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Rating Action:

Moody's confirms Fortis Bank's and BGL's A1 long-term ratings

13 May 2009

Fortis Bank's and BGL's BFSRs confirmed at C-, with negative outlook

Paris, May 13, 2009 -- Moody's Investors Service today confirmed the C- bank financial strength ratings (BFSRs) and A1 long-term debt and deposit ratings of Fortis Bank SA/NV and its Luxembourg subsidiary BGL Societe Anomyme (BGL, previously named Fortis Banque Luxembourg). The outlook on the entities' BFSRs is negative and the outlook on their long-term debt and deposit ratings is stable. The Prime-1 short-term ratings have been affirmed. These rating actions conclude the review with direction uncertain on Fortis Bank's and BGL's BFSRs and long-term debt and deposit ratings initiated on 13 February 2009.

Moody's says that these ratings actions were triggered by the acquisition by BNP Paribas (Aa1/negative/B negative/Prime 1) of 75% of Fortis Bank SA/NV and 67% of BGL, which was approved by the shareholders of Fortis Holdings on 28 and 29 April 2009 and concluded on 12 May 2009 after the European Commission confirmed its approval (initially granted in December 2008).

The confirmation of the C- BFSRs reflects Moody's assessment that Fortis Bank will benefit from a solid capital base in the medium term as a result of the Belgian state's commitment to maintain the bank's Tier 1 ratio at a minimum level of 9.2% despite potential losses. This will be sufficient to absorb potential losses that may occur from the bank's structured credit exposure and the likely increase in the cost of risk across loan portfolios given the deteriorating economic environment in Fortis Bank's core markets.

Moody's review with direction uncertain on Fortis Bank's and BGL's ratings was initiated in order to examine: (i) uncertainties surrounding the future ownership of the banks; (ii) their capacity to absorb potential losses from their structured credit exposures while maintaining adequate solvency levels; and (iii) their ability to regain customer confidence and stabilise their market positions.

The finalisation of BNP Paribas's acquisition of the banks concludes a long and damaging period of uncertainty and, in particular, should help to stabilise their liquidity positions. Although Fortis Bank's structured credit exposure will decrease with the transfer of EUR11.7 billion of its most problematic assets to Royal Park Investments (a special purpose vehicle mainly funded by the Belgian state), losses may arise from the EUR24.5 billion structure credit exposure remaining on the bank's books. However, Moody's notes that the bank's capital base -- a Tier 1 ratio of 10.7% at the end of 2008 -- gives it a substantial buffer with which to absorb potential losses. In addition, the Belgian state's commitment to maintain Fortis Bank's Tier 1 ratio at a minimal level of 9.2% for three years and its EUR1.5 billion second-level guarantee on potential structured credit losses exceeding EUR3.5 billion first piece of loss assumed by Fortis Bank, substantially boosts the bank's loss absorption capacity.

The negative outlook assigned by Moody's to Fortis Bank's and BGL's BFSRs reflects the entities' challenging situation in terms of profitability and efficiency (for further details on Fortis Bank's 2008 annual results, please refer to our issuer comment dated 20 April 2009). Moody's cautions that Fortis Bank's underlying profitability is likely to continue to be adversely affected in 2009 by (i) potential high impairments, (ii) lower revenues from its weakening franchise, (iii) potentially volatile earnings from its merchant banking activities and (iv) a high cost base related to its reduced scope. Going forward, the rating agency will therefore closely monitor the banks' ability to take full advantage of the integration into BNP Paribas's, thereby aligning operational and risk management as well as improving their risk profiles and enhancing recurring earning power.

The confirmation of Fortis Bank's and BGL's long-tem debt and deposit ratings reflects Moody's assessment of a very high probability of systemic support from Belgium (for Fortis Bank) and Luxembourg (for BGL) and of parental support from BNP Paribas. The stable outlook reflects the expectation that any potential mild downward adjustment of the BFSR would not adversely affect the long-term ratings given the imputed systemic and parental support.

Moody's understands that a group of shareholders of Fortis Holdings may challenge the last shareholder vote in the European Court of Justice with the aim to declare BNP Paribas's acquisition null and void. However, given the strong overall approval of the transaction by the shareholders we view this as standing only a remote chance of success.

HYBRID AND JUNIOR SUBORDINATED DEBT (EXCLUDING CASHES)

The long-term ratings of Fortis Bank's and BGL's Tier I hybrid and junior subordinated instruments were downgraded to Baa1 from A3, respectively, and to A3 from A2. The ratings all have a stable outlook. The wider notching of these instruments from the banks' long-term debt and deposit ratings reflects Moody's opinion of an increased likelihood of an optional coupon non-payment due to (i) the bank's substantially weakened profitability reflected in the C- BFSR and (ii) the loss of protection from the dividend pusher after the bank has announced not to pay a dividend to common shareholders. However, the rating agency notes that the coupon payments on these instruments are cumulative, thereby limiting the probability and loss severity of a coupon non-payment.

CASHES

The Ba2 ratings of the Convertible And Subordinated Hybrid Equity-linked Securities (CASHES) remain on review for possible further downgrade. Although the security has been issued by Fortis Bank SA/NV, the terms and conditions of the instrument include a mandatory deferral trigger tied to a dividend payment on Fortis Group ordinary shares. The latest rating action, on 19 March 2009, was triggered by the announcement made by Fortis Holdings that it will not distribute any dividends for 2008 and Fortis Group's disclosure of its proposed capital restructuring plan.

Moody's review will focus on the full payment of the coupons on the CASHES by Fortis Bank SA/NV due to the Alternative Coupon Satisfaction Method (ACSM) and the length of the postponement period. The rating agency explains that if Fortis Bank SA/NV were to postpone its coupons for a long period of time, the notching between the rating of the securities and the issuer rating of the holding companies could be further widened.

PREVIOUS RATING ACTION AND METHODOLOGIES

The previous rating action on Fortis Bank and BGL was implemented on 13 February 2009 when Moody's placed the entities' C- BFSRs and the A1 long-term debt and deposit ratings on review with direction uncertain. The short-term debt and deposit ratings were affirmed at Prime-1. Given the high degree of integration of BGL within Fortis Bank and the possible contagion effect between both banks, Moody's decided to align Fortis Bank's and BGL's ratings on 30 September 2008.

The principal methodologies used in rating Fortis Bank and BGL were "Bank Financial Strength Ratings: Global Methodology" and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", which can be found at www.moodys.com in the Credit Policy and Methodologies directory, in the Ratings Methodologies sub-directory. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Credit Policy and Methodologies directory.

Headquartered in Brussels, Fortis Bank SA/NV had total assets of EUR586.8 billion and reported shareholders' equity (including minority interests) of EUR16.1 billion as of 31 December 2008.

Headquartered in Luxembourg, BGL had total assets of EUR52.5 billion and reported shareholders' equity (including minority interest) of EUR5.8 billion as of 31 December 2008.

Paris
Virginie Merlin
Vice President - Senior Analyst
Financial Institutions Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt
Carola Schuler
Managing Director
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's confirms Fortis Bank's and BGL's A1 long-term ratings
No Related Data.
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