Frankfurt am Main, November 30, 2012 -- Moody's Investors Service has today downgraded the long-term issuer
rating of the European Stability Mechanism (ESM) to Aa1 from Aaa,
and is maintaining a negative outlook on the rating. At the same
time, Moody's has also downgraded the provisional long-term
rating for the Issuer Rating and debt issuance programme of the European
Financial Stability Facility (EFSF) to (P)Aa1 from P(Aaa), and is
also maintaining a negative outlook. The short-term issuer
rating of the ESM remains unchanged at Prime-1, while the
provisional short-term rating of the EFSF remains at (P)Prime-1.
Moody's decision was driven by the recent downgrade of France to
Aa1 from Aaa and the high correlation in credit risk which Moody's
believes is present among the ESFS' and ESM's entities'
largest financial supporters.
Moody's downgrade of France reflects the rating agency's view
that there has been a marginal diminution in the certainty that the sovereign
will fulfil its financial obligations. France is the second largest
contributor to the two entities' financial resources, as a
provider of callable capital in the case of the ESM and as a guarantor
country in the case of the EFSF.
Moody's view that there is a high correlation in credit risk among
the entities' supporters is consistent with the evolution to date
of the euro area debt crisis and the close institutional, economic
and financial linkages among the major euro area sovereigns. As
a result, the credit risks and ratings of the ESM and the EFSF are
closely aligned to those of its strongest supporters.
At the same time, Moody's explains that both entities remain extremely
highly rated at Aa1 because the ESM and the EFSF benefit from the following
common credit strengths:
(i) Low leverage: the ESM has a maximum lending capacity of EUR500
billion, which is backed by subscribed capital of EUR700 billion;
while the EFSF has a guarantee mechanism which results in an overcollateralisation
of up to 165%; and
(ii) The creditworthiness of the members: both entities have a weighted
median shareholder rating of Aa1 (changed from Aaa further to the downgrade
of France's government bond rating to Aa1); both the ESM's
and the EFSF's purpose is to provide an inter-governmental
support mechanism which extends financial assistance to members that are
either unable to access the capital markets, or able to do so only
at very high interest rates.
Moody's acknowledges that the ESM benefits from credit features
that differentiate it from the EFSF, including the preferred creditor
status and the paid-in capital of EUR80 billion. However,
in Moody's view, these credit features do not enhance the
ESM's credit profile to the extent that it would warrant a rating
differentiation between the two entities.
In a related rating action, Moody's has additionally downgraded
the ratings on all the debt securities that have been drawn down to date
from the EFSF to Aa1 from Aaa.
A provisional rating for a debt facility is an indication of the rating
that Moody's would likely assign to future draw-downs from
the facility, pending the receipt of documentation detailing the
terms of the debt issuance.
RATINGS RATIONALE
RATIONALE FOR DOWNGRADE
-- ESM
The one-notch downgrade of the ESM's rating to Aa1 from Aaa
follows the downgrade of France's government bond rating to Aa1
from Aaa on 19 November 2012. France's share in the ESM capital
key is 20.4%, second after that of Germany (27.1%),
and corresponds to a callable capital commitment of EUR126 billion (out
of the ESM's total callable capital of EUR620 billion).
In common with many multilateral development banks (MDBs), the credit
strength of the ESM rests in part on its certainty of being able to call
on its members to fulfil their callable capital commitments. Among
MDBs, the rating of the ESM is unusually reliant on the strength
of its strongest financial supporters given (i) its highly concentrated
potential exposure to weaker euro area member states, and (ii) the
high credit risk correlation which Moody's believes exists among
its shareholders.
In the very unlikely event of France being unable to fulfil its obligations
to the ESM, there is a reasonable probability that other non-Aaa
supporters would not be able to do so either. Accordingly,
the deterioration in the creditworthiness of France as the second-largest
euro area member state (as reflected by the recent downgrade), which
implies a marginally diminished certainty it would be able to provide
support to the ESM, has a negative effect on the ESM's creditworthiness.
Based on a scenario in which the ESM operates at full lending capacity
(EUR500 billion), the ESM's rating could only exceed France's
rating if it was assumed that either: (i) France would prioritise
its callable capital commitments to the ESM over the payment of its own
debt obligations should there be a need for such a prioritisation;
or (ii) member states that have a lower rating than France are able to
comply with their commitments to the extent that the ESM's outstanding
issuance is fully covered, even in the unlikely event that France
defaults. Moody's does not consider either to be likely.
Hence, the combination of France's large ESM capital share
and the elevated default correlation of euro area member states leads
to the conclusion that, in such a scenario, the effectively
accessible capital -- subscribed capital of EUR700 billion minus
the callable capital of defaulting countries -- will likely fall
short of covering the outstanding issuance. Accordingly,
in light of its anticipated highly concentrated credit portfolio and the
high correlation of euro area member states' creditworthiness,
Moody's considers the ESM's rating to be currently constrained
by France's government bond rating.
