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Rating Action:

Moody's downgrades HSH Nordbank's LT debt ratings to A3, negative

04 May 2010

Downgrade follows Special Comment "Assessing Post-Crisis Support for German Banks"

Frankfurt, May 04, 2010 -- Moody's Investors Service has today downgraded the senior unsecured debt and deposit ratings of HSH Nordbank AG to A3 from A2 and its subordinated debt ratings to Baa1 from A3 following Moody's revisions of the support assumptions that are factored into these ratings. Concurrently, the bank's Prime-1 short-term rating was confirmed. Today's rating action concludes the review for possible downgrade that Moody's initiated for these ratings on 21 December 2009.

Furthermore, Moody's affirmed the bank's E+ bank financial strength rating (BFSR, which maps directly to a B1 baseline credit assessment, BCA) and its developing outlook. HSH Nordbank's hybrid ratings and the Aa1 rating for obligations that qualify for the grandfathering of "Gewaehrtraegerhaftung" (a guarantee obligation) remained unaffected by today's rating action.

DOWNGRADE OF HSH'S LONG-TERM RATINGS DUE TO WEAKENING SUPPORT FROM PUBLIC SECTOR SHAREHOLDERS

"Today's rating action follows a review of the probability of future support for HSH Nordbank from the federal state of Schleswig-Holstein and the city state of Hamburg, which together hold 85.5% of the bank's equity," says Katharina Barten, a Vice President at Moody's in Frankfurt and lead analyst for HSH Nordbank. "The extent of past support measures represent such a burden to the two states' own financial strength that they will be less inclined to offer further support to the bank, should this become necessary", Ms. Barten adds. "Nonetheless, Moody's assumptions of future support from the main owners of HSH Nordbank remain factored into the bank's ratings , albeit at a lower level in recognition of the two states' continued responsibility for, and commercially-driven interest in, the bank's future."

The rating agency emphasises the importance of the bank's role as a lender to Germany's northern region as well as to the global shipping industry. Moreover, Moody's notes that external pressures on the two states to further support HSH also remain high, even though this would inevitably came at a high political price -- along with further increase in leverage -- for the regional / local governments (RLGs). An important aspect in assessing the states' further availability to offer support measures, according to the rating agency, is the large amount of grandfathered debt (approximately EUR50 billion) that currently remains on HSH's balance sheet and represents a contingent liability of the bank's owners.

At the same time, Moody's factored into HSH Nordbank's fully supported ratings a slightly lower probability of cooperative support and a higher probability of support from the German government (i.e. systemic support) which, in the rating agency's view, better reflects the most important future sources and availability of external assistance for the bank. "The adjustments to Moody's support assumptions reflect that the regional savings banks of Schleswig Holstein did not contribute to the recent support measures for HSH, but also the government's availability -- as shown in the case of WestLB -- to support systemically important Landesbanks once other sources have been exhausted," Ms. Barten explains. "This offsetting effect has resulted in the relatively mild downgrade of just one notch to A3 for HSH's senior unsecured debt ratings." Although the rating uplift from its B1 BCA was lowered from eight to seven notches, this nevertheless still implies Moody's expectation of very high support going forward.

Moody's decision should be viewed in the context of its recent analysis of changing support in Germany, as outlined in the Special Comment "Assessing Post-Crisis Support for German Banks". In this report Moody's points out that weakening support from public sector owners -- among other factors -- exerts pressure on several supported Landesbank ratings, while uncertainties for junior classes of debt are rising across the banking landscape. While the latter have not yet been factored into any German bank ratings -- whose subordinated debt ratings generally remain one notch below senior unsecured debt -- today's rating action reflects Moody's concern about gradually weakening support for banks that needed large-scale support during the crisis and have not yet demonstrated a sufficient financial recovery and stabilisation that would allow for a (material) upgrade in their BFSRs.

NEGATIVE OUTLOOK ON THE A3 RATINGS REFLECTS RISK OF FURTHER WEAKENING SUPPORT OVER LONG TERM

Moody's believes that, in a post-crisis situation with more normal market conditions and a potentially better-capitalised banking system, individual banks in distress may be less likely to receive support than in the past. This could ultimately generate downward rating pressure, unless banks are able to offset this anticipated reduction in (systemic) support by strengthening their levels of stand-alone financial strength which would exert upward pressure on their BFSRs.

