Short-term ratings downgraded to Prime-2 from Prime-1
Paris, December 15, 2011 -- Moody's Investors Service has today downgraded by one notch to Baa1
from A3 the long-term senior debt and deposit ratings of Dexia
Credit Local (DCL) and Dexia Banque Internationale à Luxembourg
(DBIL). Concurrently, Moody's downgraded both entities'
short-term ratings to Prime-2 from Prime-1.
The long-term and short-term senior debt ratings of DCL
and DBIL remain on review for downgrade.
The downgrade of DCL's ratings reflects the uncertainty over the
comprehensiveness of the funding guarantee scheme that the Belgian,
French and Luxembourg States intend to provide to DCL. The downgrade
also captures the risks of further deterioration of the issuer's
creditworthiness until the final implementation of these measures stabilise
its liquidity position. The simultaneous downgrade of DBIL's
long-term and short-term debt ratings was driven by the
rating agency's view that due to the uncertainty as to whether the
bank can achieve timely exit from the Dexia Group, the difficulties
currently affecting DCL may eventually affect DBIL. Therefore,
DBIL's senior debt ratings remain aligned with those of DCL for
the time being.
Moody's also downgraded DCL's subordinated debt rating to
B3 from Ba3 and DBIL's subordinated debt and cumulative junior subordinated
debt ratings to Ba3 from Baa1 and to B1 (hyb) from Ba1 (hyb) respectively.
DCL's B3 subordinated debt rating remains on review for downgrade.
DBIL's subordinated debt and junior subordinated debt ratings of
Ba3 and B1 (hyb) respectively are placed on review with direction uncertain.
DCL's BFSR of E+, which corresponds to B2 on Moody's
long-term rating scale, on review for downgrade, and
the entity's preferred stock security rating of Ca (hyb) with a
negative outlook are unaffected by this action. DBIL's BFSR
of D, which corresponds to Ba2 on Moody's long-term
rating scale, on review with direction uncertain, and the
entity's preferred stock rating of B3 (hyb), on review with
direction uncertain are also unaffected by this action.
RATINGS RATIONALE
-- ANNOUNCEMENT OF REDUCED TEMPORARY GUARANTEE EXERTS PRESSURE
ON DCL AND DBIL'S RATINGS
Moody's decision to downgrade DCL's long-term and short-term
senior debt ratings to Baa1 and Prime-2, respectively,
reflects (i) the uncertainty over the comprehensiveness of the funding
guarantee scheme to be provided by the Belgian, French and Luxembourg
States to DCL; and (ii) the risks of further deterioration of the
issuer's creditworthiness until the final implementation of these
measure stabilises DCL's liquidity position.
Moody's principal concern on DCL has been its liquidity profile,
a weakness which lies behind its current intrinsic financial strength
rating of E+ (B2). Since Dexia announced the decision to dismantle
the group and the agreement on a funding guarantee scheme to be provided
by the three States, DCL's senior ratings have been supported
by the assumption that a comprehensive state-backed solution to
this liquidity issue would be implemented shortly. Moody's
continues to believe that the States remain committed to supporting DCL.
However, Dexia's latest announcement of a temporary guarantee
until 31 May 2012 -- with a maximum term of drawings of
three years and a ceiling revised down to EUR45 billion, versus
the initially announced term of ten years and maximum amount of EUR90
billion -- introduces additional uncertainty as to the comprehensiveness
and timeliness of the definitive guarantee, although we acknowledge
that the principle of a guarantee of up to EUR90 billion has already been
validated legally by each of the three States for their respective shares.
The rating agency understands this constitutes a temporary measure during
which Dexia (i) will continue its restructuring process, which will
allow for the implementation of the final guarantee on the basis of better-defined
funding needs; and (ii) expects to obtain a decision by the European
Commission on the final guarantee. However, Moody's
believes DCL's overall creditworthiness risks further deterioration
in the absence of a definitive solution and that the longer the transition
period, the higher its exposure to event risks.
The simultaneous downgrade of DBIL's long-term and short-term
debt ratings was driven by the rating agency's view that due to
the higher uncertainty as to whether the bank can achieve timely exit
from the Dexia Group, the difficulties currently affecting DCL may
eventually affect DBIL.
Dexia had announced on 10 October 2011 that a binding offer from a potential
group of buyers -- including a participation of the Grand
Duchy of Luxembourg -- was expected to be submitted at the
end of a two-week exclusivity period. The group indicated
on 8 December 2011 that discussions were still on-going.
