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Rating Action:

Moody's downgrades Novo Banco's ratings to Caa1 on fresh BES resolution measures; developing outlook

04 Jan 2016

Downgrades five senior debt securities to C and subsequently withdraws the ratings

Madrid, January 04, 2016 -- Moody's Investors Service has today downgraded to Caa1 from B2 the senior debt and long-term deposit ratings of Portugal's Novo Banco, S.A. and its supported entities. This follows the Bank of Portugal's (BoP) announcement on 29 December 2015 that it had approved the recapitalization of Novo Banco by transferring EUR1,985 million of senior debt back to Banco Espirito Santo, S.A. (BES unrated). The outlook on Novo Banco's deposit and senior debt ratings is now developing.

The rating agency has also downgraded to C from B2 (on review for downgrade) the rating on Novo Banco's senior debt securities transferred to BES (ISINs PTBEQBOM0010, PTBENIOM0016, PTBENJOM0015, PTBENKOM0012 and PTBEQKOM0019). Subsequently, Moody's will withdraw the ratings on these senior bonds. The downgrade and withdrawal have been triggered by the transfer of these senior debt instruments to BES, a bank which is being liquidated and for which the BoP has asked the European Central Bank (ECB) to revoke its banking license.

At the same time, Moody's has downgraded to B2(cr) from B1(cr) Novo Banco's counterparty risk assessment (CRA) and affirmed its short-term deposit and senior debt ratings at Not-Prime and short-term CRA at Not Prime(cr). Novo Banco's baseline credit assessment (BCA) was also confirmed at caa2.

This rating action concludes the review for downgrade on Novo Banco's ratings, which was initiated on 18 November 2015.

Novo Banco's Ba1 rated senior bonds, which are guaranteed by the Republic of Portugal (Ba1 stable), are unaffected by today's rating action.

A list of the affected ratings can be found at the end of this press release.

RATINGS RATIONALE

Today's action primarily reflects the BoP's announcement on 29 December 2015 that it has taken a series of measures aimed at restoring Novo Banco's capital, thereby preserving financial stability in the Portuguese banking system and accomplishing the objectives of the resolution of BES, initiated in 2014.

While no bail-in of Novo Banco's liabilities has been applied, in Moody's opinion, the announced measures have the potential to affect to varying degrees the loss expectations for different debt instruments and liabilities rated by Moody's.

Following the announcement on 14 November 2015 of a EUR1.4 billion capital shortfall identified in the adverse stress test scenario of the ECB's stress test, the bank, its owner -- the Portuguese Resolution fund -- and other Portuguese and European authorities prepared and approved a recapitalization plan.

Under the plan, Novo Banco's capital will be restored by transferring EUR1,985 million of senior unsecured bonds back to BES, thereby reportedly raising Novo Banco's Common Equity Tier 1 (CET1) ratio to around 13%. In its announcement, BoP explained that as part of the resolution measures applied to BES in 2014, which resulted in the creation of the bridge bank Novo Banco, it has been empowered to alter the overall perimeter of assets and liabilities of both banks in its role as resolution authority. With the re-transfer of certain senior debt instruments to BES, both institutions' perimeters are declared to be final. Subsequently, BES's banking license will be revoked and the entity will be liquidated. Further, the sale process for Novo Banco will resume in January 2016.

BoP's announcement follows a previous communication on 21 December 2015 by the European Commission (EC), which approved certain measures for Novo Banco that were compatible with European State aid rules. Such measures should maintain Novo Banco as a going concern bank. The EC's announcement comprised two key elements, namely (1) the extension of the deadline for privatizing Novo Banco (previously August 2016; no new deadline communicated as yet); and (2) the extension of the government guarantee for bonds issued by the bank, to ensure the bank's liquidity position.

-- RATIONALE FOR THE DOWNGRADE OF THE SENIOR DEBT INSTRUMENTS TRANSFERRED TO BES

The downgrade of the five senior debt issuances transferred from Novo Banco to BES to C from B2 (on review for downgrade), reflects Moody's views that the affected senior bonds will be exposed to severe losses during the protracted liquidation of BES. Subsequent to the downgrade, the ratings will be withdrawn.

-- RATIONALE FOR THE RATING ACTIONS ON NOVO BANCO

The downgrade of Novo Banco's long-term debt and deposit ratings to Caa1 from B2 and its CRA to B2(cr) from B1(cr), reflects (1) the confirmation of the bank's BCA at caa2; (2) the result from the rating agency's Advanced Loss-Given Failure (LGF) analysis after considering the lower volumes of bail-inable instruments, reducing the uplift to one notch from two notches previously for the debt and deposit ratings and maintaining three notches of uplift for the CRA; and (3) Moody's reassessment of government support assumptions for Novo Banco to low from moderate, which now result in no rating uplift.

The confirmation of Novo Banco's BCA, reflects the bank's very weak credit profile despite the increased capital buffers after the EUR1.985 million recapitalization and the benefits of the extension of the government guaranteed funding. Novo Banco's deteriorating asset risk metrics and continued losses, could still erode further the bank's solvency position even after the actions approved by the BoP.

Moody's now assigns a low probability of government support to Novo Banco's ratings. This reassessment is based on the rating agency's view that the likelihood of further government support for the bank has diminished, as evidenced by the measures approved by BoP. The fact that the regulator has unexpectedly opted for a private solution to recapitalize Novo Banco, raises the probability that support in case of need, will similarly involve senior creditors in the future rather than public money.

