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Rating Action:

Moody's concludes its review on hybrid securities ratings in UK

11 Feb 2010

Approximately GBP20 billion of securities affected

London, 11 February 2010 -- Moody's Investors Service concluded its review on the ratings of certain UK hybrid securities, in line with its revised "Guidelines for Rating Bank Hybrids and Subordinated Debt" published in November 2009. This resulted primarily in a number of downgrades for hybrid securities ratings of UK banks, thus concluding the review for possible downgrade that began on November 18th, 2009. A full list of the individual securities affected can be accessed through this link:

http://v3.moodys.com/page/viewresearchdoc.aspx?docid=PBC_123179

Prior to the global financial crisis, Moody's had incorporated into its ratings an assumption that support provided by national governments and central banks to shore up a troubled bank would, to some extent, benefit the subordinated debt holders as well as the senior creditors. Contrary to this expectation -- and to the past behavior of most governments - the systemic support for these instruments has not been forthcoming in many cases during this crisis. In the UK this change in assumptions was already reflected in the removal of systemic support from subordinated and hybrid instruments from UK bank ratings in April 2009. This followed the introduction of the 2009 Banking Act in February 2009, which provided broad powers for allowing losses to be absorbed by hybrid debt holders through a good bank/ bad bank structure. The revised hybrid ratings guidelines that were published in November 2009 further widen the possible notching on a hybrid's rating that is based on the instrument's features.

RATING ACTION IN DETAIL

The starting point in Moody's revised approach to rating hybrid securities is the Adjusted Baseline Credit Assessment (Adjusted BCA). The Adjusted BCA reflects the bank's standalone credit strength, including parental and/or cooperative support, if applicable. The Adjusted BCA excludes systemic support.

The characteristics of UK junior subordinated debt instruments and non-cumulative preference shares are as follows:

• The junior subordinated debt is perpetual, ranks subordinated to senior debt in liquidation and allows the issuer to optionally defer coupon payments subject to a dividend pusher language. There is also mandatory deferral tied to the breach of solvency triggers, which is considered a "weak" trigger as it is unlikely to occur outside of a winding up of the institution. Any deferred interest is cumulative. For the UK, unless stated otherwise, junior subordinated debt instruments are rated at the Adjusted BCA level minus two notches. The additional notch reflects the junior subordinated claim as well as the risk of a missed coupon payment and the timeliness of payments, even if accumulated coupons are repaid.

• The loss absorption for non-cumulative preferred securities while the issuer remains a going concern primarily stems from the non-cumulative coupon skip feature, which is mandatory upon breach of minimum regulatory capital requirements or generally upon regulatory intervention, or at the option of the issuer if no dividends are paid. Together with their deeply subordinated claim in liquidation, this means that, unless stated otherwise, these instruments are rated to the standard Adjusted BCA minus three notches. Similar to junior subordinated debt, these instruments are also exposed to principal losses in a going concern scenario, which is captured in the three notches.

• Similar to preference shares above, Permanent Interest Bearing Shares (PIBS) in this rating action are perpetual non-cumulative instruments issued by building societies and are at the bottom of the capital structure. Their coupon skip mechanism is mandatory with respect to regulatory capital adequacy requirements and optional if interest or dividend payments on share investments have not been made. Their loss absorption is similar to non-cumulative preference shares for banks explained above; therefore they are also rated at Adjusted BCA minus three notches.

The rating actions on each UK banks and building societies are detailed below:

1) Barclays Bank Plc

The Adjusted BCA for Barclays Bank is A3, which is the same level as its unadjusted BCA.

The following securities issued by Barclays Bank were affected by this rating action:

• Junior subordinated debt and junior subordinated EMTN programme ratings (Upper Tier 2) downgraded to Baa2 from Baa1

• Non-cumulative preferred securities downgraded to Baa3 from Baa2

The outlook for all the affected instruments is negative, in line with the negative outlook for Barclays Bank's C BFSR and corresponding A3 BCA.

