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Rating Action:

Moody's downgrades Commerzbank group BFSRs and hybrids ratings

02 Mar 2009

Negative outlook for senior debt ratings

Frankfurt, March 02, 2009 -- Moody's Investors Service has today downgraded the bank financial strength ratings (BFSRs) of Commerzbank AG and of Commerzbank Europe (Ireland) to C- from C, of Dresdner Bank AG to E+ from C- and of Eurohypo AG to D from C. The outlook on Commerzbank's C- BFSR and on Eurohypo's D BFSR remains negative. Dresdner bank's E+ BFSR now carries a stable outlook, reflecting Moody's expectation of no further rating action until completion of Dresdner Bank's merger with its parent bank, Commerzbank AG, in Q2 2009. At the same time, Moody's downgraded various hybrid instruments of different Commerzbank group entities as detailed further below.

Moody's affirmed the Aa3 ratings for senior unsecured debt and deposits and the A1 ratings for subordinated debt of Commerzbank AG, Commerzbank Europe (Ireland) and Dresdner Bank AG, but the outlook on these ratings was changed to negative from stable. The A1 senior unsecured debt and deposit ratings of Eurohypo and the A2 rating for its subordinated debt were also affirmed with a change of the outlook to negative. The Prime-1 ratings for short-term liabilities of all entities mentioned above remained unaffected by the rating action.

Triggered by the downgrade of Commerzbank's BFSR to C-, the ratings for long-term deposits of BRE Bank S.A., Poland, and BRE Finance France S.A. were downgraded to A3 from A2. The outlook on these ratings remains negative, and the short-term rating of BRE Bank S.A. was downgraded to Prime-2 from Prime-1. The downgrade of Commerzbank's BFSR also triggered the downgrade of BRE Bank Hipoteczny's long-term deposit rating to Baa3 from Baa1 with a stable outlook, and the short-term rating to Prime-3 from Prime-2.

Today's rating actions reflect Moody's expectations of ongoing weaknesses of several subsidiary operations, in particular relating to exposure to commercial real estate and public sector finance, the impact of investment banking restructuring and possible further losses on troubled assets, while systemic support and intra-group support is expected to remain high.

DOWNGRADE OF BFSR RATINGS due to weaknesses in subsidiaries' operations

The downgrade of Dresdner Bank's BFSR to E+, which translates into a Baseline Credit Assessment (BCA) of B2, was triggered by substantial losses reported last week for the financial year 2008. Although the EUR6.3 billion loss included major one-off items which were partly attributable to necessary write-downs of tax credits and other charges relating to the planned merger with Commerzbank, the loss still reflected a far higher-than-expected vulnerability of Dresdner's investment banking operations, in particular due to high exposure to market risk. The E+ BFSR level reflects the rapid erosion of the bank's economic and regulatory capitalisation, chiefly the reported Tier-1 ratio at the regulatory threshold level of 4% at the end of December 2008; however, the rating also factors in the recapitalisation measures planned for Q1 2009 which are expected to bring the ratio up to 4.8%. The rating further includes elements of recognition for Dresdner's still-profitable segment of Private & Corporate Clients which Moody's believes should add value to the Commerzbank Group in the medium term.

The downgrade of Eurohypo's BFSR to D, which translates into a BCA of Ba2, mainly reflects three weaknesses: (i) the bank's failure to post a profit in any of its three business segments in 2008, (ii) the franchise impairment of its public sector finance (PF) business due to unsustainable funding costs which, in the absence of any viable strategy for a restoration, can only be scaled down in order to gradually reduce future losses, and (iii) expected higher risk provisions in the bank's commercial real estate (CRE) business which may lead to limited, if not negative contributions from this business over the next two to three years.

The downgrade of Commerzbank's BFSR by one notch to C-, which translates into a BCA of Baa1, solely reflects the financial weakness of and negative outlook for Dresdner Bank and Eurohypo. "The financial strength of Commerzbank group is a mixed picture of a very healthy core business of the parent bank on the one hand, in particular its stable segments of Private and Business Clients (PBC) and its corporate banking franchise (Mittelstand), and, on the other hand, the deteriorated, partly impaired franchises of Dresdner Bank and Eurohypo", said Katharina Barten, a Frankfurt-based Moody's Vice President and lead analyst for Commerzbank Group. "The negative rating pressure from its subsidiaries, however, remains strongly mitigated by the recapitalisation measures from the German Government announced in January 2009, which -- in spite of the eroded capital base of Dresdner -- should result in a pro-forma Tier-I ratio for the "new Commerzbank group" in excess of 10%, equipping it with major loss absorption capacity for the expected highly difficult two years ahead."

