Editor’s note: Bold text added for emphasis
Review focuses on reassessment of government support assumptions
London, 29 November 2011 — Moody’s Investors Service has today placed on review for downgrade all subordinated, junior subordinated and Tier 3 debt ratings of banks in those European countries where the subordinated debt still incorporates some ratings uplift from Moody’s assumptions of government support, with the potential complete removal of government support in these ratings. The review will affect 87 banks in 15 countries in Europe with average potential downgrades of subordinated debt by two notches and junior subordinated debt and Tier 3 debt by one notch. The greatest number of ratings to be reviewed are in Spain, Italy, Austria and France. For issuers whose ratings were already under review prior to today’s rating action, the completion of the existing review will now incorporate these additional considerations for subordinated, Tier 3 and junior subordinated debt.
Today’s rating announcements follow on from the removal of systemic support from subordinated debt in systems including Denmark, UK, Ireland, Germany and Moody’s report "Moody’s to re-assess government support in bank sub debt ratings globally" published February 2011.
The review has been caused by the rating agency’s view that within Europe, systemic support for subordinated debt may no longer be sufficiently predictable or reliable to be a sound basis for incorporating uplift into Moody’s ratings.
This concern is driven by (i) the more limited financial flexibility of many European sovereigns that will increasingly be required to make difficult decisions regarding fiscal consolidation policies; and (ii) the resolution frameworks being discussed by both national and supra-national authorities (for example by the European Commission, which is expected to announce its proposals shortly).
The frameworks have the common objective of reducing very significantly the support provided to creditors and leave subordinated debt holders particularly exposed to exclusion from any support received.
During the review period, Moody’s will (i) review the outcome of the expected European Commission proposals on bank resolutions and the implications for burden-sharing with subordinated debtholders; and (ii) interact with regulators and authorities to see if there is any additional information that would lead Moody’s to maintain an assumption of support in the subordinated debt ratings.
RATINGS RATIONALE
Moody’s believes that systemic support for subordinated debt in Europe is becoming ever more unpredictable, due to a combination of anticipated changes in policy and financial constraints. Policy makers are increasingly unwilling and/or constrained in their support for all classes of creditors, in particular for subordinated debt holders. Moody’s notes that there have been recent instances where losses have been imposed on subordinated debt holders without any significant contagion to other liability classes (e.g., in Ireland). Consequently, there would need to be very clear reasons for Moody’s to consider retaining an assumption of support in subordinated debt ratings.
For some time, the policy debate and framework within Europe has been moving in favour of imposing losses on subordinated debt holders outside of an insolvency scenario. Proposals and legislative changes to permit this include statutory writedown mechanisms, or mechanisms which enable authorities to either transfer debt between institutions or split up a bank and impose losses on subordinated debtholders. Some countries have already changed their legal or regulatory frameworks to incorporate this policy objective (e.g. UK, Denmark, Germany). There have also been cases where an ostensibly supportive legal framework has been quickly changed to an unsupportive framework, following a weakening of the sovereign and banking system (e.g., in Ireland).
Moody’s awaits the European Commission’s proposed framework on resolution regimes — originally anticipated this summer but now delayed — which the rating agency believes is likely to result in an explicitly less supportive framework for subordinated debt across the EU. However, even if there is a further delay in the publication of the framework, Moody’s considers the evidence that sovereigns can quickly change the existing legal framework as reason to continue with the review of systemic support in subordinated debt, given the other pressures on sovereigns in the current environment.
Many of the above concerns were already expressed in Moody’s February 2011 publication "Supported Bank Debt Ratings at Risk of Downgrade Due to New Approaches to Bank Resolution". Since that publication, however, many euro-area sovereigns have become increasingly constrained in their financial flexibility and consequently in their ability to support their banking systems. In several cases, the sovereign has faced an increasingly stark trade-off between the need to preserve confidence in their banking systems and the need to protect their own balance sheets.
While the need to preserve confidence may imply some continuing (though potentially declining) support for senior debt — given the potential for contagion across the banking system — the rationale for continuing to assume the willingness and ability to provide support for subordinated debt holders is much weaker. Moody’s has seen clear precedents that losses can be imposed on subordinated debt holders without any significant contagion to other liability classes. Moody’s view is that these pressures go beyond the euro area to encompass all EU members; Moody’s will also review to what extent other closely integrated markets outside the EU, such as Norway or Switzerland, are affected by this change in its support assumptions.
IMPACT OF REVIEW
The banking systems and number of banks affected by the review are in the following countries: Austria (9), Belgium (3), Cyprus (2), Finland (3), France (7), Italy (17), Luxembourg (3), Netherlands (6), Norway (5), Poland (1), Portugal (2), Slovenia (2), Spain (21), Sweden (4),Switzerland (2). A list of affected institutions is attached: https://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF268891
A full analysis of the effect of the review is set out in the Special Comment published today "Reassessment of Government Support Assumptions in European Bank Subordinated Debt". For the latest details on Moody’s global approach to incorporating systemic support in Moody’s bank debt ratings please see, "Status Report on Systemic Support Incorporated in Moody’s Bank Debt Ratings Globally." Both reports were published today and can be found on www.moodys.com .
The methodologies used in this rating were Moody’s Guidelines for Rating Bank Hybrid Securities and Subordinated Debt published in November 2009, and Incorporation of Joint-Default Analysis into Moody’s Bank Ratings: A Refined Methodology published in March 2007. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Some of the ratings of entity Caisse C’ale du Credit Immobilier were initiated by Moody’s and were not requested by the rated entity.
The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody’s Investors Service information.
Moody’s considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing this review.
Moody’s adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody’s considers to be reliable including, when appropriate, independent third-party sources. However, Moody’s is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Moody’s Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS’s EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.
Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com for information on (A) MCO’s major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody’s Corporation; however, Moody’s has not independently verified this matter.
Please see Moody’s Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody’s ratings were fully digitized and accurate data may not be available. Consequently, Moody’s provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody’s disclosures on the lead rating analyst and the Moody’s legal entity that has issued each of the ratings.
Source: Moody’s
Also see: Moody’s: Negative outlook for European telecoms companies due to weak revenue growth