-- RATIONALE FOR THE DEVELOPING OUTLOOK ON NOVO BANCO'S RATINGS

The outlook on Novo Banco's senior debt and deposit ratings is developing. This reflects (1) the uncertainties prevailing around the bank's very weak credit profile and the impact of the restructuring plan recently submitted to the EC; and (2) the uncertainties around the outcome of the sale process that BoP will resume early in January 2016, which together could affect Moody's final assessment of the senior debt and deposit ratings.

WHAT COULD CHANGE THE RATINGS UP/DOWN

An improvement of Novo Banco's BCA could result from a clear strengthening in the bank's risk absorption capacity, driven by stronger capital buffers, a reduction in the stock of problematic assets, and a sustainable recovery in Novo Banco's recurring profitability.

Upward pressure on Novo Banco's deposits and senior debt ratings could also arise if the bank is acquired by a financially strong and strategic buyer, as senior creditors could benefit from measures aimed at strengthening the bank's financial fundamentals as well as affiliate support.

Downward pressure on Novo Banco's BCA could develop if the bank's financial profile deteriorates further than anticipated and/or fails to accomplish the targeted restructuring plan.

As the bank's debt and deposit ratings are linked to the standalone BCA, any change to the BCA would likely also affect these ratings. Novo Banco's senior unsecured debt and deposit ratings could also change due to changes in the loss-given failure faced by these securities.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: Novo Banco, S.A.

....Long-Term Deposit Rating, Downgraded to Caa1 Developing from B2 Ratings under Review

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa1 Developing from B2 Ratings under Review (except for ISINs PTBEQBOM0010, PTBENIOM0016, PTBENJOM0015, PTBENKOM0012, and PTBEQKOM0019)

....Long-Term Counterparty Risk Assessment, Downgraded to B2(cr) from B1(cr)

..Issuer: NB Finance Ltd. (debts transferred from BES Finance Ltd).

....Backed senior Unsecured Regular Bond/Debenture, Downgraded to Caa1 Developing from B2 Ratings under Review

..Issuer: Novo Banco S.A., London Branch

....Long-Term Deposit Rating, Downgraded to Caa1 Developing from B2 Ratings under Review

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa1 Developing from B2 Ratings under Review

....Long-Term Counterparty Risk Assessment, Downgraded to B2(cr) from B1(cr)

..Issuer: Novo Banco S.A., Luxembourg Branch

....Long-Term Deposit Rating, Downgraded to Caa1 Developing from B2 Ratings under Review

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa1 Developing from B2 Ratings under Review

....Long-Term Counterparty Risk Assessment, Downgraded to B2(cr) from B1(cr)

..Issuer: Novo Banco, S.A., Cayman Branch

....Long-Term Deposit Rating, Downgraded to Caa1 Developing from B2 Ratings under Review

....Long-Term Counterparty Risk Assessment, Downgraded to B2(cr) from B1(cr)

..Issuer: Novo Banco, S.A., Madeira Branch

....Long-Term Deposit Rating, Downgraded to Caa1 Developing from B2 Ratings under Review

....Long-Term Counterparty Risk Assessment, Downgraded to B2(cr) from B1(cr)

Downgrades and subsequent withdrawals:

..Issuer: Novo Banco, S.A.

.Senior Unsecured Regular Bond/Debenture, Downgraded to C from B2 Ratings under Review for the following ISINs only: PTBEQBOM0010, PTBENIOM0016, PTBENJOM0015, PTBENKOM0012 and PTBEQKOM0019

Confirmations:

..Issuer: Novo Banco, S.A.

.... Adjusted Baseline Credit Assessment, Confirmed at caa2

.... Baseline Credit Assessment, Confirmed at caa2

Affirmations:

..Issuer: Novo Banco, S.A.

....Short-Term Deposit Rating, Affirmed NP

....Senior Unsecured Commercial Paper, Affirmed NP

....Short-Term Counterparty Risk Assessment, Affirmed NP(cr)

..Issuer: Novo Banco S.A., London Branch

....Short-Term Deposit Rating, Affirmed NP

....Short-Term Senior Unsecured Deposit Program, Affirmed NP

....Short-Term Counterparty Risk Assessment, Affirmed NP(cr)

..Issuer: Novo Banco S.A., Luxembourg Branch

....Short-Term Deposit Rating, Affirmed NP

....Short-Term Counterparty Risk Assessment, Affirmed NP(cr)

..Issuer: Novo Banco, S.A., Cayman Branch

....Short-Term Deposit Rating, Affirmed NP

....Short-Term Counterparty Risk Assessment, Affirmed NP(cr)

..Issuer: Novo Banco, S.A., Madeira Branch

....Short-Term Deposit Rating, Affirmed NP

....Short-Term Counterparty Risk Assessment, Affirmed NP(cr)

Outlook Actions:

....Outlook, Changed To Developing From Rating Under Review for issuers

Novo Banco, S.A.

Novo Banco S.A., London Branch

Novo Banco S.A., Luxembourg Branch

Novo Banco, S.A., Cayman Branch

Novo Banco, S.A., Madeira Branch

NB Finance Ltd.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Maria Jose Mori
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Novo Banco's ratings to Caa1 on fresh BES resolution measures; developing outlook
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