SENIOR DEBT RATINGS benefit from systemic support and intra-group support

Despite the downgrade of Commerzbank's BFSR by one notch, the Aa3 senior unsecured debt and deposit ratings of the bank -- and therefore its subsidiary Dresdner -- were affirmed. These ratings of the combined entity (pre-emptive of the forthcoming merger) remain strongly underpinned by Moody's expectations of high systemic support going forward. The Aa3 rating recognises both the systemic support rendered to date, which in Moody's view reflects a high readiness of the German government to equip the country's second-largest banking group with additional means to withstand the economic downturn ahead at an early stage, and also the bank's rising importance as a lender to the German economy, which underscores Commerzbank group's systemic importance in the long term.

In spite of the multi-notch downgrade of Eurohypo's BFSR to D, its A1 senior unsecured debt and deposit ratings also remain unchanged, reflecting the very high parental support, which is underpinned by a strong letter of support from Commerzbank AG and a profit & loss transfer agreement, which obliges Commerzbank to absorb any losses of Eurohypo (based on local GAAP accounting) until at least mid-2012. Based on these arrangements the ratings will remain one notch below those of the parent bank. Please also refer to Moody's recent press release published 22 January 2009.

THE NEGATIVE OUTLOOK reflects integration risk and low visibility of future earnings

In view of the high-risk profile of Dresdner Bank, the task of integration ahead for Commerzbank will be challenging. The success of the necessary de-risking exercise will largely hinge on achievements of a major targeted downsizing exercise for non-core and unprofitable assets, which will require a somewhat more favourable market environment. Accordingly, the negative outlook on the senior unsecured ratings reflects the uncertain profitability outlook for Commerzbank group during the next two to three years against the currently persistent hostile market environment and a potentially prolonged economic downturn. That said, a capital cushion estimated at around EUR6.8 billion should, in Moody's opinion, protect the group Tier-I ratio from moving below the 8% threshold, which equally provides for protection of Commerzbank's ratings at the current level.

DOWNGRADE OF HYBRID INSTRUMENTS concluding Moody's ratings review initiated on 17 February 2009

1) The Tier-I instruments ("dated silent partnership certificates") issued by Commerzbank Capital Funding Trust I, II and III were downgraded to Ba3 from A2, reflecting Moody's expectation of a low probability of a missed coupon in 2009 and a high probability of a missed coupon in 2010. All instruments have distributable profits (balance sheet) coupon non-payment triggers and are non-cumulative. Moody's recognises that substantial reserves are available on the non-consolidated balance sheet of Commerzbank AG (in excess of EUR6.5 billion) which offer a buffer to trigger breaches; however, total estimated losses over the next two years and the additional obligation to pay EUR1.5 billion p.a. in coupons on the new hybrids from the German Government could lead to a rapid depletion of these reserves.

2) Commerzbank's deeply subordinated upper Tier-II instruments ("Genussscheine") which mature in December 2009 were downgraded to Ba1 from A1 and those which mature in December 2010 to Ba3 from A1. The Ba1 ratings reflect Moody's estimate of a small probability of a (partial) loss on the final coupon and a moderate probability of a principal write-down for the year 2009. The Ba3 ratings reflect the additional risk of a higher probability of potential losses for the financial year 2010. Although these instruments are cumulative, the relatively short time-to-maturity does not allow much time for the principal to be written back, thus exposing investors to losses.

3) The non-cumulative Tier-I hybrid instruments ("dated silent partnership certificates") issued by Dresdner Funding Trust I, II, III and IV were downgraded to A3 from A2, reflecting (i) their very weak coupon non-payment triggers, (ii) Moody's understanding that the 4% and 8% regulatory capitalisation triggers were not breached in 2008 (Dresdner reported a Tier-1 ratio of 4%), and (iii) the rating agency's expectation that these triggers are highly unlikely to be breached in the foreseeable future for these perpetual instruments. It must be noted that following the planned merger of Dresdner Bank with Commerzbank in Q2 2009, the regulatory capital ratios of Commerzbank will be the reference for these instruments, which further decreases the probability that the triggers will be breached. The downgrade by one notch was thus not based on an expected-loss calculation, but on a wider notching of three rather than two from the senior unsecured debt rating of Commerzbank, which is in line with Moody's notching guidelines for banks with weaker BFSRs.

