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Rating Action:

Moody's affirms the ratings of six German regions and three Government-Related Issuers; stable outlooks maintained

07 Feb 2020

Frankfurt am Main, February 07, 2020 -- Moody's Public Sector Europe ("Moody's") has today affirmed all the ratings of six German regional governments and three government-related issuers. The stable outlooks for all entities are maintained. The baseline credit assessments (BCAs) of all issuers were also affirmed.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

RATIONALE FOR THE RATINGS AFFIRMATIONS

Moody's has affirmed the Aaa ratings of Baden-Wuerttemberg, Bavaria and Brandenburg. The affirmations were driven by the regions' prudent budgetary management, sound financial performance, as well as their strong and diversified economies, particularly Baden-Wuerttemberg and Bavaria, where GDP per capita is more than 10% above the national average. Bavaria and Baden-Wuerttemberg will also benefit from the adjusted equalisation scheme that is effective from 2020, which will allow them to keep more tax revenues within their budget and ensure revenue predictability. Brandenburg will further benefit from additional transfers incorporated in the new system.

The ratings also reflect the regions' limited fiscal flexibility. Baden-Württemberg has a moderate debt burden, reflected in its net direct and indirect debt (NDID) ratio of around 85% of operating revenues in 2019, down from 94% in 2018. This is expected to decline further over the coming two years towards 80%. Bavaria's debt burden continues to decline, with NDID declining to a low 31.3% of operating revenues in 2019 based on preliminary figures from 33.5% in 2018, and expected to decline further to below 30% by 2021. Bavaria has a strong commitment to become debt free in the long run. The debt burden of Brandenburg is relatively high compared to other Aaa peers, although moderately declining, with NDID likely to remain stable at 146% of operating revenues in 2019, and expected to decline to 140% by 2021.

Moody's has also affirmed the Aa1 long-term ratings of Berlin, Nordrhein-Westfalen and Saxony-Anhalt, as well as the (P)P-1 short-term ratings of Nordrhein-Westfalen and the Other Short Term (P)P-1 of Saxony-Anhalt. The affirmations reflect the revenue predictability, good financial performance and financing surpluses, as well as conservative financial management of the regions. These are counterbalanced by the regions' high debt levels and limited financial flexibility. The debt level of Saxony-Anhalt remains high, but is steadily declining, with NDID likely decreasing slightly to 206% of operating revenues as per preliminary 2019 figures, from 210% one year before, and expected to decline below 200% by 2021. Although Berlin substantially reduced its NDID in recent years, it remains very high at slightly above 200% of operating revenue projected as of year-end 2019. Moody's expects Berlin's debt level will continue to decline, but at a slower pace than in the recent past. The debt level of Nordrhein-Westfalen will also continue to decline from its still very high level of NDID of about 220% of operating revenue projected at year-end 2019, down from 233% in 2018.

The ratings affirmations of Erste Abwicklungsanstalt, hsh finanzfonds AoR and hsh portfoliomanagement AoR are based on the fact that they were set up as public-sector entities (Government Related Issuers, GRIs) and reflects Moody's view that from a credit risk perspective, it is not meaningful to distinguish between the entities and their guarantors, because of the support provided by their shareholders. Therefore their ratings are derived from the credit strength of the respective supporting regional governments that provide full, unconditional and irrevocable guarantees for all debt of the entities.

In addition to the Government-Related Issuers methodology, we used Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts published in May 2017.

RATIONALE FOR THE STABLE OUTLOOKS

The stable rating outlooks on the regions' ratings reflects Moody's expectation that their administrations will continue to demonstrate balanced accounts in the near future, the overall favourable -- although slowing -- macroeconomic environment in Germany, leading to nominal growth of Land's tax revenue, and the stable outlook on Germany's Aaa rating, given the extremely strong macroeconomic, fiscal and institutional links between the sovereign's and the regional governments' credit risks.

The stable rating outlooks on the GRIs' ratings reflects the outlooks on the guarantors' credit strength, given the direct linkage with the entities.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Environmental risks are not material to the regional administrations' ratings. They have only very limited exposure to flood risk, nevertheless this is not material, given the central government would provide support in such a scenario. Social risks are also not material to their ratings. German Länder face a trend of ageing population, resulting in declining labour supply and higher pension and social cost. However, Moody's assesses these effects as well manageable. Governance considerations are material to the RLGs' ratings. Budgetary discipline in Germany is a constitutional requirement, which requires each of the regions to maintain structurally balanced budgets. Budget planning is prudent, transparent and predictable.

Environmental risks are not material to the GRIs' ratings. Social risks are not material for their ratings either, given their activities are not focused on areas where they would be exposed to these risks, and the support coming from their owners. Governance risks are material to the ratings. The governance framework is intrinsically intertwined with the supporting government, which exerts strong oversight and ultimately takes key decisions.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Upward rating pressure on the Aa1 rated regions (Berlin, Nordrhein-Westfalen and Saxony-Anhalt) could be exerted by significant improvement in their financial performance, including a substantial reduction of their debt burden, combined with a sustained track record of balanced financial budgets, in line with the debt break criteria.

