Editor’s note: Moody’s Investors Service issued the following press release in connection with a ratings action on German and Dutch regional and sub-sovereign debt. The action was taken as a result of the change of each sovereign’s debt to a negative outlook.
Moody’s Investors Service has today changed to negative from stable the outlooks on the long-term ratings of six Länder and one government-related issuer (GRI) in Germany, and on five GRIs in the Netherlands. The ratings on all the above sub-sovereign entities remain unchanged.
The outlook change was prompted by Moody’s recent decision to change to negative from stable the outlooks on the sovereign ratings of Germany and the Netherlands, as announced on 23 July, given the strong correlation between sub-sovereign and sovereign credit risk, as reflected in macroeconomic and fiscal linkages, institutional factors and financial market conditions.
For full details of the correlation between sub-sovereign and sovereign credit risk, please refer to Moody’s Special Comment published on 15 February 2012. (https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_139829).
For additional information on Sovereign ratings, please refer to the webpage containing Moody’s related announcementshttps://www.moodys.com/eusovereign .
A full list of affected ratings is included at the end of this press release.
RATINGS RATIONALE
GERMAN SUB-SOVEREIGNS – RATIONALE FOR OUTLOOK CHANGE
Affected entities: Baden-Wuerttemberg, Bavaria, Berlin, Brandenburg, North-Rhine Westphalia, Saxony-Anhalt, Erste Abwicklungsanstalt (GRI).
The negative outlook on the Länder mirrors the corresponding change of outlook on the German sovereign. The extremely strong financial and operational linkages between the central government and German Länder imply a high correlation between the credit standing of the German federal government and that of the Länder. These linkages arise from (i) the country’s very robust equalisation system; (ii) the solidarity principle (Bundestreue) anchored in the German constitution, according to which all German Länder and the Federal Republic are committed to mutual support in the event that one of them faces severe financial pressures; and (iii) the budgetary coordination and the debt-brake mechanism enshrined in the constitution. In addition, the very high debt stocks and refinancing needs of the German Länder expose them to the same market conditions as the sovereign; and the equalisation system means that the Länder and the federal government are similarly exposed to the impact of broad macroeconomic conditions on Länder budgetary positions.
GERMAN SUB-SOVEREIGNS – WHAT COULD CHANGE THE RATINGS UP / DOWN
Given that the negative outlooks on German Länder mirror the negative outlook on Germany’s sovereign rating, downward ratings pressure on all German Länder would likely be prompted by a deterioration in the creditworthiness of the sovereign. Additionally, any issuer-specific risks that might emerge would exacerbate downward ratings pressure.
Conversely, a stabilisation of the outlooks or upward rating pressure for German Länder would require a stabilisation of the sovereign rating, or evidence of a given entity’s capacity to display comparatively stronger credit fundamentals than peers.
The ratings of the German GRI, Erste Abwicklungsanstalt, are directly linked to the creditworthiness of Land North-Rhine Westphalia, based on the strength of the guarantee mechanism provided.
DUTCH GRIs – RATIONALE FOR OUTLOOK CHANGE
Affected entities: Bank Nederlandse Gemeenten N.V. (BNG), Nederlandse Waterschapsbank N.V. (NWB), Stichting Waarborgfonds BVE (WBVE), Stichting Waarborgfonds Eigen Woningen (WEW) and Waarborgfonds Sociale Woningbouw (WSW).
The negative outlooks on Dutch GRIs mirror the negative outlook on the Netherlands’ sovereign rating. The financial and operational linkages between the central government and Dutch specialised lenders (BNG and NWB) are reflected in the robust policy interest of the central government in the activities of these entities, given their role in providing efficient funding to the sub-sovereign sector.
The financial and operational linkages between the central government and Dutch guarantee funds (WBVE, WEW, WSW) reflect strong government support for the sectors benefiting from guarantee funds (housing associations, homeowners and further education). WSW and WEW feature robust direct support mechanisms through which the Dutch government is committed to intervene if needed. In the case of WBVE, Moody’s notes the strong indirect link to the Dutch government, through WBVE’s power to call capital from its almost exclusively government-funded members in relation to their annual government appropriations.
DUTCH GRIs – WHAT COULD CHANGE THE RATINGS UP/DOWN
Given that the negative outlooks on Dutch GRIs mirror the negative outlook on the Netherlands’ sovereign rating, a downgrade of the Netherlands’ sovereign ratings would likely result in a downgrade of all affected GRIs based on the strong linkages and supportive structure. In all cases, a weakening of ownership or support structure, or an alteration in the risk profile of the sectors in which they operate could exert downward pressure on the ratings.
A stabilisation of the outlooks or upward rating pressure for Dutch GRIs’ ratings would require a stabilisation of the sovereign rating.
RATINGS AFFECTED
-GERMAN REGIONAL AND LOCAL GOVERNMENTS (RLGs)
-Baden-Wuerttemberg Aaa long-term ratings
-Bavaria Aaa long-term ratings
-Berlin Aa1 long-term ratings
-Brandenburg Aa1 long-term ratings
-North-Rhine Westphalia Aa1 long-term ratings
-Saxony-Anhalts Aa1 long-term ratings
-GERMAN GRI
-Erste Abwicklungsanstalt (EAA) Aa1 long-term ratings
-DUTCH GRIs
-Bank Nederlandse Gemeenten N.V. (BNG) Aaa long-term ratings
-Nederlandse Waterschapsbank N.V. (NWB) Aaa long-term ratings
-Stichting Waarborgfonds BVE (WBVE) Aa1 long-term rating
-Stichting Waarborgfonds Eigen Woningen (WEW) Aaa long-term rating
-Waarborgfonds Sociale Woningbouw (WSW) Aaa long-term rating
RATING METHODOLOGIES USED
The principal methodologies used in rating German RLGs were Regional and Local Governments Outside the US published in May 2008, and The Application of Joint Default Analysis to Regional and Local Governments published in December 2008. The principal methodology used in rating German and Dutch GRIs was Government-Related Issuers: Methodology Update published in July 2010. 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.
The ratings of rated entities Baden-Wuerttemberg, Land of and Bavaria, Free State of were initiated by Moody’s and were not requested by these rated entities.
Rated entities Baden-Wuerttemberg, Land of and Bavaria, Free State or their agent(s) participated in the rating process. These rated entities or their agent(s), if any, provided Moody’s access to the books, records and other relevant internal documents of the rated entities.
The ratings have been disclosed to the rated entities or their designated agents and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating(s) for German RLGs and GRIs are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody’s Investors Service information, and confidential and proprietary Moody’s Analytics information.
Information sources used to prepare the rating(s) for Dutch GRIs 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 entities, obligations or credits satisfactory for the purposes of issuing these ratings.