4) The Tier-I instruments issued by HT1 Funding Trust GmbH which represent a "repacked silent participation" in Dresdner Bank AG, were downgraded to Ba2 from A2 reflecting (i) the occurrence of a trigger breach in 2008 (both the 9% total capital ratio trigger and the distributable profits (balance sheet) coupon non-payment triggers were breached) and the resulting partial loss of the coupon and principal write-down for 2008, which Moody's estimates to be in the range of 10% to 20%, (ii) Moody's expectation that the principal will be written back on a five-year time horizon since the security has a perpetual maturity, and (iii) that the coupon payment for 2008 is expected to be made in the range of 80% - 90% thanks to the indemnity of Allianz to pay coupons on the (remaining) principal amount. Moody's understands that Allianz' obligation to pay coupons on these instruments when coupon non-payment triggers are breached will continue even after the merger of Dresdner Bank with Commerzbank and will remain in place for the life of these instruments. However, as typical for Tier-I instruments, the coupon payments are non-cumulative, and therefore those parts of coupons that are not paid (corresponding to the portion of the principal written down) will be lost and not subject to payment at a later date.

5) The dated upper Tier-II securities issued by UT2 Funding plc, Ireland, which represent a "repackaged silent participation" in Dresdner Bank, were downgraded to Ba2 from A1, reflecting (i) the occurrence of a trigger breach in 2008 and the resulting deferral of one coupon and principal write-down for 2008, which Moody's expects to be in the range of 10% to 20%, (ii) a rising probability of a further coupon deferrals in 2009 and 2010 along with principal write-downs, in line with Moody's expectations for the Commerzbank Genussscheine, and (ii) the expectation that the principal will be written back and the coupons paid retroactively before maturity in 2016 thanks to the cumulative feature of these instruments.

6) The Tier-I instruments ("dated silent partnership certificates") issued by Eurohypo Capital Funding Trust I and II were downgraded to B2 from A3, reflecting a high probability of a depletion of reserves on the unconsolidated balance sheet of Eurohypo (which are considerably lower than those of Commerzbank) and resulting likely trigger breaches which may result in the loss of one or more coupons on a five-year horizon. Moody's applied high probability to the loss of one coupon and a medium probability to a loss of a second. As coupon payments are non-cumulative, they would not be subject to payment at a later date.

7) The upper tier-II instruments ("Genussscheine") issued by Hypothekenbank in Essen, which was merged onto Eurohypo in Q3 2008, to Ba1 from A2, as these instruments will mature in 2009 and 2013 respectively, which for the former means that there is a modest probability of a (final) coupon loss and principal write-down before maturity and for the latter that the instrument, although exposed to a high risk of both coupon deferrals and principal write-downs in 2010, all such losses would likely be written back and retroactively paid before maturity in 2013.

The outlook on the instruments 1, 2 and 4 to 7 whereby ratings are based on an expected loss calculation is stable. The outlook on the instruments notched down from the senior unsecured debt rating of Commerzbank (Aa3 negative) carry a negative outlook, applying to the instruments listed under 3.

RATING HISTORY AND MOODY'S METHODOLOGIES

The last rating action on Commerzbank was on 17 February 2009, when Moody's placed on review for possible downgrade the ratings of all the group's hybrid instruments.

The principal methodologies used in rating the entities of Commerzbank Group are "Bank Financial Strength Ratings: Global Methodology", "Incorporation of Joint Default Analysis into Moody's Bank Ratings: A Refined Methodology" as well as "Guidelines for Rating Bank Junior Securities", which can be found on www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating the issuers can also be found in the Credit Policy & Methodologies directory.

Domiciled in Frankfurt, Germany, Commerzbank reported, based on preliminary financials, total assets of EUR625 billion as at 31 December 2008 and a pre-tax loss for the year of EUR403 million.

Domiciled in Frankfurt, Germany, Dresdner Bank AG is a fully owned subsidiary of Commerzbank. Based on preliminary results for 2008, Dresdner Bank reported a pre-tax loss of EUR4.7 billion.

Headquartered in Eschborn, Germany, Eurohypo is a fully owned subsidiary of Commerzbank. Based on preliminary results for 2008, Eurohypo reported total assets of EUR292 billion and a pre-tax loss of EUR1.4 billion.

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

Frankfurt
Carola Schuler
Senior Vice President
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Commerzbank group BFSRs and hybrids ratings
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