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Rating Action:

Moody's downgrades Depfa entities to A2, BFSR at D+

30 Sep 2008

All ratings of HRE group on review for downgrade

Frankfurt, September 30, 2008 -- Moody's Investors Service today downgraded the senior unsecured debt and deposit ratings of Depfa Bank plc, Depfa ACS Bank and Depfa Deutsche Pfandbriefbank AG (the Depfa entities) to A2 from Aa3. The bank financial strength ratings (BFSR) sank to to D+ from C+, which translates into a baseline credit assessment (BCA) of Baa3. The rating agency further lowered the senior unsecured debt and deposit ratings of Depfa Bank Europe plc to A2 from Aa3.

All ratings are placed on review for further downgrade; this review for downgrade also applies to the Prime-1 short-term ratings of Depfa group.

Furthermore, subordinated debt (including upper Tier II instruments or Genussscheine) of the Depfa entities were downgraded to A3 from A1. Concurrently, preferred stock and silent participations went to Baa1 from A2.

The A1 / Prime-1 / C+ ratings of HRE Bank International AG (HREI) and the A2 / Prime-1 / C- ratings of HRE Bank AG (HREB) remain under review; however, the ratings of the latter were placed on review for possible downgrade. Furthermore, the Prime-1 ratings of both entities were also placed on review for downgrade, reflecting concerns as to whether the liquidity problems currently faced by the Depfa entities may have a knock-on effect on these two entities.

The rating actions follow yesterday's arrangement of a EUR 15 billion liquidity facility made available by a group of German banks. This facility became necessary when Depfa Group's senior unsecured funding requirements -- which have so far been largely met via interbank money market funding -- dried up as a result of the current market turbulences. This EUR 15 billion facility is held available for one month and can be considered a bridge facility which is expected to enable the group to arrange for alternative funding, thus ensuring that immediate funding requirements are met.

The planned alternative source of funds is expected to be explored by way of securitizing EUR 42 billion of assets and obtaining (market-) funding which in turn will benefit from a EUR 35 billion guaranty of the Federal Republic of Germany, the tenor of which will match the maturities of respective assets. The assets in question would largely consist of bilateral loans, in particular Depfa's infrastructure finance portfolio, and such public sector lending assets which have to date neither been eligible for cover pools backing covered bond issuances, nor for repo transactions with the ECB.

The downgrades of the BFSR to D+ of the Depfa entities incorporate the following factors.

(i) The tightened funding situation triggered by the illiquidity in the international money markets. This worked against the business model of Depfa which principally requires senior unsecured funding for some 10% of its balance sheet;

(ii) The comparatively large absolute size of short-term money market funding requirements;

(iii) Weakened expectations of profitability for the Depfa entities, which was driven by rising funding costs. Also pushing the downgrades was the potential negative carry on a portion of the assets of the planned EUR 42 billion SPV, as well as the expected reduction (if not freeze for the foreseeable future) of new business in public sector finance. The latter had been pursued until recently on expectations of attractive yields.

Today's rating action also incorporates some open issues with regard to the immediate and medium-term funding arrangements, as well as Depfa's future profitability -- and thus the medium-term viability of its franchise, as well as the impact this may have on the other entities of HRE Group.

The review for downgrade of all ratings -- and the Prime-1 short-term ratings in particular - will therefore focus on the following issues:

(i) The finalisation and immediate availability of the EUR 15 billion bridge facility, made available by a pool of banks for ca 1 month

(ii) The timely subsequent set-up of the SPV

(iii) Whether these measures will fully cover the senior unsecured funding needs on a group basis

(iv) the implications of the planned transaction and general adverse funding situation on the bank's future profitability

(v) How this profitability situation will ultimately affect the debt capacity and timeliness of payments relating to the debt assumed for the acquisition of Depfa in late 2007

(vi) The ability to maintain confidence in the group's remaining business activities

(vii) And any further systemic support that may be available for the bank.

Moody's commented that the current confidence sensitivity of the markets made a swift resolution of Depfa's liquidity challenges and restoration of confidence into the group's business model mandatory, in the absence of which the standalone ratings as expressed by the BFSR could face further downward rating pressure, possibly of several notches. Depfa's A2 senior unsecured debt & deposit ratings already incorporate the rapidly evolving systemic support environment, and based on the higher probability of support, any possible further rating action on Depfa's BFSRs would not necessarily result in negative rating pressure at the current A2 levels. Additionally, the review will also focus on a potential widening of the notching of HRE Bank's hybrid securities to reflect the lower support-likelihood for such instruments in the current environment.

Moody's will separately review any potential impact on the current ratings of HRE / Depfa entities' covered bonds.

The most recent rating action concerning Depfa entities was on 23 July 2007 when Moody's affirmed their ratings and stable outlooks following the announcement that the parent bank Hypo Real Estate Holding AG planned to acquire Depfa Bank plc. The most recent rating action on HREI and HREB was on 18 July 2008, when Moody's placed their BFSRs and long-term senior debt ratings on review (HREB for upgrade and HREI for downgrade), based on the Group's plans to merge the two entities later in 2008.

Headquartered in Dublin, Depfa Bank plc reported total assets of EUR218 billion as well as a pre-tax profit of EUR338 million as of 31 December 2007.

Headquartered in Munich, HRE Group reported consolidated total assets of EUR400 billion and a pre-tax profit of EUR587 million as of 31 December 2007.

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

London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Depfa entities to A2, BFSR at D+
No Related Data.
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