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Related Issuers
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Rating Action:

Moody's comments on refined support for Depfa/HRE, maintains review for downgrade on key ratings

07 Oct 2008

Hybrid instruments downgraded, ratings of HREI aligned with those of HREB

Frankfurt, October 07, 2008 -- Moody's Investors Service today commented on the ratings impact of the updated support package available to Hypo Real Estate Group for the Depfa entities (Depfa Bank plc, Depfa ACS Bank and Depfa Deutsche Pfandbriefbank AG) as well as the HRE entities (Hypo Real Estate Bank International -- "HREI", Hypo Real Estate Bank AG -- "HREB").

Moody's maintained the review for downgrade on both Depfa's and HREI's and HREB's long- and short term ratings which had been initiated last week when the funding challenges had been made public.

This decision to maintain the review for possible downgrade takes into consideration:

(i) the actual substantial short-term liquidity-support provided, which we expect to provide for sufficient funding until year-end; and

(ii) the remaining -- and increased - uncertainty about the longer-term viability mostly of the Depfa entities, which has not been addressed by the liquidity support.

Moody's believes that the evidenced support should provide the bank with the opportunity -- albeit during a short time frame only - to establish a more sustainable long-term funding framework and to define a viable business strategy for its Depfa entities, as well as for the group's real estate business. It should also allow the group to reduce any possible contagion of its commercial real estate activities of HREI and HREB from any further liquidity and profitability challenges at its sister banks of Depfa.

However, Moody's also cautions that in case that the group fails to establish such a more sustainable funding framework and viable business strategy during the next few months, the ratings of the Depfa entities are likely to be downgraded by multiple notches, while the HREI and HREB ratings are also likely to be downgraded, albeit on a less significant scale due to the expected continuing viability of these entities.

In such a scenario, the downgrades would also most likely affect the current Prime-1 ratings of all entities.

Additionally Moody's notes in this context that the overall situation remains fluid and the details and quality of information provided on the group's liquidity situation falls short of allowing a full assessment of the group's full 12 month funding needs.

Alignment of HREI's ratings to HREB's ratings

While Moody's had previously assigned different BFSR's to both entities, mostly as a reflection of asset quality differences at the two entities, Moody's had already indicated in its rating action dated July 18, 2008 that both ratings would likely converge due to the planned merger of these entities. While this merger has not yet been fully implemented, in view of the pending merger Moody's decided to align the BFSR's and debt ratings of these two entities at the level of HREB's ratings, i.e. a BFSR of C- and a senior unsecured debt and deposit rating of A2/Prime-1. These ratings also remain under review for possible downgrade

Downgrade of the group's hybrid instruments

The downgrade of the preference shares of various Depfa entities to Ba3 from Baa1 takes into consideration their deep subordination to senior creditors, the risk stemming from a potential regulatory imposed coupon deferral, as well as increased evidence during the last 15 months that such deeply subordinated hybrid instruments may not benefit from the same degree of support that senior unsecured creditors have benefited from. The Ba3 rating therefore reflects the expected loss associated to an assumed coupon deferral over a two-year time horizon.

The ratings of HREI's and HREB's Upper Tier II instruments ("Genussscheine") were downgraded to Baa3 from A2 and A3 respectively, widening the notching from the entities senior unsecured debt ratings to 4 notches. This reflects the higher intrinsic risk of the issuers as indicated by the BFSR of C- and their respective review for possible downgrade, in combination with the observed lower support likelihood for such instruments.

The review for downgrade of all ratings will primarily focus on the following issues:

(i) The finalization and immediate availability of the bridge facility and the timely establishment of the guaranteed SPV;

(ii) For how long these measures will fully cover secured and unsecured funding needs, along with an assessment of its future ability to access debt capital markets and funding costs;

(iv) the implications of the planned transaction and evolving funding situation on the bank's future profitability and the viability of its business model, specifically, the ability of Depfa to restore profitability to double digit net interest margins over the next 6 to 12 months assuming matched funding;

(v) How this profitability situation will affect the debt capacity and timeliness of payments relating to the debt assumed for the acquisition of Depfa in late 2007;

(vi) the group's asset quality, assessing to what extent any deterioration may erode pre-provision profitability and therefore put pressure on the bank's capitalization levels;

(vii) The ability to rebuild confidence in the group's remaining business activities;

(vii) And any further systemic support that may be available for the bank.

Additionally, the review will also focus on a potential (further) widening of the notching of HRE Bank's hybrid securities to reflect the lower support-likelihood for such instruments in the current environment. The rating agency will also assess to which extent the Irish regulator may place obstacles to Depfa to pay coupons on their outstanding non-cumulative preference shares, esp. if the profitability situation in 2008 and 2009 deteriorates substantially as a result of stalled new business and rising funding costs for existing long-term assets.

Moody's will separately review any potential impact on the current ratings of HRE / Depfa entities' covered bonds, which are not covered by this Press Release.

The most recent rating action concerning Depfa entities was on 30 September 2008 when Moody's lowered the long-term ratings of the Depfa entities to A2 from previously Aa3 and placed all ratings of the HRE Group on review for downgrade. For further details on that rating action, please refer to the press release dated 30 September 2008.

Headquartered in Dublin, Depfa Bank plc reported total assets of EUR218 billion as well as a pre-tax profit of EUR338 million as of 31 December 2007.

Headquartered in Munich, HRE Group reported consolidated total assets of EUR400 billion and a pre-tax profit of EUR587 million as of 31 December 2007.

Frankfurt
Katharina Barten
Vice President - Senior Analyst
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

Moody's comments on refined support for Depfa/HRE, maintains review for downgrade on key ratings
No Related Data.
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