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Rating Action:

Moody's downgrades Novo Banco's senior debt rating to Caa2 and places it on review for further downgrade

05 Apr 2017

Long-term deposit rating of Caa1 placed on review for downgrade and standalone BCA downgraded to ca

Madrid, April 05, 2017 -- Moody's Investors Service today placed on review for downgrade Novo Banco, S.A. (Novo Banco)'s Caa1 long-term deposit ratings, downgraded the long-term senior unsecured debt rating to Caa2 from Caa1, and placed it on review for further downgrade. At the same time the rating agency downgraded the bank's: (1) standalone baseline credit assessment (BCA) by two notches to ca from caa2; and (2) long-term counterparty risk assessment (CR Assessment) to B3(cr) from B2(cr), and placed it on review for further downgrade. The outlook on the long-term deposit and debt ratings has been changed to Ratings under Review from Developing.

Novo Banco's short-term deposit and program ratings of Not Prime are unaffected by this rating action as well as the bank's short-term CRA of Not Prime(cr).

The rating action follows the announcement made by the Bank of Portugal on 31 March 2017 that as part of Novo Banco's sale process, a liability management exercise (LME) on senior bondholders will be undertaken with the aim of recapitalizing the bank by at least EUR500 million. Moody's views this offer as a distressed exchange and has reflected this in its downgrade of Novo Banco's standalone BCA to ca. The Bank of Portugal also announced that the private equity firm Lone Star (unrated) will acquire 75% of Novo Banco's capital after injecting EUR1 billion of capital, while the resolution fund will maintain 25% of the bank's shares.

The downgrade of the bank's long-term senior debt rating to Caa2 on review for further downgrade reflects Moody's expectation of the losses that Novo Banco's senior bondholders are likely to face as part of the LME.

Based on current information, the LME does not appear to include rated deposits, and the rating agency has accordingly not downgraded Novo Banco's long-term deposit ratings from Caa1. However, in placing them on review for downgrade, Moody's recognizes the downside risks to these junior deposits should the announced measures prove insufficient to restore the viability of the bank, or fail altogether, thereby increasing the risk of a resolution or liquidation and consequent losses for depositors.

During the review, Moody's will focus on the following issues: (1) the terms and conditions of the LME; (2) the scope and functioning of the so-called contingent capital mechanism to be provided by the resolution fund, that could be available to recapitalize the bank under certain circumstances; (3) Novo Banco's most recent financial profile upon the disclosure of year-end 2016 audited accounts; (4) details on the medium-term strategy and restructuring plan that Lone Star will have for Novo Banco; and (5) the timeline for the closure of the sale process including the approvals required from the European Central Bank and the European Commission (EC).

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

RATINGS RATIONALE

---DOWNGRADE OF THE STANDALONE BCA

The downgrade of the bank's standalone BCA to ca reflects Moody's view that the proposed LME on Novo Banco's outstanding senior bonds (EUR3.4 billion as end-June 2016) to recapitalize the bank has the effect of allowing the issuer to avoid a likely eventual default according to Moody's definitions. The rating agency considers this offer to be a distressed exchange that will be made as a means to avoid Novo Banco's liquidation and close the sale process. The completion of Novo Banco's sale process by the resolution fund before August 2017 was a condition imposed by the EC in order to avoid the liquidation of the bank, which was created by the Portuguese authorities in 2014 as a bridge institution following the collapse of Banco Espirito Santo, S.A. (unrated).

Novo Banco's ca standalone credit assessment also reflects the bank's very weak fundamentals given its very high and still growing stock of problem loans and the large losses that it continues to report (EUR359 million at end-September 2016). These will be in part mitigated by Lone Star's EUR1 billion capital injection and the establishment of the so-called contingent capital mechanism to recapitalize the bank under specific circumstances. However, these measures are not sufficient to prevent a the proposed LME on the bank's senior debt to raise at least EUR500 million of Common Equity Tier 1 and hence the bank's default on its senior debt.

-- RATIONALE FOR THE LONG-TERM SENIOR DEBT AND DEPOSIT RATINGS

The downgrade of the bank's senior debt rating to Caa2 on review for further downgrade reflects the rating agency's view that Novo Banco's senior debt bondholders will suffer losses under the proposed LME. Based on current available information that the offer would apply to about €3.4 billion of senior unsecured bonds, Moody's estimates that losses for these investors would be in the range of 10% to 20%. However, losses could be higher should the LME apply to a more limited stock of debt, and the review for downgrade will consider the potential for further losses for these instruments once the rating agency has more information on the terms and conditions.

