First-time rating assignment
NOTE: On October 15, 2012, the press release was revised as follows: Under the Ratings Rationale section, in the last sentence of the third paragraph, corrected ‘Aaa-rated instruments’ to ‘Aa2 or higher rated instruments.’ Revised release follows:
Frankfurt am Main, October 08, 2012 -- Moody's Investors Service has today assigned a long-term
issuer rating of Aaa and a short-term issuer rating of Prime-1
to the European Stability Mechanism (ESM). The outlook is negative.
The Aaa/Prime-1 ratings are based on (i) the ESM's anticipated
low leverage, (ii) the creditworthiness of the ESM's members
which are also the euro area member states, (iii) the sound liquidity
and capital management policy with an Early Warning System (EWS) which
ensures that funds will be available on time, and (iv) the ESM's
preferred creditor status. The ESM's purpose is to provide
an inter-governmental support mechanism which extends financial
assistance to members that are either unable to access the capital markets,
or able to do so only at very high interest rates.
RATINGS RATIONALE
The first key rating factor underlying Moody's decision to assign
a Aaa rating to the ESM relates to its anticipated low leverage.
The ESM has a lending capacity (both loans extended to and purchases of
securities issued by supported member states) of EUR500 billion and subscribed
capital of EUR700 billion (consisting of EUR80 billion of paid-in
capital and EUR620 billion of callable capital). If the ESM's
capital is reduced (e.g., due to losses resulting
from a borrower default), the leverage ratio -- defined as
lending capacity/subscribed capital which must not exceed 71% --
would automatically limit the lending capacity and thereby stabilise the
structure of the ESM funding. In such a scenario, loans under
existing programmes would continue to be disbursed, but any new
lending commitments, which would surpass the lending capacity,
would require a simultaneous increase in the ESM's capital.
The second key rating factor underpinning the Aaa/P-1 ratings is
that the ESM's shareholders are the euro area's member states,
which provide capital to the ESM according to the same capital key that
is applied to the European Central Bank (ECB). The ESM therefore
benefits from the very high credit quality of its shareholders and the
very high likelihood that they will be able to comply with their capital-related
obligations. The current capital key-weighted median rating
is Aaa, with the two main member states in terms of their capital
contribution, Germany and France, both holding Aaa ratings.
The third key rating factor is the ESM's strong liquidity and capital
management policy. In particular, the policy aims to ensure
that all payments over the next 12 months are fully covered by the ESM's
own liquidity reserves and callable capital to be contributed by Aaa-rated
shareholders. An additional credit-enhancing feature is
the ESM's Early Warning System (EWS) which, by providing an
assessment of borrowers' repayment capacity well in advance of the
repayment date, ensures that capital calls can be made and implemented
well in advance of any payment shortfall. The ESM Treaty places
a legal obligation on the ESM's Managing Director to call capital
if needed, without requiring approval by the Board of Governors
or the Board of Directors. With respect to its capital management
policy, the ESM invests in liquid Aa2 or higher rated instruments,
mainly government securities or equivalent.
The fourth key rating factor is the ESM's preferred creditor status
that is junior only to that of the International Monetary Fund (IMF).
This status differentiates the ESM from its predecessor entity,
the European Financial Stability Facility (EFSF), which ranks pari-passu
with senior unsecured bondholders.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook on the ESM's Aaa rating reflects the negative outlooks
on all but one of its Aaa-rated member states and guarantors.
The Aaa-rated member countries that currently have a negative outlook
include some that have significant contribution keys, such as Germany
(which holds a 27.1% share in the subscribed capital),
France (20.4%) and the Netherlands (5.7%).
The only Aaa-rated ESM member that has a stable rating outlook
is Finland, whose contribution key is 1.8%.
WHAT COULD MOVE THE RATING DOWN
Although the ESM compares favourably to other Aaa-rated Multilateral
Development Banks (MDBs) in terms of members creditworthiness, there
are several key differences in how the ESM's own creditworthiness
could be weakened:
1.) A deterioration in the creditworthiness of the euro area member
states (as reflected by a change in Moody's ratings for these states)
would weigh on the combined ability to provide support, and consequently
have a negative effect on the creditworthiness of the ESM. In light
of the correlation of euro area member states' creditworthiness,
the ESM is more susceptible to movements in the creditworthiness of its
individual members than are many other MDBs, as reflected by the
sensitivity of the ESM's rating to changes in the ratings of Aaa countries
with large ESM contribution keys, i.e. Germany,
France and the Netherlands.
2.) A weakening in the political commitment among euro area member
states to the ESM could have negative rating implications. The
ESM's policy mandate is related to the preservation of the euro
area and is therefore more narrowly defined compared to other MDBs.
This could potentially affect the willingness to offer support in a scenario
that includes a euro area break-up, although this is not
currently Moody's central assumption.
3.) The ESM's asset side points to significant correlation
risks, which weaken the intrinsic strength of the ESM and make it
potentially more dependent on members' support. By comparison,
MDBs usually have a relatively diversified asset structure.
4.) Although the ESM ensures that all payments due over the next
12 months are fully covered by its own liquidity reserves and by callable
capital to be contributed by Aaa-rated shareholders, the
inclusion of callable capital in the calculation separates the ESM from
other MDBs, which often have one year of coverage based only on
their own liquidity reserves. This reinforces the correlation of
the ESM's rating with the rating of its largest Aaa contributors.
5.) Since the ESM's Aaa rating is based on the assumption
of superior financial-management capabilities, transition/downgrade
risks could also arise from a potential erosion of those capabilities.
An inappropriate skill transfer or skill acquisition would therefore adversely
affect the ESM's governance and risk management practice.
Conversely, Moody's would consider moving the outlook for
the ESM's ratings to stable if the rating agency decided to change to
stable the outlooks on the ratings of those Aaa member states with key
contributions to the ESM's capital.
METHODOLOGY
ESM's ratings were assigned by evaluating factors that Moody's considers
relevant to the credit profile of the issuer, such as the issuer's
(i) business risk and competitive position compared with others within
the industry; (ii) capital structure and financial risk; (iii)
projected performance over the near to intermediate term; and (iv)
management's tolerance for risk. Moody's compared these attributes
against other issuers both within and outside ESM's core industry and
believes ESM's ratings are comparable to those of other issuers with similar
credit risk.
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 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
and public information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
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.
Dietmar Hornung
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's assigns Aaa/Prime-1 rating to European Stability Mechanism (ESM); negative outlook
