London, 03 November 2009 -- Moody's Investors Service affirmed the senior unsecured debt and
deposit ratings of Lloyds TSB Bank plc (Lloyds TSB) and Bank of Scotland
plc at Aa3 with a stable outlook, as well as the A1 senior unsecured
rating of the holding companies Lloyds Banking Group plc (Lloyds) and
HBOS plc, also with a stable outlook. The short-term
P-1 ratings of these entities were also affirmed. The Bank
Financial Strength Rating ("BFSR") of Lloyds TSB was downgraded
to C- (mapping to a baseline credit assessment -- BCA -
of Baa2) from C (BCA of A3), and the BFSR of Bank of Scotland was
downgraded to D+ (BCA of Baa3) from C- (BCA of Baa2).
The outlook on all BFSRs remains negative.
A provisional (P) Ba2 rating is to be assigned to the new LT2 Enhanced
Capital Notes ("ECNs") guaranteed by Lloyds TSB and a (P)Ba3
rating to the ECNs to be guaranteed by Lloyds Banking Group. A
final rating will be assigned upon receipt of final documents.
Elisabeth Rudman, Senior Credit Officer at Moody's and lead
analyst for Lloyds, said: "Following Lloyds' decision
to opt out of the government's Asset Protection Scheme, the
capital being raised should provide the group with a sufficient buffer
against the remaining expected losses. Nevertheless, Lloyds
is now more exposed towards the tail-risk of a potentially worse-than
expected asset quality deterioration, which is reflected in the
downgrade of the BFSR to C-. The Aa3 debt ratings of Lloyds
TSB remain unaffected as we assume an unchanged likelihood of support."
More detail is provided below on the ratings of the hybrid securities
of the group (including the correction of the rating of one instrument),
as well as rating actions on Bank of Scotland (Ireland). The government
backed ratings assigned to the debt instruments benefiting from a UK government
guarantee remain at Aaa.
LLOYDS ANNOUNCEMENT
The rating action follows today's announcement that instead of participating
in the UK Government's Asset Protection Scheme as announced in March
2009, Lloyds will implement an alternative capital raising plan.
This plan includes a GBP13bn rights issue, and the exchange
of existing Lloyds' deferrable hybrid instruments into contingent
convertible instruments, called Enhanced Capital Notes (GBP6.0bn)
and into ordinary shares (GBP1.5bn). Of this amount
GBP20.5bn is fully underwritten by a consortium led by Bank
of America Merrill Lynch and UBS.
In addition, Lloyds has agreed in principle with the European Commission
that the State Aid Remedy will include the divestment of a GBP70bn
retail banking business with a 4.6% personal current account
market share and 19% of the Group's mortgage book,
as well as a 2 year prohibition on discretionary coupon payments on existing
hybrid instruments (excluding those issued by the insurance operations).
DOWNGRADE OF BFSR
The C BFSR previously assigned to Lloyds TSB was based on the assumption
that the bank would participate in the UK Government's Asset Protection
Scheme (APS) as laid out in March 2009. Today's downgrade
of the BFSR to C- (mapping to a BCA of Baa2) with a negative outlook
incorporates the updated capital raising plans and reflects Moody's
view that although the new capital raising plan has certain advantages,
in terms of providing permanent equity capital rather than lower-quality
government B shares, the opt-out from the APS exposes the
bank to greater tail risk in its loan and securities portfolios,
thereby negatively affecting the bank's intrinsic credit profile.
We note that the impairments taken in Q309 of GBP5.2bn represent
a slowdown in impairments compared to the GBP13.4bn impairments
reported (pro-forma) in H109. However, there is still
much uncertainty over the trajectory of the UK economy, corporate
insolvencies and unemployment. Our own assumptions for loan losses
in the UK have been set out in a Special Comment published in October
2009 entitled "Moody's Approach to Estimating UK Banks'
Credit Losses". Based on these assumptions, our loss
estimates indicate that Lloyds may continue to experience a further deterioration
in asset quality over the coming quarters, particularly in commercial
property exposures and higher risk mortgages. The substantially
higher losses under our stress scenario in the absence of the APS indicate
this higher tail risk, thereby putting more downward pressure on
the BFSR of Lloyds TSB. The APS, on the other hand,
would have provided greater protection against the tail risk.