2) HSBC Holdings Plc

The Adjusted BCA for HSBC Holdings Plc is Aa3, which is the same level as its unadjusted BCA.

The following securities issued by HSBC Holdings Plc were affected by this rating action:

• Non-cumulative preferred securities (Tier 1) downgraded to A3 from A1/A2

The outlook for all the affected instruments is negative, in line with the negative outlook for HSBC Holdings Plc's Aa3 BCA

3) HSBC Bank Plc

The Adjusted BCA for HSBC Bank Plc is A1, which is one notch above its unadjusted BCA of A2.

The following securities issued by HSBC Bank Plc were affected by this rating action:

• Junior subordinated debt (Upper Tier 2) downgraded to A3 from A2,

• Non-cumulative preferred securities (Tier 1) downgraded to Baa1

The outlook for all the affected instruments is negative, in line with the negative outlook for HSBC Bank Plc's C+ BFSR and corresponding A2 BCA

4) Nationwide Building Society

The Adjusted BCA for Nationwide is Baa2, which is the same level as its unadjusted BCA.

The following securities issued by Nationwide were affected by this rating action:

• PIBS rating was downgraded to Ba2 from Ba1.

The outlook for all the affected instruments is negative, in line with the negative outlook for Nationwide Building Society's C- BFSR and the corresponding Baa2 BCA.

5) Skipton Building Society

The Adjusted BCA for Skipton is Ba1, which is the same level as its unadjusted BCA.

The following securities issued by Skipton were affected by this rating action:

• PIBS rating was downgraded to B1 from Ba3

The outlook for all the affected instruments is negative, in line with the negative outlook for Skipton Building Society's D+ BFSR and corresponding Ba1 BCA.

6) Coventry Building Society

The Adjusted BCA for Coventry is Baa2, which is the same level as its unadjusted BCA.

The following securities issued by Coventry were affected by this rating action:

• PIBS rating was downgraded to Ba2 from Ba1.

The outlook for all the affected instruments is negative, in line with the negative outlook for Coventry Building Society's C- BFSR and the corresponding Baa2 BCA.

7) Close Brothers Ltd

The Adjusted BCA for Close Brothers Ltd. is A2, which is the same level as its unadjusted BCA.

The following securities issued by Close Brothers Ltd. were affected by this rating action:

• The Junior subordinated EMTN programme rating (Upper Tier 2) was downgraded to Baa1 from A3.

The outlook for all the affected instruments is negative, in line with the negative outlook for Close Brothers Ltd. C+ BFSR and corresponding A2 BCA.

8) The Co-operative Bank

The Adjusted BCA for The Co-operative Bank is Baa3, which is the same level as its unadjusted BCA. The junior subordinated debt (Upper Tier 2) of The Co-Operative Bank was upgraded to Ba2 from Ba3.

The upgrade reflects Moody's revised notching guidelines for hybrid securities and in particular for junior subordinated debt with cumulative features which is now generally positioned two notches below the adjusted BCA.

The outlook for all the affected instruments is stable, in line with the stable outlook for The Co-Operative Bank's D+ BFSR and corresponding Baa3 BCA.

9) Clydesdale

The Adjusted BCA for Clydesdale is A2, which is the same level as its unadjusted BCA

The junior subordinated EMTN programme rating (Upper Tier 2) was confirmed at A3 (negative outlook) as the terms and conditions of the programme mean that there is no optional deferral right. Therefore the risk of this instrument is restricted to its subordinated ranking in liquidation.

10) ICICI Bank UK Plc

The Adjusted BCA for ICICI Bank is Baa2, which is three notches above its unadjusted BCA, reflecting uplift from parental support

The following securities issued by ICICI Bank UK Plc were affected by this rating action:

• Junior subordinated debt (Upper Tier 2) was upgraded to Ba1 from Ba2. The upgrade reflects Moody's revised notching guidelines for hybrid securities and in particular for junior subordinated debt with cumulative features which is now generally positioned two notches below the adjusted BCA.

