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Rating Action:

Moody's downgrades Dexia Credit Local to Baa2; outlook negative

Global Credit Research - 18 Apr 2012

Prime-2 short-term ratings confirmed; BFSR downgraded to E from E+

Paris, April 18, 2012 -- Moody's Investors Service has today downgraded by one notch to Baa2 with a negative outlook from Baa1 on review for downgrade the long-term senior debt and deposit ratings of Dexia Credit Local (DCL). The Prime-2 short-term rating has been confirmed. The downgrade of the long-term senior debt and deposit ratings to Baa2 directly follows Moody's downgrade of DCL's standalone bank financial strength rating (BFSR) to E -- mapping to caa1 on the long-term scale -- from E+/b2.

The downgrades of the BFSR -- and thus the long-term senior debt ratings -- were triggered by Moody's view that DCL, under its post-restructuring form, will likely continue to operate under significant stress. The rating agency assumes that the European Commission (EC) will approve all restructuring and support measures currently in progress, and that the measures will be executed on time. The long-term ratings continue to benefit from a very high degree of systemic support.

DCL's subordinated debt rating of B3 remains on review for downgrade. This reflects the rising risk that government support for this type of debt might not be available in the future (please see "Moody's reviews European banks' subordinated, junior and Tier 3 debt for downgrade" published on 29 November 2011).

These rating actions conclude the review for downgrade of DCL's long and short-term senior ratings and BFSR, initiated on 3 October 2011.

RATINGS RATIONALE

BFSR DOWNGRADE REFLECTS DCL's EXPECTED RUN-OFF PROFILE

The downgrade of DCL's BFSR to E (mapping to a caa1 standalone credit strength) reflects Moody's view that the entity, under its post-restructuring form, will be almost entirely managed in a run-off mode, and that its current and future viability as a run-off structure strongly relies on external support. Moody's assumes that DCL will, as the residual entity (i) continue to hold the assets left after the planned disposals of the active franchises of Dexia Group; and (ii) manage these assets either in run-off, or with minimal production necessary to meet the residual commitments until the assets can be sold. The rating agency also assumes DCL will remain a credit institution, subject to regulatory oversight.

Since the announcement of its dismantling in October 2011, Dexia Group has continued to operate thanks to the liquidity assistance of central banks and the state-guaranteed debt programme that was implemented in December 2011 on a temporary basis with a ceiling of EUR45 billion. The rating agency also believes that the contemplated replacement of this temporary state-guaranteed debt programme by a EUR90 billion long-term definitive scheme -- subject to the EC's approval of the group's restructuring plan submitted on 21 March 2012 -- will be essential to ensure the residual entities' sustainability.

Nevertheless, assuming the definitive guarantee plan is implemented smoothly and in a timely manner, DCL's operations will remain under significant stress, notably due to the low margin of its assets. In Moody's view, DCL's reliance on short-term financing is likely to remain high as the cost of long-term state-guaranteed debt is expected to be significantly higher than the yield of the assets in the current spread environment.

SENIOR DEBT RATINGS UNDERPINNED BY VERY HIGH PROBABILITY OF SYSTEMIC SUPPORT

The downgrade of DCL's long-term debt and deposit ratings to Baa2 directly follows the downgrade of its standalone BFSR. At the same time, the ratings continue to benefit from Moody's assessment of a very high probability of systemic support. At Baa2, the fully supported senior debt ratings continue to include eight notches of support uplift from the caa1 standalone credit strength.

Moody's continues to recognise and incorporate into DCL's senior ratings very strong systemic support from the Belgian, French and Luxembourg governments. The rating agency considers that because of the Belgian, French and Luxembourg governments' substantial unsecured exposures to DCL -- through the outstanding state-guaranteed debt under both the 2009 and December 2011 support programs -- there is a strong incentive for them to further support the entity both in terms of liquidity and capital in the case of need.

The negative outlook reflects the uncertainties related to the EC's approval of the definitive guarantee scheme and the transition risks until all the announced measures are implemented.

WHAT COULD MOVE THE RATINGS UP/DOWN

The outlook on the E BFSR is stable. However, the E BFSR could be remapped to a lower level from the current caa1 if (i) further pressure is exerted on DCL's financial position through the timing and terms of the definitive guarantee scheme; or (ii) DCL experiences higher-than-expected losses that materially affect its solvency. A lower remapping within the caa category could have an effect on the long-term ratings. Moody's also notes that there is potential for more extensive rating migration if (i) the probability of government support declines; or (ii) the governments providing their guarantees under the support schemes experience downward rating migration.

Upward ratings pressure is very limited given the very high support assumptions already factored into DCL's long-terms ratings and could only be achieved through a multi-notch upgrade of the BFSR. This, in turn, would be subject to a full restoration of DCL as an independently operating going concern entity with an overall satisfactory risk profile. However, Moody's considers this scenario as unlikely.

PRINCIPAL METHODOLOGIES

The methodologies used in these ratings were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: Global Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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 ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings 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 entities or their 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.

Yasuko Nakamura
Vice President - Senior Analyst
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
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 France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Dexia Credit Local to Baa2; outlook negative
No Related Data.

 

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