Action to remove government support from banks' ratings follows introduction of new senior unsecured debt class in Germany which ranks above outstanding (statutorily subordinated) senior unsecured debt instruments
NOTE: On September 6, 2018, the List of Affected Credit Ratings accessible via hyperlink from this press release was corrected as follows: footnote 2 on the tabs labeled “Senior unsecured rating” and “Junior senior rating” was corrected to say “Domestic and/or Foreign Currency rating.” Revised release follows.
Frankfurt am Main, August 03, 2018 -- Moody's Investors Service today took rating actions on 23 German banks,
their subsidiaries and branches. The rating actions were prompted
by a legal change to the German banks' insolvency rank order which
took effect on 21 July 2018. The legal changes re-introduced
an option for banks to issue plain vanilla preferred senior unsecured
liabilities ("senior unsecured debt class"), as well
as to issue new contractually non-preferred debt ("junior
senior unsecured debt class") which will rank alongside outstanding
legacy plain vanilla senior unsecured instruments. Moody's
believes that following the legal change, the likelihood of government
support being available for most of the senior unsecured instruments outstanding
on 20 July 2018 has declined, as under the revised legislation those
instruments remain subordinated to future (preferred) senior unsecured
bank debt.
Following the change in law, the legal hierarchy of bank claims
in Germany is now consistent with most other European Union (EU) countries,
where statutes do not provide full preference to deposits over senior
unsecured debt; the amended application of Moody's Advanced
Loss Given Failure (LGF) analysis reflects the revised hierarchy of claims.
The decline in government support and the revision of the rating agency's
LGF approach has resulted in rating actions on German banks' ratings
as detailed below:
- Downgrade of the long-term senior unsecured instruments
of 14 banks by one notch owing to the reduction of government support
assumptions for these securities to low from moderate previously.
This resulted from the removal of one notch of rating uplift, previously
factored into these ratings. The rating agency affirmed these ratings
for two banks for which its government support assumption remained low.
At the same time, Moody's reclassified such rated instruments
as junior senior unsecured debt from senior unsecured debt previously.
- Affirmation of the long-term senior senior unsecured instruments
with structural features issued by 10 banks, reflecting the results
from Moody's Advanced LGF analysis and unchanged moderate likelihood
assumption for government support. At the same time, Moody's
reclassified these rated instruments as senior unsecured debt from senior
senior unsecured debt previously.
- Upgrade of the long-term issuer ratings by one to three
notches for 11 banks, and affirmation for one bank, reflecting
that Moody's assigns issuer ratings at the level of the most senior
plain vanilla unsecured debt class available in any jurisdiction.
- Affirmation of the long-term and short-term deposit
ratings for 20 banks, reflecting unchanged results and rating uplift
under Moody's Advanced LGF analysis as well as unchanged government
support assumptions.
- Affirmation of the short-term program and issuer ratings,
where applicable, for 17 banks.
- For HSH Nordbank AG, all unguaranteed long-term
and short-term deposit and senior unsecured debt ratings as well
as junior senior debt and issuer ratings remain on review for upgrade,
while the bank's affected rated securities have been reclassified in accordance
with the approach applied for all other entities in this rating action
(from senior senior unsecured debt to senior unsecured debt and from senior
unsecured debt to junior senior unsecured debt).
- Affirmation of the long-term backed senior unsecured instruments
for seven banks; these instruments continue to benefit from recourse
to German public sector entities. At the same time, Moody's
reclassified these rated instruments as backed junior senior unsecured
debt from backed senior unsecured debt previously.
- Withdrawal of all senior senior unsecured program ratings where
these were in place and upgrade of senior unsecured program ratings for
15 banks. At the same time, new assignment of junior senior
program ratings to 11 issuers' programs where the issuer has the
option to issue junior senior debt. All other rating assessments
and ratings of banks that are part of today's rating action are
unaffected.
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_200292
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
(1) CHANGES IN LEGISLATION LEAD MOODY'S TO APPLY STANDARD EU LIABILITY
RANKING UNDER ITS ADVANCED LGF ANALYSIS
LEGAL BACKGROUND IN MORE DETAIL
On 21 July 2018, Germany's transposition into national law
of an amendment to the EU's Bank Recovery and Resolution Directive
(BRRD) took effect and has enabled banks to issue contractually subordinated
senior unsecured bonds ("non-preferred", or junior
senior bonds) that would fully count against the banks' regulatory
minimum requirements for own funds and eligible liabilities (MREL) as
well as ("preferred") senior unsecured bonds that rank alongside
other senior unsecured liabilities, including the most junior class
of deposits. Based on the changes in law, the legal hierarchy
of bank claims in Germany is now consistent with most EU countries,
where statutes do not provide full preference to deposits over senior
unsecured debt.