The BFSR of Bank of Scotland has been downgraded from C- to D+,
reflecting the higher risk assets within the Bank of Scotland loan books.
Over the long term, as the Bank of Scotland becomes fully integrated
within Lloyds Banking Group and the assets that are outside the risk appetite
of the group are wound down, we would expect the BFSR of Bank of
Scotland to be equalized with that of Lloyds TSB.
AFFIRMATION OF SENIOR RATINGS
The affirmation of the Aa3 senior debt and deposit ratings reflects our
view that the group remains of high systemic importance in the UK financial
system. Despite the divestments resulting from the agreement with
the EC, as the largest retail bank in the UK, with leading
market shares in mortgages and savings, we expect Lloyds to remain
systemically important. Nevertheless, as Moody's has
noted previously, it is clear that over the medium term the intention
of the Tripartite Authorities is to put in place measures to enable the
failure of large, systemic banks to be resolved in a way that could
allow losses to be shared by all providers of wholesale funding.
When this materialises further, it could put downward pressure on
the long-term debt and deposit ratings on large UK banks,
including Lloyds Banking Group.
NEW RATING TO BE ASSIGNED TO ENHANCED CAPITAL NOTES
Moody's will assign a provisional (P) Ba2 rating to the Enhanced
Capital Notes (ECNs) to be guaranteed by Lloyds TSB Bank plc and a (P)
Ba3 to the ECNs guaranteed by Lloyds Banking Group plc. These instruments
are dated non-deferrable instruments, however, the
securities convert into a fixed number of ordinary shares if the bank's
Core Tier 1 ratio drops below 5%. The instruments can be
exchanged par-for-par for existing Tier 1 and Upper Tier
2 securities, and whereas many of the existing securities will be
likely to defer in line with EC rulings, we understand that the
new securities will not be subject to any forced deferral.
Moody's notes that Lloyds has indicated it will be managing its
Core Tier 1 ratios to remain above 7%, and therefore the
probability of conversion to equity is currently low. However,
the loss severity to investors in the event of conversion could be very
high due to the fixed conversion ratio, and this risk is reflected
in the rating assigned, which is three notches below the bank's
BCA (with an additional notch for the securities guaranteed by the group
to reflect structural subordination).
SUBORDINATED CAPITAL SECURITIES
Banking Entities
In line with the downgrade of the BFSR of Lloyds TSB to C- (mapping
to a BCA of Baa2) and the BFSR of Bank of Scotland to D+ (mapping
to a BCA of Baa3), the dated subordinated debt instruments of the
banking entities have been downgraded by 2 notches as outlined below.
The junior subordinated debt and preference shares of the banking entities
have already been rated on an expected loss basis, on the assumption
that any agreement with the EC on state aid remedies will result in the
omission of coupons on instruments that are deferrable. The ratings
of these instruments have not changed, but the outstanding reviews
on the junior subordinated debt and cumulative preference shares will
be concluded shortly following today's clarification as to which
instruments are to defer, and there may be downgrades of the instruments
remaining under review by 1 or more notches:
Lloyds TSB Bank:
Senior Subordinated Debt downgraded from Baa1 (negative outlook) to Baa3
(negative outlook)
Junior Subordinated Debt affirmed at Ba1 (rating remains under review
for possible downgrade)
Cumulative Preference Shares: affirmed at Ba2 (rating under review
for possible downgrade)
Non-cumulative Preference Shares: affirmed at B3 (stable
outlook)
Lloyds Banking Group:
Senior Subordinated Debt downgraded from Baa2 (negative outlook) to Ba1
(negative outlook)
Non-cumulative Preference Shares: affirmed at B3 (stable
outlook)
Bank of Scotland:
Senior Subordinated Debt downgraded from Baa1 (negative outlook) to Baa3
(negative outlook)
Junior Subordinated Debt affirmed at Ba1 (rating remains under review
for possible downgrade)
Cumulative Preference Shares: affirmed at Ba2 (rating under review
for possible downgrade)
Non-cumulative Preference Shares: affirmed at B3 (stable
outlook)
HBOS:
Senior Subordinated Debt downgraded from Baa2 (negative outlook) to Ba1
(negative outlook)
Junior Subordinated Debt affirmed at Ba1 (rating remains under review
for possible downgrade)
Non-cumulative Preference Shares: affirmed at B3 (stable
outlook)
Correction to rating of Lloyds TSB 4.385% Perpetual Capital
Securities and Bank of Scotland MTN programme
Moody's has corrected the rating of Lloyds TSB 4.385%
EUR750m step-up perpetual capital securities (ISIN XS0218638236)
from Baa3 to Ba2 (under review for possible downgrade). Although
the instrument had been identified in our database as a cumulative preference
share, due to an administrative error it had not been downgraded
with other cumulative preference shares in previous rating actions.
