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Rating Action:

Moody's assigns (P)Aaa rating to EFSF's first issuance programme

19 Jan 2011

Frankfurt am Main, January 19, 2011 -- Moody's Investors Service has today assigned a provisional Aaa long-term rating to the first debt issuance programme of the European Financial Stability Facility (EFSF) and to the first drawdown under this programme. The provisional rating on the drawdown will become definitive when the final terms of the first issuance are known.

The overall size of the issuance programme is EUR27 billion. The proceeds of the issuance programme will be used to fund part of the EUR85 billion EU/IMF support program for Ireland, as announced on 28 November 2010. Due to the structure of EFSF, which has a significant in-built cash buffer, the maximum disbursement to Ireland (EUR17.7 billion) is lower than the programme's issuance limit.

RATING RATIONALE

The (P)Aaa rating is based on the issuance programme's contractual elements, including the irrevocable and unconditional guarantees by the participating states. All EFSF member states, apart from Greece and Ireland, collectively provide a 120% guarantee for the entire EFSF debt issuance, apportioned by their respective shares in the capital of the European Central Bank (ECB).

The EFSF debt issuance will be used to fund the loan disbursement to Ireland and various cash retentions, including the EFSF cash reserve and a loan-specific cash buffer, which are set aside to support repayment of the debt. The loan-specific cash buffer is sized so that the portion of the debt issuance that is not backed by cash held by EFSF will be fully covered by Aaa-rated government guarantees.

"As a result, the EFSF debt issuance is backed first by Ireland's promise to repay the loan; by Aaa-rated guarantees and cash sufficient by themselves to cover all of the associated debt service if the loan is not repaid; and guarantees from the non-Aaa-rated members states participating in the EFSF support programme," explains Dietmar Hornung, Vice President -- Senior Credit Officer in Moody's Sovereign Risk Group.

RATIONALE FOR STABLE OUTLOOK

The outlook on the rating is stable, in line with the stable rating outlooks of the guarantor countries, except for Spain, Portugal and Cyprus whose government bond ratings are currently under review for possible downgrade (as announced in Moody's rating actions published on 15 and 21 December 2010, and 13 January 2011, respectively).

DOWNGRADE RISK

Risks that could negatively affect the creditworthiness of the programme include a potential deterioration in the creditworthiness of the participating guarantor countries. The creditworthiness of the issuance programme is particularly sensitive to changes in the ratings of Aaa countries with large EFSF contribution keys, i.e. Germany, France and the Netherlands. Moreover, a weakening of the Eurozone Member States' commitment to EFSF could have negative rating implications.

CREDIT ENHANCEMENTS

Whereas the issuance is primarily backed by the EFSF's loan to Ireland, the following features are in place to mitigate the risk of Ireland defaulting on its loan:

(i) Over-guarantee mechanism. The guarantors have issued irrevocable and unconditional guarantees, which jointly amount to an overall 120% over-guarantee of the EFSF issuance (principal and interest). If a supporting state becomes a borrower, it may -- if all guarantors agree -- step out as a guarantor for prospective issuances, but this would not affect its liability under the existing guarantee for the Irish issuance.

(ii) EFSF cash reserve. An additional credit enhancement is represented by the EFSF's cash reserve. The funds distributed to Ireland are net of an up-front service fee (calculated as 50 basis points on the aggregate principal amount of the loan) and the net present value of the interest rate margin that would accrue on the loan at the contractual rate to its scheduled maturity date. The cash reserve will ultimately provide remuneration for the guarantors, but is initially retained by the EFSF as loss-absorbing capital.

(iii) Loan-specific cash buffer. In addition to the cash reserve, the EFSF establishes a loan-specific cash buffer which is sized such that the EFSF loan is fully covered by Aaa guarantees and/or an amount of cash equal to the relevant portion of the EFSF cash reserve, plus any loan-specific cash buffer, plus an amount sized to cover negative carry on the loan-specific cash buffer.

(iv) Potential additional support. While a pure quantitative analysis of the contractual arrangements per se supports the assignment of a (P)Aaa rating, the downgrade risk of the programme is mitigated by the strong implicit support for this facility evident among the participating countries. Statements by the Eurozone Members' respective heads of state reflect the high-level commitment to the EFSF. "A default on EFSF debt would also result in considerable reputational risks for core European countries like Germany and France, and would likely increase their borrowing costs," says Mr. Hornung.

GERMAN COURT PROCEEDINGS

Moody's has considered the likelihood and possible effect of the German constitutional court concluding that the legislation enabling Germany to guarantee EFSF's debt obligations is unlawful. According to a legal opinion reviewed by Moody's, the risk that the statute violates German or EU law is minimal. In addition, Moody's understands that, even if the constitutional court rules otherwise, there are strong arguments why Germany's obligations under guarantees that are in place at the time of the ruling should not be affected. For these reasons, Moody's considers that the risks associated with the ongoing German constitutional court proceedings are commensurate with the (P)Aaa rating.

PREVIOUS RATING ACTION AND METHODOLOGIES

Moody's last rating action affecting the EFSF was implemented on 20 September 2010, when the rating agency assigned a provisional long-term rating of Aaa to the prospective debt issuance program of EFSF.

EFSF's ratings were assigned by evaluating factors relevant to the specific characteristics of the Facility, reflecting its dual nature as financing facility and a vehicle of public policy. These attributes were compared against other issuers, and its ratings are believed to be similar to other issuers of similar credit risk.

Moody's assigns a provisional rating when it is highly likely that the rating will become final after all documents are received. Moody's will monitor the transaction on an ongoing basis to ensure that it continues to perform in the manner expected. Any subsequent changes in the rating will be publicly announced and disseminated through Moody's Client Service Desk.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating. However, the credit rating action was based on limited historical data.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Frankfurt am Main
Dietmar Hornung
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

New York
Bart Oosterveld
MD-CCO Pub, Proj and Infra Fin
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's assigns (P)Aaa rating to EFSF's first issuance programme
No Related Data.
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