Legally, the new non-preferred instruments will rank pari
passu with the majority of outstanding senior unsecured instruments issued
up until 20 July 2018, to the extent the latter instruments were
subject to Germany's statutory subordination under the previous
insolvency ranking.
CONSEQUENCES FOR MOODY'S ANALYTICAL APPROACH
This pari passu ranking of new junior senior unsecured debt with legacy
(statutorily subordinated) senior unsecured instruments makes it less
likely that German authorities would selectively support the legacy instruments
(which today's rating action reclassified into junior senior unsecured
debt), following clarification that the German authorities expect
these liabilities to bear losses in a resolution. Furthermore,
any selective support could give rise to claims by adversely selected
creditors that the No Creditor Worse Off principle established in the
BRRD had been breached.
In response to the change in the German insolvency and resolution hierarchy,
Moody's has today reclassified certain instruments issued by German
banks. Complex structured debt instruments, which were previously
treated as senior senior unsecured debt, have been reclassified
as senior unsecured debt. In addition, legacy (statutorily
subordinated) plain vanilla debt instruments, which Moody's
previously classified as senior unsecured debt will now be treated as
junior senior unsecured debt.
Following the re-introduction of a class of plain vanilla senior
unsecured debt that ranks alongside junior
deposits, the rating agency now applies an alternative liability
ranking when undertaking its Advanced LGF analysis for German banks.
As with other EU countries where the most junior tranche of deposits does
not enjoy preference over senior unsecured debt, Moody's considers
the results of both the formal legal position (pari passu, or de
jure scenario), with a 75% probability, and an alternative
liability ranking reflecting resolution authority discretion (full depositor
preference, or de facto scenario), to which the rating agency
assigns a 25% probability. Prior to the change in the law,
Moody's applied a single waterfall for German bank liabilities which
reflected the full preference for German deposits over the senior unsecured
instruments now reclassified as junior senior unsecured debt.
The combination of applying the amended liability ranking under Moody's
Advanced LGF analysis and the revised assessment of the applicability
of government support for certain debt instruments has resulted in various
rating actions on affected instruments and rating classes.
(2) RATING CLASS SPECIFIC CONSIDERATIONS
DOWNGRADE AND AFFIRMATION OF INSTRUMENTS RECLASSIFIED AS JUNIOR SENIOR
UNSECURED DEBT
Moody's believes that there would be a low likelihood of government
support for junior senior unsecured bank bonds, which are designed
to bear losses in a bank resolution. For systemically important
banks, Moody's previously assigned one notch of rating uplift
for (statutorily subordinated) instruments that have now been reclassified
as junior senior unsecured debt.
As a result of its re-assessment of government support, the
rating agency has downgraded junior senior unsecured instrument ratings
for 14 banks by one notch. In addition, due to unchanged
low government support assumptions, Moody's has affirmed junior
senior unsecured instrument ratings for two banks. Furthermore,
the securities reclassified as junior senior unsecured debt no longer
carry rating outlooks, in line with Moody's general practice
of not assigning outlooks to this debt class.
AFFIRMATION OF INSTRUMENTS RECLASSIFIED AS SENIOR UNSECURED DEBT
The results under the Advanced LGF analysis in combination with unchanged
assumptions for government support led Moody's to affirm the ratings
of instruments reclassified as senior unsecured debt issued by 10 banks.
The government support assumptions for all affected banks' senior
unsecured ratings remained unchanged. For less systemically significant
entities Moody's continues to believe that the probability of government
support would be low, although for more systemic banks and members
of systemic banking sectors with cross-sector support schemes the
probability remains at moderate, resulting in an unchanged one notch
of rating uplift from government support.
Moody's expects instruments that will henceforth be classified as
senior unsecured debt and rated at the same level as issuer ratings,
to gain relevance as a funding tool for German banks, now that the
legislative changes enable them to issue (preferred) senior unsecured
bonds in both structured and plain vanilla format and in benchmark size.
UPGRADE AND AFFIRMATION OF ISSUER RATINGS
The issuer ratings of German banks reflect their ability to honour the
most senior plain vanilla (or ordinary) senior unsecured debt instruments
and debt like obligations. Following the reintroduction of a plain
vanilla (preferred) senior unsecured debt class, for most banks
the issuer rating now reflects the increased volume of subordination that
this class of debt benefits from Moody's Advanced LGF analysis therefore
results in more rating uplift for issuer ratings than was previously the
case. As a result, German banks' issuer ratings were
today upgraded by between one and three notches, depending on individual
banks' Advanced LGF results. Moody's affirmed one issuer
rating at its current level, because the issuer rating already benefitted
from the maximum three-notch uplift under Moody's Advanced
LGF analysis.
