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Rating Action:

Moody's downgrades DEPFA Bank to Ba1/Not Prime; outlook stable

11 Jun 2015

Action follows the introduction of the new bank rating methodology on 16 March 2015

Frankfurt am Main, June 11, 2015 -- Moody's Investors Service has today downgraded to Ba1/Not-Prime from Baa3/Prime-3 the senior debt and deposit ratings of DEPFA Bank plc (DEPFA), the deposit rating of DEPFA ACS Bank (DEPFA ACS), and the backed issuer and deposit ratings of Hypo Public Finance Bank (HPFB). DEPFA's subordinated debt rating was upgraded to B2 from Caa3. Concurrently, Moody's upgraded the baseline credit assessments (BCAs) of DEPFA and its rated subsidiaries to b2 from caa2. The outlook on the group's long-term debt and deposit ratings is stable.

Furthermore, Moody's assigned Counterparty Risk (CR) assessments to DEPFA and its rated subsidiaries and branches of Baa3(cr)/Prime-3(cr).

Moody's said that today's rating actions and the assigned CR Assessment follow the implementation of its new bank rating methodology and specifically the introduction of advanced Loss Given Failure (LGF) analysis and the agency's revised assumptions regarding government support in light of restrictions for government support under the European Bank Recovery and Resolution Directive (BRRD). The action also incorporates the impact of the new bank rating methodology on the BCA.

In light of the new bank rating methodology, today's actions reflect the following considerations (1) the "Strong+" macro profile applicable to DEPFA group, which reflects its mostly non-Irish asset base; (2) the group's financial profile and related qualitative factors, which are impacted by the ongoing unwinding of DEPFA's mono-line business and accruing operating losses; (3) protection offered to creditors more senior in the creditor hierarchy, as captured by Moody's Advanced LGF liability analysis; and (4) the reduced likelihood of support from the German government (Aaa stable).

In addition, the hybrid ratings of DEPFA's funding vehicles DEPFA Funding II LP; DEPFA Funding III LP, and DEPFA Funding IV LP were upgraded by one notch to Ca(hyb) from C(hyb).

This rating action concludes the review on DEPFA group's debt, deposit and issuer ratings which the rating agency initiated on 17 March 2015 following the publication of its new bank rating methodology.

For its own business reasons, Moody's has withdrawn the outlook on the rating of DEPFA's subordinated debt instruments. Please refer to Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

Please click here to access Moody's new bank rating methodology ("Banks," published on 16 March 2015)

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_179038.

RATINGS RATIONALE

The new methodology includes a number of elements that Moody's has developed to help accurately predict bank failures and determine how each creditor class is likely to be treated when a bank fails and enters resolution. These new elements capture insights gained from the crisis and the fundamental shift in the banking industry and its regulation.

(1) MACRO PROFILE "STRONG+"

DEPFA group's macro profile derives from its asset base, which is dominated by exposures to borrowers and issuers outside Ireland (Baa1 stable), despite its domicile in that country. Given concentrations in the United States (Aaa stable), Germany and elsewhere in the EU, the group's individual macro profile is "Strong+". DEPFA's exposure to Irish borrowers is very low, which drives a macro profile for DEPFA that is considerably stronger than the macro profile for Ireland, which is "Moderate+".

Irish banks benefit from a dynamic and open domestic economy with a very high level of wealth, which counterbalances the country's relatively small GDP. Susceptibility to event risk remains low and funding conditions have materially improved.

(2) DEPFA'S b2 BCA REFLECTS ADEQUATE CAPITAL AND FUNDING, BUT ALSO OPACITY OF ITS UNWINDING

Moody's new methodology for the positioning of bank BCAs has a stronger focus on capital and funding, and de-emphasises certain qualitative factors, such as franchise value. DEPFA's b2 BCAs, which the rating agency upgraded from caa2, thus reflects the group's low asset risk, its capital reserves -- which represent a buffer for expected operating losses -- and its fully matched maturity profile of assets and liabilities. At the same time, the banks' b2 BCA remains constrained by high sector and single-name concentrations, the vulnerability of DEPFA's capital position to accruing operational losses, and opacity in the context of the ongoing unwinding of the group.

(3) PROTECTION OFFERED TO DEPOSITORS, SENIOR AND OTHER CREDITORS CAPTURED BY MOODY'S ADVANCED LGF LIABILITY ANALYSIS

Irish banks are subject to the EU Bank Resolution and Recovery Directive (BRRD), which Moody's considers to be an Operational Resolution Regime. To reflect this, Moody's has introduced its Loss Given Failure (LGF) analysis which has a positive effect on DEPFA's debt and deposit ratings.

