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Rating Action:

Moody's downgrades Oesterreichische Volksbanken to Caa1 from B2; outlook negative

15 Jun 2015

Action concludes review and incorporates the new bank rating methodology

NOTE: On December 30, 2015, the press release was corrected as follows: In the fifth paragraph of the REGULATORY DISCLOSURES section, changed the unsolicited credit ratings disclosure to: “The ratings of rated entity Oesterreichische Volksbanken AG were not initiated or not maintained at the request of the rated entity”; in the sixth paragraph of the REGULATORY DISCLOSURES section, changed the participating rated entity in unsolicited credit ratings disclosures to: “Moody’s considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody’s. On this basis, the rated entity Oesterreichische Volksbanken AG or its agent(s) is considered to be a participating entity”. Revised release follows.

Frankfurt am Main, June 15, 2015 -- Moody's Investors Service has today downgraded the long-term deposit, senior unsecured debt and issuer ratings of Oesterreichische Volksbanken AG (VBAG) and Investkredit Bank AG (Investkredit; assumed by VBAG in September 2012) to Caa1 from B2. This concludes the review for downgrade on VBAG, which was initiated on 30 October 2014 and extended on 12 February 2015 and also reflects the implementation of the rating agency's new bank rating methodology (published on 16 March 2015).

In light of the new bank rating methodology, today's actions incorporate the following considerations (1) the "Moderate+" macro profile applicable to VBAG, which reflects that its asset base is mostly based outside of Austria (Aaa stable); (2) a reassessment of VBAG's weak financial profile as a wind-down entity with higher risk assets, a diminishing earnings base and low capitalisation; (3) the protection offered to creditors more senior in the creditor hierarchy, as captured by Moody's Advanced Loss-Given-Failure (LGF) liability analysis; and (4) the reduced likelihood of support from the Austrian government in the event of need.

Also reflecting these factors, Moody's has confirmed VBAG's subordinated debt ratings at Ca and its standalone baseline credit assessment (BCA) at caa3. The bank's Not-Prime short-term debt and deposit ratings are unaffected.

Furthermore, Investkredit's subordinated debt ratings were confirmed at Ca while VBAG's hybrid capital instruments -- or other issuing entities of the group -- continue to be rated on an expected loss basis and were downgraded to C(hyb) from Ca(hyb) reflecting an increase in expected loss severity.

Moody's has assigned Counterparty Risk (CR) Assessments of B3(cr)/Not-Prime(cr) to VBAG, in line with the new methodology.

VBAG's long-term senior debt and deposit ratings carry a negative outlook. Moody's has withdrawn the outlooks on the bank's subordinated and hybrid capital instruments for its own business reasons. Please refer to Moody's Investors Service's "Policy for Withdrawal of Credit Ratings", available on its website, www.moodys.com.

Please refer to the end of this press release for a list of all affected ratings.

Please refer to this link for the new methodology: http://www.moodys.com/viewresearchdoc.aspx?docid=PR_320662

RATINGS RATIONALE

The new methodology includes a number of elements that Moody's has developed to help accurately predict bank failures and determine how each creditor class is likely to be treated when a bank fails and enters resolution. These new elements capture insights gained from the crisis and the fundamental shift in the banking industry and its regulation.

(1) MACRO PROFILE "MODERATE+"

Following the decision to break-up and wind-down VBAG, the bank's macro profile derives from its residual exposures. Given its asset concentrations in several CEE countries, VBAG's individual macro profile is "Moderate+", significantly lower than the macro profile for Austria, which is "Very Strong-".

(2) VBAG's caa3 BCA REFLECTS WEAK RESILIENCE TO SHOCKS DURING THE WIND-DOWN PROCESS

In confirming the caa3 BCA, Moody's has based its reassessment on the understanding that during its wind-down, VBAG will benefit from a comfortable and largely matched funding structure. At the same time, solvency considerations still constrain the BCA. After failing the ECB's Comprehensive Assessment by a substantial margin and to prevent default or regulatory intervention, VBAG will now transfer the majority of its performing assets to other parts of the Volksbanken sector while retaining its higher risk assets and relinquishing its banking license. The opening balance sheet of the wind-down entity as of 1 January 2015 reports total assets of EUR7.1 billion and a slim capital cushion of EUR 30 million of shareholder's equity. Although exempt from banking regulatory requirements going forward, thereby reducing the risk of insolvency, the rating agency believes that VBAG is exposed to a considerable portion of non-performing assets and its thin capital base cannot sufficiently absorb unexpected losses. Moody's understands that the contemplated wind-down plan and break-up will technically occur by July 2015 with retroactive effect to the beginning of the year.

(3) PROTECTION OFFERED TO DEPOSITORS, SENIOR AND OTHER CREDITORS CAPTURED BY MOODY'S ADVANCED LGF LIABILITY ANALYSIS

Under BaSAG, the Austrian implementation of the EU Bank Resolution and Recovery Directive (BRRD), wind-down entities such as VBAG are included in what Moody's considers to be an Operational Resolution Regime. This enables the application of resolution tools to wind-down entities. Therefore, Moody's is applying its new Advanced LGF analysis, which has a positive effect on VBAG's debt and deposit ratings.

For VBAG, the LGF analysis relied on the bank's liability structure as published in its opening balance sheet. The analysis indicates a very low loss-given-failure for deposits and senior unsecured debt, leading to a two notch uplift from its caa3 Adjusted BCA. The assessment is supported by the wind-down entity's substantial volume of senior unsecured debt including promissory notes which Moody's considers to rank pari passu with senior unsecured instruments.