Moody's has also corrected the subordinated and junior subordinated
debt ratings assigned to Bank of Scotland's Global MTN Programme.
Due to an administrative error the ratings assigned were Baa2, rather
than Baa1 (subordinated rating) and Ba1 under review for possible downgrade
(junior subordinated rating) prior to today's rating action.
As a result of today's rating action those ratings move to Baa3
(subordinated rating) and Ba1 under review for possible downgrade (junior
subordinated rating).
Insurance operations
The review direction on the junior subordinated debts with full optional
deferral features issued by Scottish Widows plc (GBP 560m 5.125
per cent.) and Clerical Medical Finance (EUR 750m 4.25 per
cent.) -- both Ba1 - was changed to uncertain from
possible downgrade where they were placed last September 09, 2009.
The action reflects the EC's intention not to force coupon deferral on
these securities as a part of its approval of Lloyds' State-aid
package; nevertheless, Moody's expects that, given the
current restructuring situation of the bank, there is still a moderate
risk of coupon deferral on these securities.
The Baa2 junior subordinated debt (GBP200m 7 3/8 per cent.) rating
of Clerical Medical Finance plc and the Baa1 senior subordinated debt
(EUR 400m 6.45 per cent.) rating of Clerical Medical Finance
plc were placed on review for possible downgrade to reflect the deterioration
in LBG's stand-alone credit profile, as reflected in
the downgrade of the BFSR of Lloyds TSB and Bank of Scotland; the
ratings also reflect the limited ability for CMF to defer payments on
these two issues as coupon deferral is restricted to mandatory triggers
upon specified remote solvency level. For all the insurance instruments,
Moody's rating reviews will focus on the extent to which capital
at the insurance and banking operations is likely to be managed collectively
going forwards.
SCOTTISH WIDOWS AND CLERICAL MEDICAL FINANCE RATING ACTIONS
The review direction on the following ratings was changed to uncertain
from review for possible downgrade:
Scottish Widows:
Junior Subordinated Debt: Ba1 (review direction uncertain) -
GBP560m 5.125 per cent. Perpetual
Clerical Medical Finance:
Junior Subordinated Debt (guaranteed by Clerical Investment Group Ltd):
Ba1 (review direction uncertain) - €750m 4.25 per cent.
Perpetual
The following ratings were placed on review for possible downgrade:
Clerical Medical Finance:
Junior Subordinated Debt (guaranteed by Clerical Investment Group Ltd)
Baa2 (review for downgrade) - GBP200m 7 3/8 per cent. Undated
Subordinated Guaranteed Bonds
Senior Subordinated Debt (guaranteed by Clerical Investment Group Ltd)
Baa1 (review for downgrade) - EUR400m 6.45 per cent.
