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Rating Action:

Moody's downgrades Dexia Crediop to Ba3/NP/E+; all ratings remain on review for downgrade (Italy)

10 Nov 2011

Milan, November 10, 2011 -- Moody's Investors Service has today downgraded Dexia Crediop's standalone bank financial strength rating (BFSR) to E+ (mapping to B2 on the long-term scale) from D+ (Ba1), and its long and short-term deposit and debt ratings to Ba3/Not-Prime from Baa3/Prime-3. All of Dexia Crediop's ratings remain on review for downgrade.

The downgrade of Dexia Crediop reflects (i) the funding challenges for Dexia Crediop and its funding dependence on its parent Dexia Credit Local (DCL, A3/P-1/E+, all ratings on review for downgrade); (ii) the concentration risks in its loan and securities portfolio, combined with a very high, albeit reduced, leverage of 34 times (total assets/equity); and (iii) the challenges to the core business model as public sector lender.

The rating action follows the negative rating actions at the parent level, Dexia Credit Local, which is the controlling owner of Dexia Crediop, with a 70% stake in it. For further details, please refer to Moody's press release on Dexia's main operating units published on 14 October 2011(http://www.moodys.com/research/Moodys-takes-actions-on-Dexia-Group-further-to-proposed-restructuring--PR_228337).

RATINGS RATIONALE

-- DOWNGRADE OF DEXIA CREDIOP'S BFSR

The BFSR downgrade to E+ from D+ reflects Dexia Crediop's funding challenges stemming from its high reliance on wholesale funding sources, combined with a significant concentration risk to a deteriorating Italian public sector credit profile, and the overall challenges to its business model as a public sector lender.

Given the currently difficult access to markets, Moody's believes that Dexia Crediop would face significant challenges in meeting its financing requirements over the next 12 months without liquidity support from DCL. In fact, DCL and the Dexia Group controls Dexia Crediop's strategy and activities and has provided ongoing funding to its subsidiary as Dexia Crediop was addressing its own liquidity imbalances and facing greater challenges in obtaining cost-effective market funding. Dexia Crediop's funding dependence on Dexia Group is sizeable, and Moody's estimates it to be equal to about 25% of the total stock of funding at end-June 2011 (net of Dexia Crediop's funding provided to DCL), and it is expected to increase.

In addition, Dexia Crediop continues to rely significantly on funding from the European Central Bank, and the traditional long-term funding channel via bonds sold to retail clients in the Italian markets is currently constrained as a consequence of the euro area debt crisis. Moody's is concerned that the current difficult situation in the Italian markets would make Crediop increasingly dependent for funding on the European Central Bank and on its parent and, in view of DCL's very weak own funding position, it may become more challenging for DCL to provide liquidity to support its subsidiary. Such a high funding reliance of Dexia Crediop exposes it to the overall financial strength of DCL.

The BFSR downgrade also reflects the risks stemming from Dexia Crediop's large borrower concentration in Italy, with the top twenty exposures accounting for a very sizeable part of the loan book at June-end 2011. Following the weakening of the credit quality of the Republic of Italy and the Italian public sector entities, as evidenced by Moody's recent rating actions on 4 and 5 October 2011 (please refer to Moody's press releases http://www.moodys.com/research/Moodys-downgrades-Italys-government-bond-ratings-to-A2-with-a--PR_227333., and http://www.moodys.com/research/Moodys-downgrades-Italian-sub-sovereign-ratings-following-sovereign-downgrade--PR_226394), these concentrations represent a significant risk to Dexia Crediop's credit profile.

-- DOWNGRADE OF DEXIA CREDIOP'S DEPOSIT AND DEBT RATINGS

The downgrade of the long and short-term deposit and debt ratings was primarily driven by the downgrade of Dexia Crediop's standalone BFSR. Its deposit and debt ratings of Ba3 incorporate Moody's assessment of a moderate probability of parental support in case of need, which resulted in a two-notch uplift from the B2 standalone rating for Dexia Crediop.

Moody's said that Dexia Crediop's likelihood of parental support steams from its strong interlinks with its parent, DCL, through its operational and funding support. While the parent's capacity to continue providing support to its subsidiary on a standalone basis is limited, as DCL's standalone rating is at the same level of its subsidiary, Moody's believes that systemic support incorporated on the parent's deposit and debt ratings of A3 should also be factored in the ratings of the group's foreign subsidiaries, including Dexia Crediop, as long as DCL is allowed to downstream some of that government support to other group entities such as Dexia Crediop.

FOCUS OF THE REVIEW

The review of Dexia Crediop's ratings will focus on:

(i) The conclusion of the current rating review for DCL, since further negative rating migration of DCL's standalone BFSR and debt and deposit ratings will likely affect Dexia Crediop's BFSR and deposit ratings, respectively;

(ii) DCL's capacity to continue providing liquidity support to its subsidiary in view of Dexia Crediop's increasingly challenged funding profile;

(iii) Continuous erosion of Dexia Crediop's franchise in the Italian public-finance sector, due to likely more limited financing capacity and the negative effect of the targeted restructuring of DCL.

POTENTIAL TRIGGERS FOR A DOWNGRADE/UPGRADE

Downward pressure would be exerted on Dexia Crediop's standalone credit strength because of (i) further deterioration of its liquidity position; (ii) greater-than-expected deterioration in asset quality, especially impairments on one of its large exposures; (iii) deterioration of the bank's franchise, particularly in light of the actual group's restructuring process.

The bank's debt and deposit ratings are linked to the standalone BFSR, and any change to the BFSR would likely also impact these ratings. Additionally a downgrade on DCL's BFSR or deposit and debt ratings, or signs of a lower probability of support from its parent bank could also lead to a downgrade of Dexia Crediop's deposit and debt ratings.

An upgrade of Dexia Crediop's standalone rating is currently unlikely given the review for downgrade of the bank's ratings. An improvement of the bank's BFSR could be driven by (i) a sustainable improvement of the bank's liquidity imbalances; (ii) a return to a normalized access to wholesale funding and broader diversification of its funding sources; and (iii) a significant reduction in its credit risk concentration by borrower, with its top 20 borrowers representing less than 750% of pre-provision income and 200% of Tier1 capital.

PRINCIPAL METHODOLOGIES

The methodologies used in these ratings were Bank Financial Strength Ratings: Global Methodology published in February 2007, Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007, and Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt published in November 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Rome, Italy, Dexia Crediop reported total consolidated assets of EUR42.3 billion (30 June 2011).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating are the following : parties involved in the ratings, and public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Simone Zampa
Vice President - Senior Analyst
Financial Institutions Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
Telephone:+39-02-9148-1100

Johannes Wassenberg
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
Telephone:+39-02-9148-1100

Moody's downgrades Dexia Crediop to Ba3/NP/E+; all ratings remain on review for downgrade (Italy)
No Related Data.
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