The rating agency applies the following assumptions to DEPFA group: Residual tangible common equity (TCE) of 2.77% and losses post-failure of 8% of tangible banking assets, a 25% run-off in junior wholesale deposits, a 5% run-off in preferred deposits, and a 25% probability of deposits being preferred to senior unsecured debt. Moody's also assumes that the junior proportion of deposits is in line with its estimated EU-wide average of 26%. Except for residual TCE (which is typically 3%), these are Moody's standard assumptions.

Based on these parameters and the substantial preference shares in DEPFA's capital structure, which afford a buffer for the group's more senior creditors in resolution, DEPFA group's debt and deposit ratings include two notches derived from Moody's LGF analysis.

(4) DECLINE IN THE LIKELIHOOD OF GOVERNMENT SUPPORT

Moody's says that the introduction of the BRRD has demonstrated a reduction in the willingness of EU governments to bail-out banks. That said, DEPFA is ultimately 100% owned by the German government (Aaa stable), and DEPFA's direct owner, the German Government's unwinding vehicle FMS Wertmanagement (FMS-WM, Aaa stable) has some leeway to render assistance during the group's unwinding process, for instance by taking measures that reduce costs and lower the group's operating losses. In addition, Moody's takes the view that FMS-WM's ownership of the majority of DEPFA's EUR1.2 billion hybrid instruments can be applied to delay or avoid the bank's failure. Moody's therefore maintains two notches of support in the senior debt and deposit ratings of DEPFA and its rated subsidiaries, which compare with eight notches previously, reflecting the assumption of "high" support.

RATIONALE FOR THE UPGRADE TO Ca(hyb) OF DEFPA's PREFERRED SECURITIES

Moody's has upgraded the hybrid ratings of DEPFA's funding vehicles DEPFA Funding II LP; DEPFA Funding III LP, and DEPFA Funding IV LP based on the loss on their issued preference shares reflected by the purchase price used in the recent purchase of these instruments by DEPFA's owner, FMS-WM. The instruments' aggregate nominal value of EUR 1.2 billion was purchased for a total consideration of EUR 741 million, implying a valuation between 58% and 61.5%. Moody's notes that the implied loss was slightly below its expectations, but that there is no prospect of future coupon payments, which are at the bank's discretion.

RATIONALE FOR THE OUTLOOK ON DEBT AND DEPOSIT RATINGS

The stable outlook on DEPFA's long-term debt and deposit ratings reflects Moody's view that the probability of DEPFA's fully-phased-in Common Equity Tier 1 (CET1) ratio remaining at or above 10% over the next 12 to 18 months is relatively high.

RATIONALE FOR THE CR ASSESSMENT

As part of today's actions, Moody's has also assigned Baa3(cr)/Prime-3 Counterparty Risk Assessments to DEPFA and its branches and rated subsidiaries. CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails, and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than expected loss; and (2) apply to counterparty obligations and contractual commitments rather than to debt or deposit instruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

The CR Assessment takes into account the issuer's standalone strength as well as the likelihood of affiliate and government support in the event of need, reflecting the anticipated seniority of these obligations in the liabilities hierarchy. The CR Assessment also incorporates other steps authorities can take to preserve the key operations of a bank should it enter a resolution.

The starting point for the CR Assessments of DEPFA and its subsidiaries and branches is the banks' b2 Adjusted BCA, to which Moody's then applies an Advanced LGF approach that takes into account the level of subordination in the bank's liability structure, and incorporates the same support assumptions as applied to deposit and senior unsecured debt ratings. As a result, the CR Assessment for Irish banks is typically one notch higher than their senior unsecured debt and deposit ratings, reflecting Moody's view that authorities are likely to honour the operating obligations the CR Assessment refers to in order to preserve a bank's critical functions and reduce potential for contagion.

WHAT COULD CHANGE THE RATINGS UP/DOWN

The banks' BCAs could be upgraded due to (1) reducing operating losses; and (2) higher capital levels which may be achieved by FMS-WM converting hybrid capital into common equity.

The banks' BCAs could be downgraded due to (1) a material deterioration in its asset quality; (2) a failure to mitigate operating losses, especially if these losses reduce capital levels faster than currently anticipated; and/or (3) a deterioration in liquidity and funding.

If DEPFA's subordinated instruments increase (or decrease) relative to the group's tangible banking assets, this could result in additional (or fewer) notches of uplift resulting from Moody's LGF analysis. A material reduction could result from a conversion of hybrid capital into equity, if this was required to avoid default, which may nevertheless weigh on DEPFA's debt and deposit ratings.

PRINCIPAL METHODOLOGIES

The principal methodology used in these ratings was Banks published in March 2015. 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.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating as indicated:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person(s) that paid Moody's to determine this credit rating.

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.

Katharina Barten
VP - Senior Credit Officer
Financial Institutions Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades DEPFA Bank to Ba1/Not Prime; outlook stable
No Related Data.
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