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Rating Action:

Moody's downgrades HSH's and DKB's Pfandbriefe

16 Dec 2011

London, 16 December 2011 -- Moody's Investors Service has today downgraded HSH Nordbank AG's public-sector Pfandbriefe to Aa1 from Aaa, its mortgage Pfandbriefe to Aa1 from Aaa and its ship Pfandbriefe to Baa1 from A2.

Furthermore, the mortgage Pfandbriefe of Deutsche Kreditbank AG (DKB) have been downgraded to Aa1 from Aaa, and the Public Sector Pfandbriefe to Aa1 from Aaa.

The above rating action concludes Moody's review of HSH's ship Pfandbriefe and the public sector Pfandbriefe issued by DKB and HSH. However, the mortgage Pfandbriefe of both issuers remain on review for downgrade, pending communication on the form and level of over-collateralisation (OC) to support the respective Aa1 ratings.

RATINGS RATIONALE

The above rating action follows the previous rating actions taken on German Landesbanken. For more information see "Moody's takes rating actions on 12 German Landesbanken" published on 16 November 2011. Whilst HSH was downgraded to Baa2 from A3, DKB's credit profile as a fully owned subsidiary of BayernLB reflects the credit standing of its parent which was downgraded to Baa1 from A1.

Moody's says that the rating actions on the above covered bonds is not caused by deterioration in the credit quality of the cover pool assets backing the covered bonds.

Following the rating actions on the issuers, the ratings assigned to the mortgage and public-sector Pfandbriefe of both HSH and DKB are now restricted at Aa1 as a result of the combination of the TPI framework and their Timely Payment Indicators (TPIs) of "High", which remain unchanged.

The OC in the public-sector Pfandbrief programmes of both issuers is sufficient (in both form and level) to support the Aa1 rating in Moody's expected loss modelling. Therefore, the above rating action concludes the review of these covered bond ratings, as the issuer ratings are no longer on review.

However, Moody's continues the review for downgrade of the mortgage Pfandbriefe of both issuers, pending the delivery from both issuers of their relevant proposals related to the form and level of OC they intend to maintain in the future, in order to maintain the current ratings.

Moody's notes that it may limit the value to OC that is "voluntary" when the issuer is rated below A3.

Moody's currently rates ship Pfandbriefe one notch above the issuer rating. HSH's ship Pfandbriefe have been downgraded to Baa1 and are no longer on review for downgrade. This reflects Moody's removal of HSH's rating from review.

KEY RATING ASSUMPTIONS/FACTORS

Covered bond ratings are determined after applying a two-step process: expected loss analysis and TPI framework analysis.

EXPECTED LOSS: Moody's determines a rating based on the expected loss on the bond. The primary model used is Moody's Covered Bond Model (COBOL), which determines expected loss as (i) a function of the issuer's probability of default (measured by the issuer's rating); and (ii) the stressed losses on the cover pool assets following issuer default.

The cover pool losses are based on Moody's most recent modelling (based on data, as per 30 June 2011) and are an estimate of the losses Moody's currently models if the relevant issuer defaults. Cover pool losses can be split between market risk and collateral risk. Market risk measures losses as a result of refinancing risk and risks related to interest-rate and currency mismatches (these losses may also include certain legal risks). Collateral risk measures losses resulting directly from the credit quality of the assets in the cover pool. Collateral risk is derived from the collateral score.

The cover pool losses of DKB's mortgage Pfandbriefe are 20.0%, with market risk of 12.2% and collateral risk of 7.7%. The collateral score for this programme is currently 11.6 %. The level of OC to support the Aa1 rating currently assigned to this programme is 15.5%.

The cover pool losses of DKB's public-sector Pfandbriefe are 10.8%, with market risk of 8.5% and collateral risk of 2.3%. The collateral score for this programme is currently 4.1%. The level of OC to support the Aa1 rating currently assigned to this programme is 7.5%.

The cover pool losses of HSH's mortgage Pfandbriefe are 22.5%, with market risk of 10.1% and collateral risk of 12.3%. The collateral score for this programme is currently 18.4%. The level of OC to support the Aa1 rating currently assigned to this programme is 17.5%.

The cover pool losses of HSH's public-sector Pfandbriefe are 12.6%, with market risk of 7.7% and collateral risk of 5.0%. The collateral score for this programme is currently 9.0%. The level of OC to support the Aa1 rating currently assigned to this programme is 9.0%.

The cover-pool losses of HSH's ship Pfandbriefe are 72.6%, with market risk of 5.6% and collateral risk of 67.0%. The collateral score for this programme is currently 100%. The ratings assigned to these bonds relies on the OC imposed by the German Pfandbrief Act.

For further details on cover pool losses, collateral risk, market risk, collateral score and TPI Leeway across all covered bond programmes rated by Moody's please refer to "Moody's EMEA Covered Bonds Monitoring Overview", published quarterly. These figures are based on the latest data that has been analysed by Moody's and are subject to change over time. These numbers are updated quarterly in the "Performance Overview" published by Moody's.

TPI FRAMEWORK: Moody's assigns a "timely payment indicator" (TPI), which indicates the likelihood that timely payment will be made to covered bondholders following issuer default. The effect of the TPI framework is to limit the covered bond rating to a certain number of notches above the issuer's rating.

Moody's has assigned a TPI of High to the mortgage and public-sector Pfandbriefe issued by DKB and HSH, and a TPI of "Improbable" to the ship Pfandbriefe issued by HSH .

SENSITIVITY ANALYSIS

The robustness of a covered bond rating largely depends on the credit strength of the issuer.

The TPI Leeway measures the number of notches by which the issuer's rating may be downgraded before the covered bonds are downgraded under the TPI framework.

Based on their current TPI of High, the mortgage and public-sector Pfandbriefe issued by HSH have a TPI Leeway of 0 notches, meaning the covered bonds might be downgraded as a result of a TPI cap once HSH's rating is downgraded, all other variables being equal. The TPI leeway for HSH's ship Pfandbriefe is one notch, although Moody's notes that a further downgrade of the issuer is likely to lead to a downgrade of the ship Pfandbriefe, as they are currently rated one notch above the issuer rating.

As the issuer rating of DKB is not public, Moody's does not publish the TPI leeway for its Pfandbrief programmes.

A multiple-notch downgrade of the covered bonds might occur in certain limited circumstances. Some examples might be (i) a sovereign downgrade negatively affecting both the issuer's senior unsecured rating and the TPI; (ii) a multiple-notch downgrade of the issuer; or (iii) a material reduction of the value of the cover pool.

As noted in Moody's comment 'Rising Severity of Euro Area Sovereign Crisis Threatens Credit Standing of All EU Sovereigns' (28 November 2011), the risk of sovereign defaults or the exit of countries from the Euro area is rising. As a result, Moody's could lower the maximum achievable rating for covered bonds transactions in some countries, which could result in rating downgrades.

The principal methodology used in this rating was "Moody's Rating Approach to Covered Bonds" published in March 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The lead analyst and rating office for each of the transactions affected are generally different from the contact and office listed at the end of this press release. For each transaction, the lead analyst name and the rating office is available on the issuer page on www.moodys.com

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, parties not 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 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.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

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.

Martin Rast
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Juan Pablo Soriano
MD - Structured Finance
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades HSH's and DKB's Pfandbriefe
No Related Data.
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