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Rating Action:

Moody's concludes review on 30 RBS hybrid and junior subordinated instruments

22 Apr 2010

London, 22 April 2010 -- Moody's has today concluded its review of the hybrid and junior subordinated debt instruments of Royal Bank of Scotland Group ("RBSG"), which had been kept under review at the time of the last rating action on RBSG's hybrids on December 22, 2009. The instruments affected are all so-called "Must Pay Securities", i.e. securities which are not affected by the European Commission requirement for RBSG to skip coupons for two years from a date starting not later than 30th April 2010. The payment of coupons on these securities was also affected by the availability of distributable profits, and following the publication of audited 2009 accounts showing sufficient distributable profits (based on retained earnings), the conclusion of the review reflects the clarity that these instruments constitute "Must-Pay Securities".

At the rating action of 22nd December 2009 Moody's did not conclude the rating of the potential Must Pay Securities, because of uncertainty as to the availability of distributable profits. This affected the eventual outcome as to which securities would pay or would not pay in 2010-2012, as RBSG has to pay dividends on certain non-cumulative preference shares if it has sufficient distributable profits, and such a payment would also activate the dividend pusher of certain UT2 and LT2 securities. In RBSG's audited 2009 accounts, the bank has reported retained earnings of GBP13.262bn at the holding company level (and GBP12.134bn at the consolidated Group level), following a similar transaction to 2008 whereby retained earnings were boosted by a GBP9.95bn transfer from the merger reserve. This was in turn possible because of the GBP27.471bn capital raising from the UK government, which was accounted for in the merger reserve. Therefore, Moody's no longer expects any restrictions on coupon payments on these securities, and has adjusted the ratings as indicated in our press release of 22nd December 2009, i.e. they are notched down from the Baseline Credit Assessment ("BCA") in line with the notching guidelines set out in Moody's Revised Hybrid Methodology of November 2009. The outlook on the securities is negative, in line with the negative outlook on the BCA.

The debt exchange announced by RBSG on 25th March 2010 which proposes the exchange of UT2 securities into senior notes and a cash tender of T1 securities up to a Tier 1 reduction cap of 50bp does not affect the ratings of these instruments. We view this as an opportunistic debt exchange, which is broadly neutral for the bank's credit profile. It is expected to increase Core Tier 1 by up to 35bp on an after tax basis, but it will also reduce total Tier 1 by up to 50bp.

List of securities:

http://v3.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_124424

Non-cumulative preference shares "Must Pay" -- upgraded from B3 to Ba2/ Ba3 (neg outlook)

The non-cumulative preference shares/ preferred securities which do not have optional coupon skip but have mandatory coupon skip tied to the breach of distributable profit triggers, have been upgraded from B3 (on review for possible upgrade) to

• Ba2 with a negative outlook for securities issued by Nat West plc, and

• Ba3 with a negative outlook for securities issued by RBSG plc. This places the instruments at three notches below the Baa2 adjusted BCA of Nat West plc, with an additional notch for structural subordination at the RBSG holding company level.

Cumulative preferred security "Must Pay" -- upgraded from Ba3 to Ba2 (neg outlook)

The cumulative preferred security of RBSG plc which due to dividend pusher language is a Must Pay security if dividends are paid on non-cumulative preference shares, has been upgraded to Ba2 (negative outlook) from Ba3 (on review for possible upgrade). The instrument is placed at two notches below the Baa2 adjusted BCA of RBS plc, with an additional notch for structural subordination at the RBSG holding company level.

Junior subordinated debt "Must Pay" -- confirmed at Ba1/ affirmed at Ba2 (negative outlook)

The Must Pay junior subordinated debt securities of RBS plc and Nat West plc which were rated Ba1 (under review for possible downgrade), and due to dividend pusher language are Must Pay securities if dividends are paid on non-cumulative preference shares, have been confirmed at Ba1 (negative outlook). The instruments are rated two notches below the adjusted BCA of RBS plc and Nat West plc.

In addition, the Must Pay junior subordinated debt of RBSG which is rated Ba2 (negative outlook) was affirmed at Ba2 (negative outlook).

LT2 "Must Pay" dated subordinated instruments with deferral features -- affirmed at Ba2 (negative outlook)

The ratings of the six RBSG LT2 dated subordinated instruments with cumulative deferral features have been affirmed at Ba2 (negative outlook). Moody's views these instruments as in line with the junior subordinated debt (Upper Tier 2) that has similar features. Due to the dividend pusher clause these instruments are Must Pay securities and are rated two notches below the Baa3 adjusted BCA of RBSG.

PREVIOUS RATING ACTIONS AND METHODOLOGIES USED

The last rating action on RBSG was on 22nd December 2009 when rating actions were taken on certain hybrid and subordinated instruments.

The principal methodologies used in rating the entities are "Bank Financial Strength Ratings: Global Methodology" and "Moody's Revised Methodology for Rating Bank Hybrid Securities and Subordinated Debt", which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. 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.

RBSG is headquartered in Edinburgh, United Kingdom, with total assets of GBP1,696bn at the end of December 2009.

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

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 concludes review on 30 RBS hybrid and junior subordinated instruments
No Related Data.
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