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Rating Action:

Moody's downgrades KBC's hybrid securities

13 Aug 2009

Paris, August 13, 2009 -- Moody's Investors Service has today downgraded the hybrid instruments issued directly and indirectly by KBC Bank N.V. (KBC Bank) following the group's announcement last week of a coupon deferral on its sterling perpetual issue (see below).

KBC Bank's directly issued cumulative perpetual securities were downgraded to Ba3 with a negative outlook from Baa1 on review for possible downgrade.

KBC Bank's indirectly issued non-cumulative perpetual trust preferred securities were downgraded to Caa1 on review for possible downgrade from B1 on review with direction uncertain.

There has been no change either to KBC Bank's bank financial strength rating (BFSR) of C+ with a negative outlook or to KBC Bank's Aa3 and KBC Group's A1 long term senior debt and deposit ratings (both with negative outlooks).

The downgrade of the cumulative instruments to Ba3 reflects the request by the European Commission to skip H2 2009 coupon payments as a result of KBC requiring state aid. While this only affects the sterling cumulative instruments where the coupon payment is still due this year, Moody's downgraded all cumulative instruments as the agency factors in further coupon deferral risk at least over the next 18 months on all of these instruments. However, due to the cumulative character, the expected loss should be moderate, underpinning the Ba3 rating.

The downgrade of the non-cumulative instruments to Caa1 and the ongoing review for downgrade incorporates the significantly greater expected loss that would result from non-cumulative coupon deferrals at least over the next 18 months. The review will assess the risk that the period of non-payment on these coupons is extended beyond the currently incorporated 18 months horizon.

KBC'S ANNOUNCEMENT ON ITS PERPETUAL SECURITIES

As a result of its ongoing discussions with the EU on its state support package, KBC made the following announcements on its hybrid debt instruments on Thursday 6 August 2009, applicable for the remainder of the year:

1) Announcement on non-cumulative hybrid instruments

- KBC will pay 2009 annual coupons on the non-cumulative perpetual securities issued by KBC Funding Trust III and KBC Funding Trust IV as coupon payment has been deemed mandatory; KBC said that this has been cleared by the EU Commission;

- KBC and the Commission have not agreed yet on the payment of 2009 quarterly coupons on the non-cumulative perpetual securities issued by KBC Funding Trust II

-KBC will not exercise its call options on any of its hybrids (KBC Bank Funding Trust II, III and IV are all callable in 2009)

2) Announcement on cumulative hybrid instruments (euro and sterling issues)

- KBC has committed to skip the 2009 coupon payment on its directly issued cumulative sterling perpetual securities as the coupon payment has been deemed discretionary

- KBC did not comment on both tranches of its directly issued cumulative euro perpetual securities, for which no coupon payment is due this year

RATIONALE FOR THE DOWNGRADE OF THE INDIRECTLY ISSUED NON-CUMULATIVE PERPETUAL SECURITIES

The Caa1 rating on the non-cumulative perpetual preference securities issued by KBC Bank Funding Trust II, III and IV is based on an expected-loss approach and reflects the rating agency's assumptions of a very high likelihood of the omissions of coupons at least over six quarters and the high loss severity resulting thereof given the non-cumulative nature of these instruments.

Based on the communication released by KBC, Moody's understanding of the EU interpretation of the legal documentation on these instruments is as follows:

- coupon payments on these instruments will be paid until the first call date (June 2009 for KBC Funding Trust II and November 2009 for KBC Funding Trust III and IV)

- coupon payments after the first call date are optional and likely to be skipped

Moody's also understands that KBC is in discussion with the EU regarding the potentially mandatory payment for KBC Funding Trust II. The payment of KBC Funding Trust III and IV's mandatory coupons in November 2009 would act as a dividend pusher for KBC Funding Trust II's 2009 quarterly coupons, provided all three perpetual trust preferred issues are deemed parity securities.

In either case, Moody's assumes that coupons on all three perpetual trust preferred issues are likely to be deemed optional by the EU after November 2009. As Moody's also makes the assumption that a dividend on KBC Group's ordinary shares is unlikely in 2010, the probability of at least 6 quarterly coupons (KBC Funding Trust II, III and IV) being missed is high.

The review for possible downgrade on KBC's perpetual trust preferred securities will focus on assessing the potential duration of the deferral i.e. the probability that KBC maintains a dividend suspension beyond 2010:

-either because of a lack of profitability

-or because of constraints from regulatory authorities

Regarding the latter point, the terms of the final agreement between KBC and the EU commission on the support package will be important. The discussion is expected to be finalised before year-end and Moody's will closely review the conditions to determine whether there are clauses detrimental to the hybrid debt holders such as limiting the group's capacity to resume dividend and coupon payments when public aid has not been fully reimbursed.

RATIONALE FOR THE DOWNGRADE OF THE DIRECTLY ISSUED CUMULATIVE PERPETUAL SECURITIES

KBC Bank's directly issued perpetual debt securities were downgraded to Ba3, negative outlook. The wider notching of these instruments from the banks' long-term debt and deposit ratings reflects the certainty of one coupon omission on the sterling instruments and Moody's assumption of near-certain coupon omissions on both sterling and euro issues in 2010 and H1 2011 based on:

- the lack of parity securities outstanding that could trigger the dividend pusher, according to KBC, thus limiting the dividend pusher to dividend payments on ordinary shares in the case of the sterling instruments

- Moody's expectation that a dividend on ordinary shares is unlikely to be paid in 2010

- the similarity of the legal documentation between the sterling and euro instruments

The rating agency notes that the coupon payments on these instruments are cumulative and have to be paid in accordance with an Alternative Coupon Settlement Mechanism (ACSM, referred to as Alternative Coupon Payment Method --ACPM-- in KBC's documentation), thereby limiting the loss severity of coupon deferrals. Moody's cautions however about the potential delays for the ACSM to kick in: given the EU's stance on parity securities, the ACSM will not be activated before the Group resumes dividend payment on its ordinary shares.

The negative outlooks on theses instruments reflects both the negative outlooks on the bank's BFSR and long-term debt and deposit rating as well as the possibility that coupon deferrals last beyond H1 2011 (please refer above to the rationale for the review for downgrade on the non-cumulative instruments).

RATING HISTORY AND MOODY'S METHODOLOGIES

The last rating action on KBC Bank N.V. and KBC Group N.V. was on 20 May 2009, when Moody's affirmed KBC Bank's BFSR at C+ with negative outlook, its deposits and debt ratings at Aa3/Prime-1 with negative outlook and affirmed KBC Group's long-term debt rating at A1 with negative outlook. Simultaneously, Moody's downgraded KBC Bank's directly issued perpetual debt securities to Baa1 under review for possible downgrade and downgraded KBC Bank's indirectly issued non-cumulative trust preferred securities to B1 under review with direction uncertain.

The principal methodologies used in rating the issuers affected by this press release are "Bank Financial Strength Ratings: Global Methodology", "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" as well as "Guidelines for Rating Bank Junior Securities", which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies sub-directory. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Credit Policy & Methodologies directory.

Based in Brussels, KBC Group had total assets amounting to EUR344.4 billion at end-June 2009. KBC Group's consolidated total income for the first half of 2009 (IFRS) stood at EUR583 million, down from EUR4,360 million for the first half of 2008. In the same period, the net profit group share stood at minus EUR3,298 million (H1 2008: EUR1,047 million). At end-June 2009, KBC Bank's Tier 1 ratio stood at 10.8% (core Tier 1: 8.1%).

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

Paris
Stephane Le Priol
VP - Senior Credit Officer
Financial Institutions Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades KBC's hybrid securities
No Related Data.
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