The outlook for the affected rating class instruments is stable, in line with the stable outlook for ICICI Bank UK Plc's D BFSR and corresponding Baa2 BCA.

The junior subordinated and Tier 1 debt of RBS and Lloyds are unaffected by this announcement, as we have already taken rating actions to incorporate the expected coupon skip on certain instruments following the European Commission requirement to defer coupons as a result of State Aid received (May Pay securities), and have already applied the revised methodology to instruments not expected to skip coupons due to dividend pusher language (Must Pay or potential Must Pay securities).

The principal methodology used in these rating actions was Moody's Guidelines for Rating Hybrid Securities and Subordinated Debt, published in November 2009. 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.

The last rating action on Barclays Bank Plc was on 1 February 2009, when Moody's downgraded Barclay's senior debt ratings to Aa3 (with stable outlook) and BFSR to C (with negative outlook).

Barclays is headquartered in London, UK. At 30 June 2009 it had total assets of GBP1,545billion.

The last rating actions on HSBC Holdings Plc and HSBC Bank plc were on 9 April 2009, when Moody's downgraded the subordinated debt ratings of HSBC Holdings Plc to A1 from Aa3 and its hybrid securities to A2 from A1 (with a negative outlook); in the same rating action Moody's downgraded HSBC Bank Plc' subordinated debt rating to A2 from Aa3, and hybrid debt to A3 from A1 (with a negative outlook).

HSBC Holdings is headquartered in London, UK. At 30 June 2009 it had total assets of US$2,422 billion.

The last rating action on Nationwide Building Society was on 14 April 2009, when Moody's downgraded Nationwide's senior debt ratings to Aa3 (with stable outlook), and its BFSR to C- (with negative outlook).

Nationwide Building Society is headquartered in UK. At 30 September 2009 it had total assets of US$318billion.

The last rating action on Skipton Building Society was on 14 April 2009, when Moody's downgraded Skipton's senior debt ratings to Baa1 (with negative outlook), BFSR to D+ (with negative outlook) and dated subordinated debt to Ba2.

Skipton Building Society is headquartered in UK. At 30 June 2009 it had total assets of US$25billion.

The last rating action on Coventry Building Society was on 14 April 2009, when Moody's downgraded Coventry's senior debt ratings to A3 (with negative outlook), and its BFSR to C- (with negative outlook).

Coventry Building Society is headquartered in UK. At 31 December 2008 it had total assets of US$25billion.

The last rating action on Close Brothers was on 12 May 2009, when Moody's changed Close Brother's Bank outlook to negative in view of the increasing pressures on the bank's profitability and capital, as a result of the credit crunch.

Close Brothers is headquartered in London. At 31 July 2009 it had total assets of GBP4,005 billion.

The last rating action on The Co-Operative Bank was on 3 August 2009, when Moody's downgraded the bank's BFSR to D+, following the merger with Britannia Building Society.

The Co-Operative Bank is headquartered in Manchester. At 10 January 2009 it had total assets of GBP14,964 billion.

The last rating action on Clydesdale Bank was on 12 May 2009, when the bank's senior debt ratings were downgraded to A1 (with negative outlook), BFSR was downgraded to C- (with stable outlook) and subordinated debt ratings were downgraded to A3.

Clydesdale is headquartered in UK. At 30 September 2009 it had total assets of US$68billion.

The last rating action on ICICI Bank UK Plc was on 3 November 2008, when Moody's downgraded the bank's senior debt ratings to Baa2 (with stable outlook), subordinated debt to Baa3 and junior subordinated debt to Ba2.

ICICI Bank UK Plc is headquartered in London, UK. At 31 March 2009 it had total assets of US$7billion.

Please visit www.moodys.com to access the following documents for additional information:

Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt -- November 17, 2009

Frequently Asked Questions: Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt -- November 17, 2009

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 concludes its review on hybrid securities ratings in UK
No Related Data.
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