For subordinated debt issued by VBAG, the LGF analysis indicates a high loss-given-failure for this junior debt class, leading to a one notch reduction from the bank's caa3 Adjusted BCA.

(4) WITHDRAWAL OF GOVERNMENT SUPPORT

Moody's says that the introduction of the BRRD has demonstrated a reduction in the willingness of EU governments to bail-out banks. VBAG is subject to the BRRD and BaSAG. Moody's thus takes the view that the likelihood of support from the Austrian government is constrained and attributes a very low willingness to support, in case of need, given VBAG's wind-down status and significantly reduced size and contagion risks. Consequently government support for VBAG's debt and deposit instruments has been removed, leading to an overall downgrade of these ratings to Caa1 from B2.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects potential downward pressure on VBAG's BCA because of the very high uncertainties and execution risks associated with whether VBAG can wind itself down according to plan, in particular regarding expected proceeds from the asset disposals and implications for its capital levels. This may result from an adverse change in the European and Eastern European economic environment during the multi-year wind-down horizon, but could also be caused by lower-than-expected asset-value realisations absence any negative external developments.

Material changes in the liability structure that might occur during VBAG's unwinding mean that the negative outlook also reflects a potential reduction in rating uplift from the LGF analysis.

RATIONALE FOR THE CR ASSESSMENT

As part of today's actions, Moody's has assigned a CR Assessment of B3(cr)/Not-Prime(cr) to VBAG. CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails, and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than expected loss and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

The CR Assessment takes into account the issuer's standalone strength as well as the likelihood of affiliate and government support in the event of need, reflecting the anticipated seniority of these obligations in the liabilities hierarchy. The CR Assessment also incorporates other steps authorities can take to preserve the key operations of a bank should it enter a resolution.

The starting point for the CR Assessment of VBAG is the bank's caa3 Adjusted BCA, to which Moody's then applies an Advanced LGF approach that takes into account the level of subordination in the bank's liability structure, and incorporates the same support assumptions as applied to deposit and senior unsecured debt ratings. As a result, the CR Assessment for VBAG is one notch higher than its deposit ratings, reflecting Moody's view that authorities are likely to honour the operating obligations the CR Assessment refers to in order to preserve a bank's critical functions and reduce potential for contagion.

WHAT COULD CHANGE THE RATING -- UP/DOWN

The negative outlook implies no upward rating pressure on VBAG's long-term ratings.

However, upward rating pressure on VBAG's long-term ratings could result from substantial improvement in the bank's standalone creditworthiness that would prompt an upward adjustment of its standalone BCA and/or positive effects from Moody's LGF analysis.

Upward pressure on VBAG's caa3 BCA could arise from a substantial capital increase and/or a successful wind-down and de-risking of its balance sheet, which would also support VBAG's aim of preserving an adequate liquidity position. Upward pressure on the bank's debt and deposit ratings may further arise because of positive effects from the LGF analysis, which currently provides two notches of rating uplift to the bank's debt and deposit ratings; this would require a relative increase in subordinated instruments.

Downward rating pressure on VBAG's long-term ratings could result from a deterioration in the bank's standalone creditworthiness and/or negative effects from the LGF analysis.

Downward pressure on the BCA could develop if the proposed restructuring proves insufficient to indicate that senior creditors will be repaid in full and on time and/or if the Austrian Financial Market Authority (FMA) steps in to initiate resolution measures.

Downward pressure on VBAG's long-term ratings could also result from negative effects from the LGF analysis, in particular if (1) upon the execution of the break-up of VBAG by July 2015, the bank's liability structure is materially different to the opening balance sheet implementation; and (2) a significant reduction in the volume of subordinated instruments occurs.

LIST OF AFFECTED RATINGS

The following ratings of VBAG were downgraded:

- Long-term deposit, senior unsecured debt and issuer ratings to Caa1 from B2, negative outlook

- Preferred Stock Non-cumulative to C(hyb) from Ca(hyb), outlook withdrawn

- Junior subordinated debt (Upper Tier 2) to C(hyb) from Ca(hyb), outlook withdrawn

The following ratings or rating inputs of VBAG were confirmed:

- Subordinated and senior subordinated debt ratings at Ca, outlook withdrawn

- BCA and adjusted BCA at caa3

The following rating assessments of VBAG were assigned:

- Long-term Counterparty Risk Assessment of B3(cr)

- Short-term Counterparty Risk Assessment of Not-Prime(cr)

The following ratings of VBAG were unaffected:

- Short-term debt and deposit rating at Not-Prime

The following ratings of Investkredit were downgraded:

- BACKED long-term senior unsecured debt ratings to Caa1 from B2, negative outlook

- BACKED junior subordinated debt (Upper Tier 2) to C(hyb) from Ca(hyb), outlook withdrawn

The following rating of Investkredit was confirmed:

- BACKED subordinated debt ratings at Ca, outlook withdrawn

The following rating of OEVAG Finance (Jersey) Limited was downgraded:

- BACKED Preferred Stock Non-cumulative to C(hyb) from Ca(hyb), outlook withdrawn

The following rating of Investkredit Funding Ltd was downgraded:

- Preferred Stock Non-cumulative to C(hyb) from Ca(hyb), outlook withdrawn

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.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine this credit rating.

The ratings of rated entity Oesterreichische Volksbanken AG were not initiated or not maintained at the request of the rated entity.

Moody’s considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody’s. On this basis, the rated entity Oesterreichische Volksbanken AG or its agent(s) is considered to be a participating 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.

Swen Metzler
Vice President - Senior Analyst
Financial Institutions Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
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 Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Oesterreichische Volksbanken to Caa1 from B2; outlook negative
No Related Data.
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