Hybrid instruments downgraded to Ca (hyb) from previously B3 (hyb)/Caa1 (hyb)
Frankfurt am Main, March 01, 2012 -- Moody's Investors Service has today downgraded to E from E+ WestLB's
bank financial strength rating (BFSR) and changed the outlook for this
rating to stable from developing. The revised BFSR now maps to
Caa1 on the long-term scale, from B2 previously. Additionally,
Moody's extended the ongoing review for WestLB's A3/Prime-2
long and short-term senior debt and deposit ratings and specified
the directions of these reviews as follows:
- The direction of the review of the A3/Prime-2 ratings
for long and short-term senior debt was changed to review for upgrade
from uncertain.
- The direction of the review of the A3/Prime-2 ratings
for long and short-term deposits was changed to review for downgrade
from uncertain.
The opposite directions of the extended rating reviews reflect the different
risk drivers for bank deposits compared with those for outstanding senior
unsecured debt.
Concurrently, Moody's downgraded WestLB's Upper Tier
2 instruments (profit participation certificates, or Genussscheine)
to Ca(hyb) from B3(hyb), and trust-preferred securities and
silent participations (Stille Einlagen) to Ca(hyb) from Caa1(hyb).
These ratings also carry a stable outlook - from developing previously
-, in line with the stable outlook of the bank's E
BFSR.
WestLB's Aa1 ratings for grandfathered debt were unaffected by today's
rating actions.
RATINGS RATIONALE
- DOWNGRADE OF BFSR REFLECTS OPACITY OF NEAR AND MEDIUM TERM FINANCIAL
PROFILE
The downgrade of WestLB's BFSR to E reflects a combination of the
following factors (i) WestLB's limited lifetime as a diversified,
commercial bank; (ii) the lack of information regarding WestLB's
future financial profile and key financial metrics; and (iii) Moody's
expectation that following the break-up of WestLB, the bank's
operational complexity and difficult-to-forecast losses
(over an extended period) will both pose challenges, as operations
and assets are wound down.
WestLB's breakup is planned for 30 June 2012. On (or from)
that date, it will discontinue its commercial activities as a lender
and will no longer use its (brand) name, WestLB. It will
also off-load its risk-bearing assets and most liabilities,
and restrict further activities to portfolio management and services that
(mostly) support the unwinding of assets.
- DIRECTION CHANGES OF DEBT / DEPOSIT RATINGS REVIEWS REFLECT VARYING
DEGREES OF RISK
The varying directions of the extended rating reviews reflect the different
risk drivers for (i) bank deposits, which are linked to the deposit-taking
entity, i.e. WestLB; and (ii) those for outstanding
senior unsecured debt (bonds and notes), given the decision to transfer
senior debt to WestLB's existing wind-down vehicle,
EAA Erste Abwicklungsanstalt (EAA, rated Aa1 stable/Prime-1)
at the end of Q2 2012, or, possibly, to Landesbank Hessen-Thueringen
(Helaba, rated C-/A1, both on review for downgrade,
Prime-1).
Although detailed information on instruments to be transferred is not
yet available, Moody's takes the view that the break-up
and the transfer of assets and liabilities to EAA are very likely to proceed
according to plans, thus improving the prospect of full repayment
at maturity for bond holders. The spin-off of EUR40 billion
of assets and liabilities and their transfer to Helaba has also not been
decided yet; however, if Helaba decides to go ahead with the
transaction, a transfer of liabilities to the Frankfurt-based
bank would also imply upward rating pressure for respective investors.
If Helaba decides against it, then any alternative scenario would,
in Moody's view, likely entail a transfer to another member
of the group of public sector banks, or to EAA.
At the same time, Moody's concedes that a degree of political
and operational risk remains, which could lead to other outcomes,
implying above-average transition risk for bond holders.
While decisions on the level of future support for WestLB are pre-mature
at this stage, Moody's understands that no explicit support
(e.g. in the form of a guaranty) will be available to WestLB
following its break-up; this is principally credit negative,
considering that WestLB will cease to represent a systemically important
bank. However, under the plan, WestLB will be 100%
owned by the State of North Rhine Westphalia (NRW, rated Aa1,
stable) that is expected to support the subsequent restructuring and unwinding
of the bank, as well as various obligations towards staff and other
third parties.
- HYBRID RATINGS DOWNGRADE REFLECTS NO SUPPORT FOR THESE INSTRUMENTS
Although Moody's has no information as to whether these hybrid instruments
will be transferred during WestLB's breakup, or remain within
the bank, the rating agency takes the view that (i) they are unlikely
to be subject to any outside assistance, and (ii) will likely remain
in WestLB and incur further losses.
To reflect this additional risk for these instruments (which were partially
written down in 2009 and have not been paying coupons since 2009),
Moody's positioned these ratings at Ca, which is three notches
below the Caa1 standalone credit assessment. The downgrade anticipates
that after the break-up, no cooperative support will be available
to support these ratings.
FOCUS OF THE REVIEW
The review will focus on (i) any risks that may yet alter the prospects
for investors in currently outstanding debt of WestLB, (ii) whether
Helaba will decide for the takeover of EUR 40 billion of WestLB's
assets and liabilities; (iii) the selection of bonds and deposits
that will be subject to transfers out of WestLB to either EAA or,
possibly, Helaba; and (iv) operational risk, including
legal obstacles, that could hamper or delay current plans.
WHAT COULD CHANGE THE RATINGS UP / DOWN
There is currently no upside pressure on the E BFSR, constrained
by WestLB's very limited prospects to become a financially viable operating
entity. E is the lowest category of the BFSR scale.
Security for holders of WestLB's senior unsecured bonds and notes
continues to depend on ongoing support which Moody's considers will
be forthcoming, as reflected by the review for upgrade. Positive
rating pressure would be prompted by a transfer of liabilities to EAA,
or if Helaba acquires some of WestLB's liabilities.
There is negative transition risk in particular for the A3 ratings of
deposits in WestLB, as indicated by the review for downgrade.
Although Moody's does not exclude the possibility that deposits
will be transferred out during the breakup, the deposit ratings
-- unless discontinued and withdrawn -- will
continue to reflect the combination of financial strength of and support
available to WestLB, which bears major uncertainties considering
the level of opacity regarding the bank's future.
The methodologies used in this rating were Bank Financial Strength Ratings:
Global Methodology published in February 2007, Incorporation of
Joint-Default Analysis into Moody's Bank Ratings: A Refined
Methodology published in March 2007, and Moody's Guidelines for
Rating Bank Hybrid Securities and Subordinated Debt published in November
2009. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant 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 relevant 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.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following :
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
two years preceding the credit rating action. Please see the special
report "Ancillary or other permissible services provided to entities
rated by MIS's EU credit rating agencies" on the ratings disclosure
page on our website www.moodys.com for further information.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
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.
Katharina Barten
VP - Senior Credit Officer
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 WestLB's BFSR to E; reviews extended for senior debt and deposits
