New York, April 30, 2013 -- Moody's Investors Service has today downgraded Slovenia's
government bond rating to Ba1 from Baa2. The outlook remains negative.
The decision to downgrade Slovenia's sovereign rating was driven
by the following key factors:
1) The state of Slovenia's banking sector
2) The marked deterioration of Slovenia's government balance sheet
3) Uncertain funding prospects that heighten the probability that external
assistance will be needed
RATINGS RATIONALE
The first key factor underpinning today's rating action is the ongoing
turmoil in the country's banking system and the high likelihood
that the sovereign will be required to provide further assistance and
capital injections. Asset quality at the banks deteriorated considerably
in 2012 and has continued to deteriorate since. At Nova Ljubljanska
Banka (Caa2/negative/E), the country's majority state-owned
lender and largest bank, non-performing loans (NPLs) reached
28.2% of total loans in 2012. NPLs reached 28%
at Nova Kreditna Banka Maribor (Caa2/negative/E), the second largest
bank, and were approximately 20% system-wide at end-2012.
The authorities have been injecting capital and providing assistance to
the three largest banks since 2011, and Moody's expects bank
asset quality to continue to deteriorate given the weak economic environment.
The economy entered recession once again in 2012, contracting by
2.3% as a result of the banking crisis, and Moody's
forecasts that the economy will contract by a further 1.9%
in 2013 before a weak recovery in 2014 where growth is expected to reach
0.2%. Risks remain skewed firmly to the downside
and the economic outlook will depend to a large degree on the stabilization
of the banking crisis.
Delays in establishing the Bank Asset Management Company (BAMC,
the "bad bank"), following a political transition,
suggest that the sovereign remains heavily exposed to contingent liabilities.
Moody's estimates bank recapitalization costs in the order of 8-11%
of GDP. In Moody's opinion, implementing the BAMC's
mandate is essential for stabilizing the banking system.
The second key factor underlying Moody's decision to downgrade Slovenia's
government bond rating is the substantial increase in Slovenia's
government debt metrics. Slovenia's general government debt
at the end of 2012 reached an estimated 54.1% of GDP,
up from 22% in 2008. Slovenia's fiscal debt burden
remains among the lowest in the euro area, where the average is
approximately 93% of GDP. The ratio for Slovenia,
however, is likely to exceed 60% at the end of 2013 and not
expected to stabilize until 2014-15 at above 65% of GDP,
excluding BAMC debt issuance. However, the level at which
debt metrics for Slovenia will peak is very uncertain and will depend
in part on whether the government will need to provide further assistance
to the banking system. The level will also depend on the new government's
fiscal targets, which are likely to be less ambitious than the previous
government's targets, and on the macroeconomic outlook.
Risks are skewed negatively and debt levels could exceed 70-75%
of GDP after the banking system's issues have been resolved,
but are unlikely to reach unsustainable levels. Nevertheless,
risks to bondholders have increased and the sovereign's cost of
funding is likely to be prone to volatility.
Given the marked deterioration of the government's balance sheet
and the sovereign's limited debt tolerance as reflected by its increasing
cost of funding, Moody's has changed its assessment of Slovenia's
government financial strength, the third factor in Moody's
sovereign bond rating methodology, to 'medium' from
'high'. The adjustment to the factor score leads to
a change in the sovereign's rating range as indicated by our methodology
to Ba1-Ba3 from Baa2-Ba1.
The third key factor leading to the rating action is the uncertain funding
environment facing Slovenia, which heightens the risk that the sovereign
will require external assistance to meet its financial obligations.
Moody's notes that Slovenia's recent efforts to manage the
sovereign's liabilities have been relatively successful.
The sovereign issued 18-month treasury bills to retire outstanding
instruments maturing in June 2013, easing liquidity concerns and
decreasing rollover risk. With the treasury bill swap, Moody's
estimates that the sovereign now holds enough liquidity to meet its funding
needs through the end of the year, excluding a potential capital
infusion to the banking sector.
Despite the recent success, the sovereign's cost of funding
remains elevated and sensitive to financial market confidence.
Slovenia's vulnerability to external shocks, like those brought
about by the crisis in Cyprus, could make it difficult for the sovereign
to fund itself at sustainable rates, which increases the likelihood
that authorities would need to request an external assistance program.
The negative outlook reflects Moody's view that the challenges of
the banking system remain substantial. The weak macroeconomic environment
amplifies these challenges and increases the possibility of losses to
bondholders.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Although unlikely in the near future, a substantial improvement
in economic conditions, a more benign funding environment,
and stabilization of the banking system without more support being required
than what authorities currently expect would lead to a stable outlook.
Slovenia's sovereign rating could be downgraded again in the event
that the sovereign experiences a material deterioration in funding conditions;
such a deterioration is most likely to result from economic or financial
shocks arising from Slovenia's banking sector or from the euro area
sovereign debt crisis. A substantial weakening of Slovenia's
macroeconomic environment could also jeopardize the stabilization of debt
metrics, resulting in a loss of creditworthiness.
CEILINGS
As part of this rating action, Moody's has made the following
adjustments to country ceilings for corporate and structured ratings:
Local Currency Bond Ceiling -- Baa2 (from A3)
Local Currency Deposit Ceiling -- Baa2 (from A3)
Foreign Currency Bond Ceiling -- Baa2 (from A3)
Foreign Currency Deposit Ceiling -- Baa2 (from A3)
The lower ceilings reflect the increased risk of events which would,
in Moody's view, damage the credit standing of substantially
all debt issuers in Slovenia, including severe economic and financial
dislocation such as would be expected in the unlikely event of Slovenia
leaving the euro area.
The local currency country risk ceiling reflects the maximum credit rating
achievable in local currency for a debt issuer domiciled in Slovenia.
The foreign currency bond and deposit ceilings are assessed to be in line
with the local currency ceilings given that Slovenia uses the euro as
its legal tender.
METHODOLOGY
The principal methodology used in this rating was "Sovereign Bond Ratings
Methodology" published in September 2008. Rating ceilings were
set in accordance with "Local Currency Country Risk Ceiling for Bonds
and Other Local Currency Obligations" published in March 2013.
Please refer to the Credit Policy page on www.moodys.com
for details.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain 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 certain 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 certain 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.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Jaime C. Reusche
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Bart Jan Sebastian Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Downgrades Slovenia's Sovereign Rating to Ba1 from Baa2, Outlook Negative
