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Rating Action:

Moody's Announces Selective Rating Actions on U.K. Mortgage Lenders

14 Apr 2009

Rating actions also affect subordinated and hybrid instruments

London, 14 April 2009 -- Moody's Investors Service today has affirmed the debt and deposit ratings of 2 building societies, whereas three banks and one building society either remain or have been placed under review for possible downgrade. The debt and deposit ratings of 9 other institutions have been downgraded. This rating action on UK mortgage lenders includes our continued expectation of systemic support for the senior obligations for these institutions, and follows the recalibration of Moody's Bank Financial Strength Ratings ("BFSR") as announced in our Special Comment "Calibrating Bank Ratings in the Context of the Global Financial Crisis", published in February 2009.

In addition, the subordinated and hybrid securities of the same institutions were downgraded in line with our concern that systemic support may not be extended to these instruments in the case of financial distress.

Downgrade of the BFSRs, Long Term Ratings, and Subordinate and Hybrid Securities

"Today's rating actions reflect Moody's concern that the current economic crisis in the U.K and indeed globally will lead to significantly higher credit losses than previously anticipated, particularly among the residential and commercial real estate assets, to which these mortgage lenders and building societies have a highly concentrated exposure", said Marjan Riggi, VP/Senior Credit Officer and lead analyst for U.K mortgage lenders.

(I) BFSRs: While Moody's BFSR framework remains unchanged; as a result of the unprecedented depth of the economic crisis we are placing an increased emphasis on rating factors which address the near-term threats to banks' intrinsic financial strengths and sustainability. Specifically the focus is on the performance of capital adequacy indicators and future core earnings under different Expected-Loss scenarios for the current portfolios; capital adequacy levels that include stresses on assets and earnings have often become a considerable constraint to the intrinsic strength of these entities.

"These rating actions include the results derived from the analysis of various stress scenarios, incorporating a peak-to-trough house price decline of 40% for our base scenario, and compared this to banks' exposure to different asset classes (prime, subprime, buy-to-let, self-certified, second lien etc.) taking into account indexed loan-to-value-buckets which already reflected a double-digit house price decline. We also stressed the non-housing-association-related parts of the banks' commercial loan portfolio - whose performance has already come under considerable pressure in this economic downturn, and which we expect to worsen significantly over the next couple of years - to different levels, depending among other factors, on the size of individual exposures and concentration risks", Marjan Riggi continued.

The key concerns for mortgage lenders in the U.K. remain: (1) the amount of capital available to absorb the upcoming losses, especially those arising from specialist loan books (typically self-certified loans, buy-to-let loans, second-lien loans, or purchased loans), and commercial real estate loans where concentration risks are high; (2) for a few lenders with notable holdings of structured and other illiquid securities, our updated marks were a driver in increased expected losses for such portfolios; and (3) an important parameter in this analysis is the future earnings capacity of mortgage lenders which directly affects their ability to add to or replenish the capital cushion. In the case of building societies, earnings levels are naturally constrained by their mutuality model and therefore their ability to increase depleted capital levels is more limited.

(II) SENIOR DEBT AND DEPOSIT RATINGS: While this analysis has revealed a wider variety of intrinsic credit profiles with BFSRs ranging from C+ to E+, our long term and short term senior debt and deposit ratings continue to take into account the expectation of systemic (and, where relevant, parental or mutual) support and are in line with our expectation that banks in highly rated countries will receive or are likely to receive support depending on their level of systemic importance as well as their importance to their parent, if any. Therefore, no senior debt or deposit ratings have been downgraded below Baa3.

With regard to mutual support, we increasingly consider that the support within the building society group -- mainly stemming from Nationwide -- is shifting towards systemic support, as Nationwide has already contributed to the consolidation of the sector by taking over two weaker entities. During this time of exceptional stress we believe that the likelihood of government support has increased, underpinning the investment grade debt and deposit ratings of these institutions.

(III) SUBORDINATED DEBT/HYBRIDS: Moody's notes that due to the potential lack of systemic support for the subordinated and hybrid securities in the U.K., the anchor for subordinated and hybrid debt ratings issued by these institutions will no longer be the supported debt and deposit rating, but the standalone intrinsic strength rating, the Baseline Credit Assessment ("BCA") which is derived from the BFSR. This change in our rating of subordinated debt and hybrids in the UK follows the recent precedence on the exclusion of support on such instruments by the U.K. government in the case of the Dunfermline Building Society, and builds on an earlier precedence of Bradford & Bingley.

Our general approach for notching subordinated debt and hybrid securities has been in line with the "Guidelines for Rating Bank Junior Securities" from April 2007 with the exception that we now notch the subordinated ratings off the standalone rating, the BCA:

• Banks with BFSRs above D+: dated and undated (junior) subordinated debt is rated one notch below the BCA. Hybrids (typically preference shares or PIBS) are rated two notches below the BCA.