-- EFSF
Similarly to the ESM, the one-notch downgrade of the EFSF's
rating to Aa1 from Aaa follows the recent downgrade of France's
government bond rating to Aa1 from Aaa. France's share in
the EFSF contribution key is 21.8%, second after Germany's
29.1% share. France's share corresponds to
a guarantee commitment of EUR158 billion (out of EFSF's total guarantee
commitment of EUR726 billion). Further to France's loss of
its Aaa rating, only 67% instead of the previous 100%
of the EFSF issuances are now backed by guarantees issued by Aaa-rated
sovereigns. The full coverage of EFSF issuances by guarantees issued
by Aaa-rated sovereigns had been a key factor for the EFSF's
Aaa.
In the very unlikely scenario of the French sovereign bond default,
Moody's does not expect that France would be able to fund its commitments
to the EFSF. Furthermore, given the credit risk correlation
of the EFSF guarantor countries, Moody's considers it unlikely
that lower-rated member states would be in a position to honour
their own commitments to the EFSF and fully compensate for a potential
shortfall arising from France. Hence, in light of the elevated
credit risk correlation among the guarantor countries, the EFSF's
rating is -- similar to that of the ESM -- currently constrained
by France's government bond rating.
RATIONALE FOR NEGATIVE OUTLOOK
-- ESM
The negative outlook on the ESM's long-term rating reflects
the negative outlooks on the ESM member states with significant capital
contribution keys and high ratings. Specifically, the Aaa
ratings of Germany (which holds a 27.1% share in the subscribed
capital) and the Netherlands (5.7%), as well as the
Aa1 rating of France (20.4%) all have negative outlooks.
-- EFSF
The negative outlook on the EFSF's (P)Aa1 rating reflects the negative
outlooks on euro area sovereigns that are EFSF guarantors, including
some countries with significant shares in the EFSF's guarantor pool.
Specifically, the Aaa ratings of Germany (which holds a 29.1%
share in the guarantor pool) and the Netherlands (6.1%),
as well as the Aa1 rating of France (21.8%) all have negative
outlooks.
WHAT COULD MOVE RATINGS UP/DOWN
-- ESM
Risks that would negatively affect the creditworthiness of the ESM --
leading to a potential further downgrade of the ESM's rating --
would include a deterioration in the creditworthiness of the participating
euro area member states (as reflected by a change in Moody's ratings
for these states). In this context, the ESM's rating
is sensitive to changes in the ratings of Aaa- and Aa-rated
countries with large ESM capital contribution keys, i.e.,
Germany, France and the Netherlands.
Furthermore, a weakening of the political commitment among euro
area member states to the ESM could also have negative rating implications.
Also, given that the ESM's Aa1 rating is based on the assumption
of superior financial-management capabilities, transition/downgrade
risks could also arise from a potential erosion of those capabilities.
Such risks would arise in the event of an inappropriate skill transfer
or skill acquisition that might adversely affect ESM's governance
and risk management practice.
Given that the outlook on the ESM's Aa1 rating is currently negative,
the rating is unlikely to experience upward pressure in the near term.
However, Moody's could change the outlook for the ESM's
ratings to stable if the outlooks on the ratings of the highly rated countries
that are key capital contributors to the ESM returned to stable.
-- EFSF
Risks that would negatively affect the creditworthiness of the EFSF programme
-- leading to a potential downgrade of the EFSF's rating --
include a deterioration in the creditworthiness of the participating euro
area member states (as reflected by a change in Moody's ratings
for these states). In this context, the EFSF's rating
is sensitive to changes in the ratings of Aaa and Aa countries with large
EFSF contribution keys, i.e., Germany,
France and the Netherlands. Moreover, as with the ESM,
a weakening of the political commitment among euro area member states
to the EFSF, as perceived by Moody's, could also have
negative rating implications.
Given that the outlook on the EFSF's (P)Aa1 rating is currently
negative, the rating is unlikely to experience upward pressure in
the near term. However, the outlook on the EFSF's ratings
could return to stable if Moody's decided to move to stable the
outlooks on the ratings of highly rated countries with large EFSF contribution
keys, i.e. Germany, France and the Netherlands.
RATING METHODOLOGY
The ESM's ratings were assigned by evaluating factors that Moody's
considers relevant to the credit profile of the issuer, such as
the issuer's (i) business risk and competitive position compared with
others within the industry; (ii) capital structure and financial
risk; (iii) projected performance over the near to intermediate term;
and (iv) management's tolerance for risk. Moody's compared these
attributes against other issuers both within and outside ESM's core industry
and believes that the ESM's ratings are comparable to those of other issuers
with similar credit risk.
The EFSF's ratings were assigned by evaluating factors relevant to the
specific characteristics of the facility, reflecting its dual nature
as a financing facility and vehicle of public policy. These attributes
were compared against those of other issuers, and Moody's believes
the EFSF's ratings to be similar to other issuers of similar credit risk.
Moody's assigns a provisional rating when it is highly likely that the
rating will become definitive after all documents have been received.
Moody's will monitor the transaction on an ongoing basis to ensure that
it continues to perform in the manner expected. Any subsequent
changes in the rating will be publicly announced.
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, parties not involved in the ratings,
and public 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.
These rated entities have received a Rating Assessment Service within
the last two years preceding the Credit Rating Action.
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.
Dietmar Hornung
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
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 ESM to Aa1 from Aaa and EFSF to (P)Aa1 from (P)Aaa, maintains negative outlook on ratings