In the case of HSH Nordbank, this likely trend could be exacerbated by the European Commission's as yet outstanding approval for state aid, which Moody's expects will include a requirement for a change in the bank's shareholder background. Although the rating agency expects this to be required only over the medium term, this could nevertheless lead to a public listing of the bank or a takeover by private investors. This would in turn almost certainly jeopardise the bank's membership in Germany's group of public sector banks -- and thus also HSH's continued benefit from cooperative support that is still factored into Moody's ratings. Given the bank's loss-making situation and the persistently challenging environment in the shipping and commercial real estate markets, upward pressure on the BFSR -- which could potentially mitigate further rating pressure from weakening support -- appears very limited for the foreseeable future.

E+ BFSR CONSTRAINED BY SECTOR CONCENTRATION, WEAK CAPITAL LEVELS AND CONTINUED NEED OF SUPPORT

Moody's affirmation of the BFSR at the weak E+/developing level reflects the following short- and long-term challenges to HSH's franchise:

(i) The persistent and significant risk faced by the global shipping industry, to which HSH has an exposure worth approximately EUR35 billion. Specifically, HSH faces the threat that one or several major bankruptcies among shipping companies or ship financiers could yet rock the sector, which may occur if these were followed by fire-sales of assets and a renewed slump in asset prices.

(ii) HSH's limited access to capital while running a highly capital-intensive lending franchise. This implies that the bank will need to shrink its balance sheet to achieve more adequate capitalisation levels over the coming years.

(iii) The bank's medium-term dependence on costly support from its owners, the exact costs of which have not yet been decided by the European Commission, implying major additional uncertainties for the bank's future performance.

PRIME 1 SHORT-TERM RATING CONFIRMED ON RECENT STABILISATION COUPLED WITH LIKELY OUTSIDE SUPPORT

Moody's confirmation of HSH's Prime-1 short-term rating recognises the mitigating effect of the EUR10 billion risk shield that has been provided by the bank's owners and has been structured as a second loss guaranty for the vast majority of the bank's assets and exposures, along with the recent stabilising trend of the group's liquidity profile and funding situation. The rating agency notes positively that the bank has made progress in more effectively mobilising its resources to obtain secured funding, and that it currently holds a liquidity cushion that should ensure sufficient time to react to any renewed stress in the markets. More importantly, Moody's expects that the bank would receive further liquidity support in the foreseeable future (i.e. in addition to the EUR17 billion in guarantees drawn from the Financial Market Stabilisation Fund) if renewed stress in debt capital markets and/or money markets were to constrain HSH's access to market funding which continues to strongly underpin the bank's Prime-1 short-term rating.

SUMMARY OF RATINGS AND RATING ACTIONS:

- Rating for senior unsecured debt and deposits: downgraded to A3, negative

- Rating for senior subordinated debt: downgraded to Baa1, negative

- Prime-1 short term rating: confirmed

- E+ BFSR (B1 BCA): affirmed, outlook remains developing

- Aa1 rating for grandfathered obligations, stable outlook: unaffected

The previous rating action on HSH Nordbank was implemented on 21 December 2009, when Moody's placed the bank's A2 senior unsecured debt and deposit ratings, the A3 subordinated debt ratings and the Prime-1 short-term rating on review for possible downgrade and affirmed the E+ BFSR with its developing outlook.

The principal methodologies used in rating HSH Nordbank were "Moody's Bank Financial Strength Ratings: Global Methodology", published in February 2007, "Incorporation of Joint-Default Analysis into Moody's Bank Ratings", published in March 2007, and " Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt", published in November 2009, which are available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Headquartered in Hamburg and Kiel in northern Germany, HSH Nordbank reported total assets of EUR174.5 billion as of the end of December 2009 and reported a pre-tax loss of EUR1.3 billion for the 12-month period.

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

Frankfurt
Carola Schuler
Managing Director
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades HSH Nordbank's LT debt ratings to A3, negative
No Related Data.
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