Moody's does not at present expect junior deposits to incur losses, and has therefore not downgraded Novo Banco's long-term deposit ratings. However, the review for downgrade on these ratings reflects the risk that losses could yet arise for Novo Banco's junior deposits should the announced measures prove insufficient to restore the viability of the bank, or fail altogether, thereby increasing the risk of a resolution or liquidation and consequent losses for depositors.

--RATIONALE FOR THE CR ASSESSMENT

The downgrade of the bank's CR Assessment to B3(cr) reflects Moody's assessment of an increased probability of default for Novo Banco's senior operating obligations following the downgrade of the bank's standalone BCA to ca. The review for further downgrade will consider the risk of default on these obligations, depending on the implementation of the announced measures.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Given the low standalone BCA, scope for further downgrade is limited, but it would likely be downgraded to c in the event that plans to restore the bank's solvency prove unsuccessful and the resolution fund places the bank into a resolution or liquidation process. This or the prospect of larger-than-expected losses on senior unsecured debt or deposits would likely result in lower ratings.

The BCA could be upgraded if the bank successfully completes the LME and demonstrates that its solvency has been materially improved without the prospect of further losses for creditors. A positive change in the BCA would likely lead to an upgrade in all ratings.

LIST OF AFFECTED RATINGS

Issuer: Novo Banco, S.A.

..Downgraded:

....Adjusted Baseline Credit Assessment, downgraded to ca from caa2

....Baseline Credit Assessment, downgraded to ca from caa2

..Downgraded and placed on review for further downgrade:

....Long-term Counterparty Risk Assessment, downgraded to B3(cr) from B2(cr)

....Senior Unsecured Regular Bond/Debenture, downgraded to Caa2 Rating under Review from Caa1 Developing

..Placed on review for downgrade:

....Long-term Bank Deposits, currently Caa1, outlook changed to Rating under Review from Developing

..Outlook Action:

....Outlook changed to Rating under Review from Developing

Issuer: NB Finance Ltd.

..Downgraded and placed on review for further downgrade:

....Backed Senior Unsecured Regular Bond/Debenture, downgraded to Caa2 Rating under Review from Caa1 Developing

..Outlook Action:

....Outlook changed to Rating under Review from Developing

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

..Downgraded and placed on review for further downgrade:

....Long-term Counterparty Risk Assessment, downgraded to B3(cr) from B2(cr)

..Placed on review for downgrade:

....Long-term Bank Deposits, currently Caa1, outlook changed to Rating under Review from Developing

..Outlook Action:

....Outlook changed to Rating under Review from Developing

Issuer: Novo Banco S.A., Luxembourg Branch

..Downgraded and placed on review for further downgrade:

....Long-term Counterparty Risk Assessment, downgraded to B3(cr) from B2(cr)

....Senior Unsecured Regular Bond/Debenture, downgraded to Caa2 Rating under Review from Caa1 Developing

..Placed on review for downgrade:

....Long-term Bank Deposits, currently Caa1, outlook changed to Rating under Review from Developing

..Outlook Action:

....Outlook changed to Rating under Review from Developing

Issuer: Novo Banco S.A., London Branch

..Downgraded and placed on review for further downgrade:

....Long-term Counterparty Risk Assessment, downgraded to B3(cr) from B2(cr)

....Senior Unsecured Regular Bond/Debenture, downgraded to Caa2 Rating under Review from Caa1 Developing

..Placed on review for downgrade:

....Long-Term Bank Deposit, currently Caa1, outlook changed to Rating under Review from Developing

..Outlook Action:

....Outlook changed to Rating under Review from Developing

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

..Downgraded and placed on review for further downgrade:

....Long-term Counterparty Risk Assessment, downgraded to B3(cr) from B2(cr)

..Placed on review for downgrade:

....Long-term Bank Deposits, currently Caa1, outlook changed to Rating under Review from Developing

..Outlook Action:

....Outlook changed to Rating under Review from Developing

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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

No Related Data.
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