• Banks with BFSRs in the D range (D+, D, D-): dated subordinated debt is rated one notch below the BCA. Undated subordinated debt is rated two notches below the BCA, and hybrid securities are rated three notches below the BCA.

• Banks with BFSRs of E+: We widened the notching for dated subordinated debt to three notches below the BCA. Undated subordinated debt is rated 4 notches below the BCA, and hybrid securities are rated five notches below the BCA (but capped at the Ca level if no default has yet occurred), to reflect the significantly higher expected loss of these instruments issued by these institutions.

SUMMARY OF RATING ACTIONS:

Abbey National plc ("Abbey"): the BFSR is downgraded to C- from C+ on review for downgrade (mapping to BCA of Baa2); senior debt/deposit ratings of Aa3 are on review for downgrade; the P-1 rating is affirmed; subordinated debt ratings are downgraded to Baa3; Tier 1 hybrid instruments are downgraded to Ba1; the review will focus on the impact of the integration of Alliance & Leicester and the degree to which this will be offset by further capital measures from their ultimate parent, Banco Santander S.A. (Aa1/B).

Alliance & Leicester: the BFSR is downgraded to E+ from C+ with a developing outlook (mapping to BCA of B1); senior debt/deposit ratings of Aa3 are on review for downgrade, the P-1 rating is affirmed; dated subordinated debt is downgraded to Caa1; junior subordinated debt is downgraded to Caa2; and Tier 1 hybrid instruments are downgraded to Caa3; the developing outlook on the BFSR reflects the intrinsic weakness of A&L, balanced by the potential strength to be derived from its shareholders, Abbey and Banco Santander; the Aa3 ratings and the review for downgrade are aligned with the ratings of Abbey, reflecting the cross-guarantee for senior debt between the two institutions.

Britannia Building Society ("Britannia"): The BFSR is downgraded to D+ from C (mapping to BCA of Ba1) and has been placed on review with direction uncertain reflecting the pressure from its weak intrinsic strength and the benefits expected from the merger with the Co-Operative Bank plc (rated A2/C); senior debt/deposit ratings of A2/P-1 are on review for downgrade; the review will focus on the impact of the near-term merger with the Co-Operative Bank and the extent to which the strength of the Co-Operative Bank can offset some of the intrinsic challenges that Britannia is facing; dated subordinated debt is downgraded to Ba2; and PIBS are downgraded to B1.

Chelsea Building Society ("Chelsea"): The BFSR is downgraded to E+ from C (mapping to BCA of B1) with a negative outlook; senior debt/deposits downgraded to Baa3 from A2 with a stable outlook; short-term ratings are downgraded to P-3 from P-1; dated subordinated debt downgraded to Caa1.

Coventry Building Society ("Coventry"): The BFSR is downgraded to C- from C+ (mapping to BCA of Baa2) with a negative outlook; senior debt/deposits downgraded to A3 from A2 with a negative outlook; the short-term ratings are downgraded to P-2 from P-1; dated subordinated and junior subordinated debt is downgraded to Baa3; PIBS are downgraded to Ba1.

Leeds Building Society ("Leeds"): The BFSR has been affirmed at C+ (mapping to BCA of A2), outlook changed to negative; senior debt/deposit ratings and subordinated debt ratings have been affirmed at A2/A3 with a stable outlook; the P-1 rating has also been affirmed.

Nationwide Building Society ("Nationwide"): The BFSR is downgraded to C- from B (mapping to BCA of Baa2) with a negative outlook; senior debt/deposit ratings downgraded to Aa3 from Aa2 with a stable outlook; P-1 ratings affirmed; dated subordinated debt and junior subordinated debt is downgraded to Baa3; PIBS downgraded to Ba1.

Newcastle Building Society ("Newcastle"): The BFSR is downgraded to D- from C- (mapping to BCA of Ba3) with a negative outlook; senior debt/deposits ratings are downgraded to Baa2 from A3 with a negative outlook and the P-2 short-term ratings are affirmed; dated subordinated debt is downgraded to B1.

Norwich & Peterborough Building Society ("Norwich & Peterborough"): The BFSR is downgraded to D from C (mapping to BCA of Ba2) with a negative outlook; senior debt/deposits ratings are downgraded to Baa2 from A2 with a negative outlook; P-1 short-term ratings downgraded to P-2.

Nottingham Building Society ("Nottingham"): The BFSR has been affirmed at C- (mapping to BCA of Baa2) and the outlook is changed to negative; senior debt/deposit ratings are affirmed at A3 with a negative outlook; P-2 ratings affirmed.

