we believe the triggering events, notably increase in hedging costs, are not remote.

The issue ratings withdrawn all have a 'p' subscript. Under our imputed promises criteria, we add a qualifying subscript ('p') to the ratings on certain market-linked securities where those securities have interest variation related to equity prices, commodity prices, or a fixed-income (bond price) or credit default swap index. This subscript denotes that the rating addresses the repayment of principal only and not any payment of interest. If we believed that not only the interest, but also the principal, is not fully protected, we would not also be able to rate such securities.

S&P Global Ratings rates and will continue to rate such market-lined notes when they meet the provisions of the inputted promises criteria.

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