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Global Credit Research - 03 Aug 2010
Bank financial strength rating (BFSR) affirmed with stable outlook
Frankfurt am Main, August 03, 2010 -- Moody's Investors Service has today downgraded to Baa3 from Baa2 the long-term
debt and deposit ratings of Hypo Alpe-Adria-Bank International
AG ("Hypo Alpe Adria") and its ratings for subordinated liabilities
to Ba1 from Baa3. Concurrently, the bank's short-term
rating was downgraded to P-3. Hypo Alpe Adria's E
Bank financial strength rating (BFSR), mapping to a stand-alone
Baseline Credit Assessment (BCA) of Caa2, was affirmed with a stable
outlook. The multi-notch uplift for the bank's deposit
and debt ratings reflects Moody's assessment of a very high probability
of ongoing systemic support. The outlook on the debt and deposit
ratings is negative.
At the same time, Moody's confirmed the Ca ratings for the
non-cumulative preferred securities (Tier 1 instruments) issued
by Hypo Alpe Adria (Jersey) Ltd and Hypo Alpe Adria (Jersey) II Ltd with
a stable outlook. The ratings of Hypo Alpe-Adria's supplementary
capital bonds (Ergänzungskapital) were affirmed at C with their stable
Today's rating actions conclude the review for possible further
downgrade of the short- and long-term debt ratings that
Moody's initiated on 4 December 2009.
The Aa3/A1/Prime-1 ratings for debt backed by the Austrian federal
state of Carinthia and the Aaa rating for debt backed by the Republic
of Austria are not affected by the rating action.
Baa3/P-3 RATINGS BENEFIT STRONGLY FROM EXPECTED MEDIUM-TERM
Moody's decision to downgrade Hypo Alpe Adria's long-term
debt ratings by only one notch follows the recent completion of another
EUR450 million capital injection by the Republic of Austria and EUR150
million by the State of Carinthia, as announced in December 2009.
In Moody's view, the ongoing dialogue with the European Commission
about the bank's restructuring plan has reduced the risk of a transformative
event such as the break-up of the group. The rating agency
recognises that more than half of Hypo Alpe-Adria's outstanding
debt is guaranteed by the State of Carinthia (ca. EUR19.4
billion) or by its sole owner, the Republic of Austria (EUR1.35
According to Moody's, Hypo Alpe Adria's ability to retain
its Baa3 long-term deposit rating for the foreseeable future depends
on the following factors:
i) Moody's expectation of a continued commitment by the Republic
of Austria to support the bank given its important role in the Austrian
federal state of Carinthia and the systemic relevance of its subsidiaries
in some neighbouring countries in south-eastern Europe.
ii) The approval of the bank's suggested restructuring plan by the
Moody's decision to apply a negative outlook to the senior unsecured
debt and deposit ratings reflects its view of a lower probability of future
systemic support over time because (i) Hypo Alpe Adria's systemic
importance will inevitably decrease as major parts of the bank are divested
or wound down over time, and (ii) the "grandfathering"
or sovereign guarantee for the bank's debt will reduce over time
in light of the largely staggered nature of the maturity profile of this
debt until 2017.
BFSR CONSTRAINED BY WEAK ASSET QUALITY, CAPITALISATION, AND
The E BFSR reflects Moody's view that, the recent capital
injections notwithstanding, Hypo Alpe Adria is likely to continue
to face substantial challenges in its efforts to rebuild some of its previous
financial strength. Moreover, the rating agency believes
that the bank has yet to prove that its franchise in Austria and abroad
can be restored. Accordingly, Moody's stated that the
BFSR currently continues to remain constrained by several factors,
i) the severe asset quality problems, with non-performing
loans (NPLs) accounting for more than 20% of total loans and a
relatively weak coverage ratio despite some offsetting impact from collateralisation;
ii) the poor outlook on Hypo Alpe-Adria's short- and
medium-term profitability and thus internal capital-generation
iii) the bank's limited capital buffer to absorb future credit losses
which may require further capital measures; and
iv) continued concerns about the long-term viability of Hypo Alpe
Adria's diversified commercial franchise, which suffers from
limited opportunities for new business against the background of its far-reaching
restructuring and downsizing programme.
Moody's expects that the bank will focus on de-risking its
current business profile, which may have positive rating implications
in the long run. However, targeted restructuring measures
remain dependent on the approval of the European Commission, which
are not expected to be granted before year-end 2010.
The possible impact on the ratings of Hypo Alpe Adria's covered
bonds will be discussed in a separate press release.
RATINGS OF HYBRID INSTRUMENTS NOW ALL WITH STABLE OUTLOOK
The confirmation of the Ca ratings and stable outlook of the non-cumulative
preferred securities (Tier 1 instruments) issued by HGAA's subsidiaries,
Hypo Alpe Adria (Jersey) Ltd and Hypo Alpe Adria (Jersey) II Ltd,
is based on Moody's view that the likelihood of a break-up
of the group has decreased following the recent completion of the capital
injection by the Republic of Austria and the State of Carinthia and the
ongoing dialogue with the European Commission about the bank's restructuring
plans. The ratings do factor in further coupon losses over the
next years. The Ca ratings take into account that the perpetual
instruments could have some prospect of recovery in the long term.
At the same time, the ratings of Hypo Alpe-Adria's supplementary
capital bonds (Ergänzungskapital, ISINs: AT0000345202,
XS0178449467) were affirmed at C with their stable outlook. The
C ratings reflect Moody's expectation of coupon losses over the next years
and the potential for principal losses at maturity in 2014 and 2015,
respectively. Moody's believes that the recovery potential of those
instruments is very limited.
PREVIOUS RATING ACTION AND METHODOLOGIES
Moody's previous rating action on Hypo Alpe-Adria was implemented
on 15 April 2010, when Moody's downgraded the ratings of Hypo Alpe-Adria
for senior debt backed by the Austrian federal state of Carinthia to Aa3
from Aa2 and the guaranteed subordinated debt to A1 from Aa3. At
the time, Moody's gave the bank's guaranteed ratings
a "developing" outlook and maintained the review for possible
further downgrade on the short- and long-term debt ratings
of Hypo Alpe-Adria.
The principal methodologies used in rating Hypo Alpe-Adria 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
Based in Klagenfurt, Austria, Hypo Alpe-Adria reported
consolidated assets of EUR41.1 billion at the end of 2009 and an
after-tax loss of EUR 1.6 billion.
Frankfurt am Main
Senior Vice President
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
MD - Banking
Financial Institutions Group
Moody's Deutschland GmbH
Moody's downgrades Hypo Alpe-Adria to Baa3/P-3, negative outlook
An der Welle 5
Frankfurt am Main 60322
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