The ratings of the GRIs could be upgraded in case of an improvement in the respective guarantors' credit strength.

A significant deterioration in the regions' fiscal metrics leading to a material increase in debt levels, or -- although not expected -- any alterations in the fundamental supportive structure of the Länder sector, or an -- also unlikely -- downgrade of Germany's sovereign rating would lead to a downgrade.

The GRIs' ratings could be downgraded in case of a weakening of the respective guarantors' credit strength, any weakening of the guarantees, or change in the entities' legal status.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Baden-Wuerttemberg, Land of

.... LT Issuer Rating, Affirmed Aaa

..Issuer: Berlin, Land of

.... LT Issuer Rating, Affirmed Aa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Aa1

..Issuer: Nordrhein-Westfalen, Land of

.... LT Issuer Rating, Affirmed Aa1

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Aa1

....Other Short Term, Affirmed (P)P-1

....Senior Unsecured Regular Bond/Debenture , Affirmed Aa1

..Issuer: Erste Abwicklungsanstalt

.... LT Issuer Rating, Affirmed Aa1

.... ST Issuer Rating, Affirmed P-1

....Commercial Paper, Affirmed P-1

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Aa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Aa1

....Other Short Term, Affirmed (P)P-1

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Aa1

..Issuer: hsh finanzfonds AoR

....LT Issuer Rating, Affirmed Aa1

.... ST Issuer Rating, Affirmed P-1

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Aa1

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Aa1

..Issuer: hsh portfoliomanagement AoR

.... LT Issuer Rating, Affirmed Aa1

.... ST Issuer Rating, Affirmed P-1

....BACKED Commercial Paper, Affirmed P-1

.... BACKED Senior Unsecured Medium-Term Note Program , Affirmed (P)Aa1

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Aa1

..Issuer: Bavaria, Free State of

....LT Issuer Rating, Affirmed Aaa

..Issuer: Brandenburg, Land

....LT Issuer Rating, Affirmed Aaa

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Aaa

....Senior Unsecured Regular Bond/Debenture, Affirmed Aaa

..Issuer: Saxony-Anhalt, Land of

....Commercial Paper, Affirmed P-1

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Aa1

....Other Short Term, Affirmed (P)P-1

....Senior Unsecured Regular Bond/Debenture , Affirmed Aa1

Outlook Actions:

..Issuer: Baden-Wuerttemberg, Land of

....Outlook, Remains Stable

..Issuer: Berlin, Land of

....Outlook, Remains Stable

..Issuer: Nordrhein-Westfalen, Land of

....Outlook, Remains Stable

..Issuer: Erste Abwicklungsanstalt

....Outlook, Remains Stable

..Issuer: hsh finanzfonds AoR

....Outlook, Remains Stable

..Issuer: hsh portfoliomanagement AoR

....Outlook, Remains Stable

..Issuer: Bavaria, Free State of

....Outlook, Remains Stable

..Issuer: Brandenburg, Land

....Outlook, Remains Stable

..Issuer: Saxony-Anhalt, Land of

....Outlook, Remains Stable

The specific economic indicators, as required by EU regulation, are not available for these entities. The following national economic indicators are relevant to the sovereign rating, which was used as an input to this credit rating action.

Sovereign Issuer: Germany, Government of

GDP per capita (PPP basis, US$): 52,386 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.5% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.7% (2018 Actual)

Gen. Gov. Financial Balance/GDP: 1.9% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 7.4% (2018 Actual) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: Very High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

SUMMARY OF MINUTES FROM RATING COMMITTEE

On 04 February 2020, a rating committee was called to discuss the rating of the Bavaria, Free State of; Brandenburg, Land; Saxony-Anhalt, Land of; Baden-Wuerttemberg, Land of; Berlin, Land of; Nordrhein-Westfalen, Land of; Erste Abwicklungsanstalt; hsh finanzfonds AoR; hsh portfoliomanagement AoR. The main points raised during the discussion were: The issuer's fiscal or financial strength, including its debt profile, has materially increased; The issuer has become less susceptible to event risks.

The principal methodology used in rating Bavaria Free State of, Baden-Wuerttemberg, Land of , Berlin Land of , Brandenburg, Land of , Nordrhein-Westfalen, Land of and Saxony-Anhalt, Land of was Regional and Local Governments published in January 2018. The principal methodology used in rating Erste Abwicklungsanstalt, hsh finanzfonds AoR and hsh portfoliomanagement AoR was Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

The person who approved Bavaria, Free State of, Baden-Wuerttemberg Land of, Berlin Land of, Brandenburg Land of, Nordrhein-Westfalen Land of, Saxony-Anhalt Land of and Erste Abwicklungsanstalt credit ratings is Mauro Crisafulli, Associate Managing Director, Sub-Sovereign, +44 20 7772 5456, +44 20 7772 5454. The person who approved hsh finanzfonds AoR and hsh portfoliomanagement AoR credit ratings is David Rubinoff, Managing Director, Sub-Sovereign, +44 20 7772 5456, +44 20 7772 5454.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Harald Sperlein
Vice President - Senior Analyst
Sub-Sovereign Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Mauro Crisafulli
Associate Managing Director
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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