Pending a definitive announcement, Moody's continues to align
DBIL's senior debt ratings with those of DCL.
Moody's maintains the Baa1 long-term and Prime-2 short-term
ratings for DCL and DBIL on review for downgrade. The reviews for
downgrade reflect the continued uncertainties over the implementation
of a comprehensive solution for each entity, whether it be in the
form of a guarantee scheme for DCL or a sale of DBIL.
-- DOWNGRADE OF SUBORDINATED DEBT RATINGS IN LINE WITH HYBRID
METHODOLOGY
The downgrade of DCL's and DBIL's subordinated debt ratings
results from the complete removal of government support from these ratings,
which are now positioned below both banks' Adjusted Baseline Credit
Assessment (Adjusted BCA).
The affected ratings are as follows:
- DCL's subordinated debt rating was lowered to B3 from Ba3
and is now positioned one notch below the Adjusted BCA. This is
equivalent to the bank's B2 standalone credit strength in the absence
of parental or cooperative support. The rating remains on review
for downgrade, reflecting the review for downgrade on the BFSR.
- DBIL's subordinated debt and cumulative junior subordinated
debt ratings were lowered to Ba3 from Baa1 and to B1 (hyb) from Ba1 (hyb)
respectively. Both ratings are now positioned one notch and two
notches respectively below the bank's Adjusted BCA of Ba2.
This is equivalent to DBIL's standalone credit strength in the absence
of parental or cooperative support. Both ratings remain on review
with direction uncertain, reflecting the review with direction uncertain
on the BFSR.
This action follows Moody's announcement on 29 November 2011 of
the review for downgrade of European banks' subordinated,
junior and Tier 3 debt ratings 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 their ratings. For more details,
please refer to Moody's press release "Moody's review
European bank's subordinated, junior and Tier 3 debt for downgrade"
dated 29 November 2011.
KEY RATING SENSITIVITIES
An upgrade of DCL's BFSR and senior ratings is highly unlikely in light
of the current review for downgrade.
DCL's BFSR could be downgraded as a result of (i) Moody's perception of
an increased risk that the expected erosion of DCL's franchise may effectively
result in the entity diminishing over time; (ii) higher losses stemming
from the legacy bond portfolio; or (iii) a potential inability to
generate a level of income sufficient to preserve an adequate level of
capital. The long-term debt ratings could be downgraded
due to (i) a downgrade of the BFSR; (ii) further uncertainty over
the implementation of the expected comprehensive guarantee scheme by the
governments of France, Belgium and Luxembourg, including Moody's
perception that the latter is not sufficient to support DCL's liquidity
and hence unlikely to afford appropriate protection to existing creditors.
An upgrade of DBIL's BFSR could arise from a successful exit of DBIL from
Dexia Group, which would likely lead to a stabilisation of the bank's
franchise and reduce the risks from other Dexia entities. However,
an upgrade of DBIL's long-term ratings is highly unlikely in light
of the current review for downgrade. Although Moody's recognises
the high degree of involvement of the Luxembourg government in the restructuring
of Dexia, the level of systemic support that will be incorporated
into DBIL's senior long-term debt rating will depend on the nature
of its transition to a future ownership structure outside the Dexia group.
Downward pressure on DBIL's BFSR could arise from a failure to delink
DBIL from the rest of Dexia Group. The long-term debt ratings
could be downgraded as a result of (i) a downgrade of the BFSR; and/or
(ii) a potential diminution of systemic support, which will depend
in part on DBIL's future ownership structure.
METHODOLOGIES USED
The methodologies used in these ratings were Bank Financial Strength Ratings:
Global Methodology published in February 2007, Incorporation of
Joint-Default Analysis into Moody's Bank Ratings: A Refined
Methodology published in March 2007, and Moody's Guidelines for
Rating Bank Hybrid Securities and Subordinated Debt published in November
2009. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
LIST OF AFFECTED RATINGS
http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF270747
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 have been disclosed to the rated entities or its designated
agent(s) and issued with no amendment resulting from that disclosure.
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parties involved in the ratings, public information, and confidential
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Yasuko Nakamura
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Financial Institutions Group
Moody's France SAS
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Carola Schuler
MD - Banking
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Moody's downgrades Dexia Credit Local and Dexia Banque Internationale à Luxembourg to Baa1 from A3, on review for downgrade
