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For its own business reasons, Moody's has withdrawn the outlook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