Due 2023 Subordinated Guaranteed Bonds
REVIEW OF BANK OF SCOTLAND (IRELAND)
The Baa1/Prime-2/D- ratings of Bank of Scotland (Ireland)
Limited, the group's Irish subsidiary, have been placed
on review for possible downgrade. The D- BFSR currently
assigned to Bank of Scotland (Ireland) was based on Moody's understanding
that the bank's parent would put in place a scheme whereby it was
to mirror the UK Government's Asset Protection Scheme, thereby
largely mitigating further downward pressure on the rating. These
pressures result from the uncertainties around the future of the weak
retail business, the bank's large single borrower concentrations
as well as its overall exposure to the Irish commercial real estate sector,
the very high reliance on the parent for funding and the broader risks
relating to the Irish economy. The review for possible downgrade
on the BFSR will therefore focus on how the group plans to mitigate the
risks within the Irish subsidiary without the protection that the APS
would have brought.
The review for possible downgrade of the Baa1/Prime-2 bank deposit
ratings will also focus on the longer-term strength of the franchise.
Although we expect support from Lloyds Banking Group to remain strong
the long-term viability of the franchise may be impaired further
by the withdrawal from the APS and therefore may lead to a reducing importance
of BOSI to Lloyds.
PREVIOUS RATING ACTIONS
The last rating action on the group was on 22 June 2009 when the senior
debt ratings of Lloyds TSB were affirmed at Aa3 and the BFSR was downgraded
to C and the last rating action on subordinated capital securities took
place on 9 September 2009, when the junior subordinated debt instruments
and cumulative preference shares were downgraded to Ba1/ Ba2 and left
under review for further possible downgrade.
The principal methodologies used in rating this issuer 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), which
can be found at www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Downgrades:
..Issuer: Bank of Scotland plc
....Bank Financial Strength Rating,
Downgraded to D+ from C-
....Multiple Seniority Medium-Term
Note Program, Downgraded to Baa3, Ba1 from Baa2, Baa2
....Subordinate Regular Bond/Debenture,
Downgraded to Baa3 from Baa1
..Issuer: HBOS plc
....Multiple Seniority Medium-Term
Note Program, Downgraded to Ba1 from Baa2
....Subordinate Regular Bond/Debenture,
Downgraded to Ba1 from Baa2
..Issuer: Halifax plc
....Subordinate Regular Bond/Debenture,
Downgraded to Baa3 from Baa1
..Issuer: Leeds Permanent Building Society
....Subordinate Regular Bond/Debenture,
Downgraded to Baa3 from Baa1
..Issuer: Lloyds Banking Group plc
....Subordinate Regular Bond/Debenture,
Downgraded to Ba1 from Baa2
..Issuer: Lloyds TSB Bank Plc
....Bank Financial Strength Rating,
Downgraded to C- from C
....Preferred Stock Preferred Stock,
Downgraded to Ba2 from Baa3
....Subordinate Regular Bond/Debenture,
Downgraded to Baa3 from Baa1
..Issuer: Scotland International Finance No.
2 B.V.
....Subordinate Regular Bond/Debenture,
Downgraded to Baa3 from Baa1
On Review for Possible Downgrade:
..Issuer: Bank of Scotland (Ireland) Limited
....Bank Financial Strength Rating,
Placed on Review for Possible Downgrade, currently D-
....Deposit Rating, Placed on Review
for Possible Downgrade, currently P-2
....Senior Unsecured Deposit Rating,
Placed on Review for Possible Downgrade, currently Baa1
..Issuer: Clerical Medical Finance plc
....Junior Subordinated Regular Bond/Debenture,
Placed on Review for Possible Downgrade, currently Baa2
....Subordinate Regular Bond/Debenture,
Placed on Review for Possible Downgrade, currently Baa1
On Review Direction Uncertain:
..Issuer: Clerical Medical Finance plc
....Junior Subordinated Regular Bond/Debenture,
Placed on Review Direction Uncertain, currently Ba1
..Issuer: Scottish Widows plc
....Junior Subordinated Regular Bond/Debenture,
Placed on Review Direction Uncertain, currently Ba1
Outlook Actions:
..Issuer: Bank of Scotland (Ireland) Limited
....Outlook, Changed To Rating Under
Review From Negative
..Issuer: Halifax plc
....Outlook, Changed To Stable(m) From
Rating Under Review
London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Elisabeth Rudman
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's affirms Lloyds TSB long-term rating at Aa3 stable, downgrades BFSR to C-
