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Announcement:

Moody's comments on Danish government's second support package for financial sector

21 Jan 2009

London, 21 January 2009 -- Moody's Investors Service today commented on the second government support package announced by the Danish government for the domestic financial sector. The package comprises the recapitalisation of the financial sector and the extension of the guarantee scheme for the issuance of medium-term loans by banks, and also includes senior unsecured debt of mortgage credit institutions and supplementary issuances (typically referred to as junior covered bonds). Moody's views the package as a positive development in the current challenging market environment, but the rating agency does not expect it to lead to rating upgrades in the sector. Moody's credit outlook for the Danish banking system remains negative.

This second support package follows the two-year government guarantee scheme announced in October 2008 and means that Danish banks can now benefit from capital support, similar to that provided by a number of other jurisdictions. The package, which Moody's notes will be fully detailed in forthcoming legislation, is the result of an agreement between the major political parties in Denmark.

Moody's understands that the institutions eligible to participate in the recapitalisation scheme of approximately DKK100 billion (EUR13 billion) include all solvent banks and mortgage credit institutions in Denmark as well as Danish Ship Finance. The institutions have until 30 June 2009 to apply for the capital injection, which will be in the form of hybrid core capital with an annual interest rate of between 9% and 12%, depending on the credit quality assessment of the respective institutions. The government expects the participating institutions to have Tier 1 ratios of a minimum of 12% after the capital injection. This level is viewed as sufficient by the government to support lending growth as well as to cover loan losses in the current downturn. Recapitalisation is intended to be temporary and the participating institutions can repay the injected capital after three years.

In addition to the recapitalisation plan, the government will expand the Act on Financial Stability to include a possibility for banks and mortgage credit institutions to issue medium-term loans with a state guarantee until the end of 2010. The state guarantee can be used for maturities of up to three years and loans maturing at the latest on 31 December 2013. Moody's understands that the guarantee will also be available for junior covered bonds. Junior covered bonds refer to supplementary issuance to cover reduced value of the assets in the cover pool.

RATING IMPLICATIONS

Moody's expects that recapitalisation as such is unlikely to lead to rating upgrades given that the measure is intended to be temporary. However, higher capital levels would be viewed favourably by the rating agency given the pressure on profitability that Danish banks are experiencing, which reflects the increasing need for impairments on loan portfolios. Improved capital adequacy will merely help to counterbalance the downward pressure on the ratings exerted by the difficult operating environment, deteriorating asset quality and higher funding costs, as well as the cost of the two support packages.

Regarding the state guarantee for the issuance of medium-term notes by the banks and mortgage credit institutions, Moody's will review the final terms of the guarantee to determine whether backed Aaa ratings could be assigned to eligible debt securities.

Regarding junior covered bonds, Moody's acknowledges that the intention behind their inclusion in the guarantee scheme is to provide the mortgage credit institutions with an enhanced tool with which to mitigate the negative impact of possible asset-value deterioration in order to comply with a certain loan-to-value ratio. However, a final view on the possible repercussions of any junior covered bonds issuance in respect of the outstanding covered bonds will only be taken once the details of the guarantee scheme have been fully assessed.

Since such support schemes are intended to be temporary, we will follow the strategies of the rated institutions closely to monitor the transition in terms of capitalisation, liquidity and funding once the schemes expire.

BANKING SYSTEM OUTLOOK

The outlook on the Danish banking system is negative, reflecting Moody's expectations for the fundamental credit conditions in the Danish banking system over the next 12 to 18 months (see Banking System Outlook, published in November 2008).

The Danish economy has deteriorated significantly and the outlook remains weak. Due to a worsening operating environment and difficult funding conditions, corporate bankruptcies have increased rapidly, particularly in the property development sector. The export sector has also been adversely affected by the global downturn.

In light of the difficult economic conditions, Moody's expects the corporate loan books of the Danish banks to continue to be negatively affected in the next 12-18 months. The rating agency also cautions that the combination of falling house prices and the high indebtedness of Danish households poses a risk for financial institutions, especially in the event of rapidly declining employment.

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

London
Eeva Antila
Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's comments on Danish government's second support package for financial sector
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