Concludes review for downgrade
London, 18 June 2013 -- Moody's Investors Service has today downgraded Co-Operative Bank's
senior unsecured debt and deposit ratings to Caa1, from Ba3 and
assigned a developing outlook, and downgraded the bank's standalone
bank Financial Strength Rating to E from E+, equivalent to
a baseline credit assessment (BCA) of ca, from the previous BCA
of b1. Moody's has also downgraded Co-Operative Bank's subordinated
debt and junior subordinated debt ratings to Ca and Ca (hyb) from B2 and
B3 (hyb) respectively with a negative outlook. The short-term
ratings have been affirmed at Not-Prime.
Today's rating action follows the bank's announcement of a
regulatory capital shortfall requiring a recapitalisation via burden-sharing
with junior creditors and asset disposals (primarily of its parent's
insurance businesses). The announcement confirms Moody's
view that the Co-operative Bank may only return to being a fully
solvent, operational entity through a substantial recapitalization,
which as proposed would involve a bail-in of junior creditors,
together with a very significant restructuring of the bank's operations.
The downgrade of the bank's BCA to ca reflects the imminence of
Co-Operative Bank's default on its junior debt alongside
the lack of clarity on the implications for the bank's future standalone
strength given (1) the uncertainty over whether the proposed liability
management exercise with junior creditors will achieve the forecast level
of recapitalisation and (2) the execution risks that the entirely new
senior management structure will face in completing the significant,
far-reaching restructuring that the bank will need to undertake
over the course of several years.
The downgrade of the bank's senior ratings to Caa1 reflects a material
risk that, particularly until completion of the recapitalisation
plan, further burden sharing may be required at some point if these
efforts to recapitalise and restructure the bank prove unsuccessful.
The potential for burden-sharing involving senior creditors under
that scenario is partly mitigated, from a rating perspective,
by the possibility of some systemic support. The downgrades of
the bank's subordinated and junior subordinated instruments to Ca
and Ca (hyb) are based on Moody's expectations that investors in
these instruments will only be able to recover between 35% and
65% of their original investment, with the negative outlook
indicating the risk that the final loss faced by investors may be greater.
Today's rating action concludes Moody's review for downgrade that
commenced on 9 May 2013.
RATINGS RATIONALE
ca standalone financial strength reflects high likelihood of default
The downgrade of the standalone BCA to ca from b1 reflects the high likelihood
that the Co-Operative Bank will shortly default on its junior debt.
The proposed distressed exchange, which is intended to complement
the external support expected from its parent in order to allow the bank
to remain a going concern, constitutes a default under Moody's rating
methodology. Moody's defines a distressed exchange as an
offer by an issuer to creditors of a new or restructured debt, or
a new package of securities, cash or assets, that amounts
to a diminished financial obligation compared to the original obligation,
with the effect of allowing the issuer to avoid becoming insolvent.
Moody's includes these exchanges in its definition of default to capture
credit events whereby issuers effectively fail to meet their debt service
obligations, but do not actually file for bankruptcy or miss an
interest or principal payment. The bank's decision to propose
this exchange to junior bondholders follows regulatory scrutiny of the
adequacy of its capital levels, as well as the Co-operative
Group's difficulty to fully mitigate the identified capital shortfalls
from within the group. This intensified scrutiny was triggered
by the regulator's growing recent concerns about the bank's
exposure to commercial real estate, due to the bank's deteriorating
asset quality following the acquisition of the Britannia Building society
in 2009.
The lowering of the standalone BCA also incorporates the current uncertainty
as to whether the recapitalisation via a liability management exercise
with junior creditors and the sale of its insurance businesses will be
successfully executed. Moody's acknowledges the steps being taken
by management to address Co-Operative Bank's capital deficit
and ensure the long-term viability of the bank. The bank
expects to generate about GBP1 billion from the exchange offer in 2013,
alongside an additional GBP500 million of capital in 2014 from the sale
of Co-Operative Banking Group's insurance businesses and
the ongoing deleveraging of the bank's non-core portfolio,
which could include the disposal of other assets. In addition,
the bank will undertake a cost savings plan to improve profitability.
In Moody's opinion, the recapitalisation plan and the asset
disposals and the cost-saving plan need to be successful for the
bank to remain a going concern. However, significant execution
risks exist around this strategy, introducing a level of uncertainty
which is incompatible with a standalone financial strength assessment
above E/ca.
Deposit and senior unsecured debt ratings reflect elevated risk over the
medium term
The downgrade to Caa1 of the senior unsecured and deposit ratings for
Co-operative Bank also reflects Moody's assessment that the
bank's standalone strength has weakened, as reflected in the
lowering of the BCA. The long-term debt ratings balance
the steps being taken to support the long-term viability of the
bank, against the significant medium-term execution risk
in completing the recapitalisation and restructuring plans, which
imply a material risk that further burden-sharing may be required
at some point, including, potentially, senior creditors.
In addition, notwithstanding the current emphasis on private sector
participation and parental support, the deposit and unsecured debt
ratings reflect some potential for systemic support from the UK authorities
in the event the recapitalization does not proceed as envisioned.
This view reflects the bank's nationwide network and market shares,
especially in the local authority sector, as well as its role in
the UK's clearing system. The developing outlook reflects
Moody's view that Co-Operative's plan to improve its current
and longer-term capitalisation could, if successful,
lower the risks of burden-sharing on its senior unsecured bondholders.
Downgrade of subordinated debt ratings reflects expected recovery of 35%
to 65% for bondholders
The downgrades of Co-Operative Bank's subordinated debt and junior
subordinated debt ratings to Ca and Ca (hyb) reflect Moody's expectation
that investors in these instruments will be able to recover between 35%
and 65% of their initial investment over time. The negative
outlook for the ratings reflects the possibility of higher losses if the
bank's exchange offer is unsuccessful.
WHAT COULD MOVE THE RATINGS DOWN/UP
Negative pressure on Co-operative Bank's deposit and senior unsecured
rating would stem from either the bank's failure to execute the
proposed recapitalisation and the cost saving and restructuring plans
or a significant deterioration of its liquidity, which could lead
to higher losses for these securities.
Upward pressure on the ratings could develop upon successful conclusion
of the liability management exercise as well as following successful completion
of the full recapitalisation plan and significant progress being made
in the bank's restructuring, deleveraging and cost-saving
initiatives.
The principal methodology used in this rating was Global Banks published
in May 2013. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Carlos Alberto Suarez Duarte
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Johannes Felix Wassenberg
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades Co-Operative Bank's ratings following announcement of exchange offer