Principality Building Society ("Principality"): The BFSR is downgraded to D- from C- (mapping to BCA of Ba3) with a negative outlook; senior debt/deposit ratings are downgraded to Baa2 from A3 with a negative outlook; the P-2 short-term ratings are affirmed; dated subordinated debt is downgraded to B1; and PIBS downgraded to B3.

Skipton Building Society ("Skipton"): The BFSR is downgraded to D+ from C+ (mapping to BCA of Ba1) with a negative outlook; senior debt/deposit ratings are downgraded to Baa1 from A2 with a negative outlook; P-1 short-term ratings are downgraded to P-2; dated subordinated debt is downgraded to Ba2; This rating action concludes the review for downgrade on Skipton's BFSR initiated on November 3, 2008, following the merger with Scarborough Building Society. Furthermore as a consequence of the merger Scarborough's ratings are withdrawn.

Standard Life Bank ("Standard Life"): The BFSR is downgraded to D from C- (mapping to BCA of Ba2) with a negative outlook; senior debt/deposit ratings of A2/P-1 are on review for downgrade; the review will focus on the level of support available from the bank's parent Standard Life Assurance Ltd. rated A1; dated subordinated debt is downgraded to Ba3; junior subordinated debt downgraded to B1.

West Bromwich Building Society ("West Bromwich"): The BFSR is downgraded to E+ from C- (mapping to BCA of B3) with a negative outlook; senior debt/deposit ratings are downgraded to Baa3 from A3 with a stable outlook; short-term ratings downgraded to P-3 from P-2; dated subordinated debt and junior subordinated debt is downgraded to Caa3; PIBS are downgraded to Ca.

Yorkshire Building Society ("Yorkshire"): The BFSR is downgraded to D+ from C (mapping to BCA of Ba1) with a negative outlook; senior debt/deposit ratings are downgraded to Baa1 from A2 with a negative outlook; short-term ratings are downgraded to P-2 from P-1; dated subordinated debt is downgraded to Ba2.

The principal methodologies used in rating these issuers were "Bank Financial Strength Ratings: Global Methodology" (February 2007) and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" (March 2007), as well as "Moody's Assesses Bank Hybrid Securities in the Context of the Credit Crisis" (December 2008), which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies sub-directory. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Credit Policy & Methodologies directory.

Previous rating actions on the above institutions are as follows:

The last rating action on Abbey was on July 14, 2008 when the Aa3/Prime1/C+ ratings were affirmed, and the outlook was changed to stable from positive.

The last rating action on Alliance & Leicester was on October 20, 2008 when the long term ratings were upgraded to Aa3 reflecting the completion of the acquisition by Banco Santander (Aa1/P-1).

The last rating action on Britannia was on January 21, 2009 when Moody's affirmed the A2/C/P-1 ratings following the announcement that the Co-operative Bank and Britannia are to merge.

The last rating action on Chelsea was on October 7, 2008 when the A2/P-1 ratings were affirmed and the BFSR was downgraded to C.

The last rating action on Coventry was on April 20, 2007 when the ratings of A2/P-1/C+ were affirmed.

The last rating action on Leeds was on April 20, 2007 when the ratings of A2/P-1/C+ were affirmed.

The last rating action on Nationwide was on September 8, 2008 when the ratings of Aa2/Prime-1/B were affirmed.

The last rating action on Newcastle was on November 27, 2008 when the ratings were downgraded to A3/P-2/C-.

The last rating action on Norwich and Peterborough was on April 20, 2007 when the ratings were upgraded to A2/P-1.

The last rating action on the Nottingham was on May 20, 2008 when the ratings of A3/P-2/C- were assigned for the first time.

The last rating action on Principality was on November 24, 2008 when the ratings were downgraded to A3/P-2/C-.

The last rating action on Skipton was on November 3, 2008 when the ratings of A2/P-1 were affirmed and the BFSR of C+ was put on review for possible downgrade following the announcement of a merger between Skipton and the Scarborough. At the same time, the A3 deposit ratings of Scarborough were put on review for possible upgrade.

The last rating action on Standard Life Bank was on November 19, 2007 when the A2/P-1/C- ratings were affirmed.

The last rating action on West Bromwich was on September 15, 2008 when the ratings were downgraded to A3/P-2/C-.

The last rating action on Yorkshire was on September 15, 2008 when the ratings of A2/P-1 were affirmed and the BFSR was downgraded to C.

Structured Finance related rating actions, if any, are not covered by this press release.

All of the banks and building societies included in this action are headquartered in the U.K.

London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Marjan Riggi
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Announces Selective Rating Actions on U.K. Mortgage Lenders
No Related Data.
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