MOODY'S SAYS RATINGS FOR GERMAN LANDESBANKEN ARE NOT AFFECTED BY E.U. COURT'S STATEMENT REGARDING STATE AID GRANTED TO WESTLB AG
Moody's Investors Service says that neither the ratings of WestLB nor those of any other Landesbank will be affected by the European Court of Justice's assertion on 12 December that the German government has failed to properly implement the EU Commission's decision in 1999, which requires the recovery of state aid granted to WestLB AG (rated Aa1/P-1/D).
Moody's statement also applies to the other German Landesbanken which the EU Commission recently started investigating - namely, Hamburgische Landesbank (Aa1/P-1/C+), Landesbank Schleswig-Holstein (Aa1/P-1/C+), Landesbank Hessen-Thueringen (Aaa/P-1/C), Bayerische Landesbank (Aaa/P-1/D+), as well as Norddeutsche Landesbank (Aa1/P-1/C-).
The recent statement by the European Court of Justice had indicated that, in instances in which the Commission finds state aid to be incompatible with the laws of the European Union, the Court may not only require the State to withdraw or amend the aid but also demand the recovery of past benefits at the same time. In the case of WestLB, the Commission challenged the insufficiency of the remuneration received by the Land of North Rhine-Westphalia (the state of NRW) from WestLB for the transfer of WfA (Wohnungsbaufoerderungsanstalt des Landes NRW - i.e. the state of NRW's public funding body for the construction of housing). For the period 1992-1998, this had amounted to some EUR807 million. The Court has upheld the Commission's declaration that the measures taken by Germany to comply with community law have not been sufficient.
Moody's notes that the European court also stated that, if a Member State decided to recover state aid by means other than cash payment, it must provide evidence to enable the Commission to establish that such alternative measures are suitable to achieve the result required.
Moody's does not rule out a scenario in which WestLB could be forced to make substantial payments to NRW in order to comply with the EU Commission ruling. However, the rating agency is also aware that in a second, still pending court case, WestLB, the state of NRW and the Federal Republic of Germany are challenging the EU Commission's actions against WestLB over the transfer of WfA and its calculation of the "correct" remuneration for WestLB's regulatory capital benefit. Moody's notes that the outcome of this case could have a significant impact on any payments that may have to be made by WestLB.
Nevertheless, Moody's says that, even in a "worst-case" scenario for WestLB, the potential negative impact of these payments will not affect WestLB's Aa1 debt and deposit ratings, which are based on the support mechanism of Gewaehrtraegerhaftung (statutory guarantee) for WestLB's liabilities, in conjunction with NRW's strong implicit support. In this context, Moody's points out that the implicit support by WestLB's ultimate shareholders and guarantors was recently reinforced by the decision of the supervisory board and shareholders of WestLB to increase WestLB's capital by EUR1.25 billion at the end of 2002.
However, according to Moody's, WestLB's D financial strength rating (FSR) reflects, among other factors, the bank's modest regulatory and economic capitalisation, which may weaken if these potential retrospective payments have to be paid. In order to offset this, Moody's believes that the state of NRW will have to take steps to balance these payments so that WestLB's capitalisation will not be materially negatively affected.
Similarly, the other Landesbanken, which face similar investigations by the EU Commission, also benefit from capital injections in kind through the transfer of public housing funding entities in the 1990s by their respective states. Moody's says that, at this point in time, it will not take any rating actions with regard to the rating outlooks of the banks' FSRs. The rating agency added that the investigations are still in their initial stages and differ from each other in some aspects - for example, the amount of capital benefit varies widely, so that the ultimate payment, which is being requested by the EU Commission to ensure compliance, is still uncertain as of today.
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