AFFIRMATION OF LONG- AND SHORT-TERM DEPOSIT RATINGS
The deposit ratings of most banks subject to this rating action have been
affirmed, reflecting that the changes to the Advanced LGF analysis
have had no rating impact.
At the same time, the previous government support assumptions for
all affected banks' deposit ratings remained unchanged.
RATIONALE FOR SHORT-TERM PROGRAM AND ISSUER RATINGS
Following today's rating action, Moody's short-term
issuer and program ratings map to the long-term senior unsecured
debt rating category. In January 2016, because of the statutory
subordination of long-term senior unsecured bonds, but not
money market obligations, the rating agency anchored short-term
debt ratings to deposits, reflecting the preferred legal position
of short-term instruments. With the change in legislation
and the resulting pari passu ranking of senior unsecured debt with deposits,
short-term instruments are appropriately positioned by re-anchoring
these instruments to long-term senior unsecured debt.
Today's affirmations of most short-term issuer and program
ratings follows the affirmation or upgrade of the banks' long-term
senior unsecured debt or program and/or issuer ratings.
AFFIRMATION OF DEBT OBLIGATIONS GUARANTEED BY PUBLIC SECTOR ENTITIES
Whereas most of the German banks' state-guaranteed senior
unsecured debt matured before year-end 2015, several German
banks continue to have instruments outstanding that are statutorily backed
by German public sector entities. Such debt instruments are subject
to bail-in and are treated pari passu with all other unsecured
debt of equal seniority. However, the guarantee status ensures
unchanged recourse in resolution to the public sector guarantors.
Because the rating levels of these instruments are determined based on
the creditworthiness of the guarantors, Moody's affirmed all
backed obligations affected by today's rating action. At
the same time, Moody's reclassified plain vanilla instruments
issued by seven banks as backed junior senior unsecured debt, previously
treated as backed senior unsecured debt, to reflect the less favourable
seniority status of these legacy bonds. Furthermore, the
securities reclassified as backed junior senior unsecured debt no longer
carry rating outlooks, in line with Moody's general practice
of not assigning outlooks to this debt class.
UPDATE OF PROGRAM RATINGS
Since 21 July 2018, German banks can make use of the option to issue
either contractually non-preferred (junior) senior unsecured debt
or senior unsecured debt without such contractual clarifications that
would benefit from a higher priority position in the bank insolvency ranking.
Moody's reflects these distinct issuance options through today's
assignment of junior senior unsecured program ratings for those programs
of issuers that explicitly foresee both options. The newly assigned
ratings of junior senior unsecured programs reflect the rating levels
of outstanding bonds of the same respective seniority level. For
all German banks with senior unsecured program ratings in place,
these program ratings now reflect the ranking of (preferred) senior unsecured
debt new issuances. Accordingly, the rating agency upgraded
the senior unsecured program ratings of 15 German banks.
At the same time, Moody's withdrew the previously assigned
senior senior unsecured program ratings, as far as these ratings
had been in place. This reflects that the statutory distinction
of seniority levels based on structural coupon and principal repayment
components of bonds issued under these programs has legally ceased to
exist for bonds newly issued since 21 July 2018.
WHAT COULD CHANGE THE RATINGS UP/DOWN?
Pressure in either direction on the German banks' ratings may arise due
to: (1) Fundamental developments that result in upgrades or downgrades
to a bank's BCA; (2) Any change in Moody's assessment of the strength
and/or availability of parental support or cross-sector support
-- the latter is generally applicable to banks that are
members of an institutional protection scheme; (3) alterations in
a bank's liability structure that changes the expected loss severity for
particular liability classes; and/or (4) any change in Moody's assumptions
regarding the likelihood of government support being available.
Changes in the severity of loss for certain liability classes --
and therefore pressure on the results of Moody's Advanced LGF analysis
-- may develop if the individual banks' subordinated instruments
increase (or decrease), and/or if senior unsecured debt increases
(or decreases) relative to their tangible banking assets. This
could result in additional (or fewer) notches of rating uplift resulting
from Moody's LGF analysis.
In relation to junior senior unsecured debt ratings, the rating
agency expects downward pressure to develop over time. This is
because the current stack of outstanding junior senior debt obligations
which qualifies for regulatory MREL recognition by far exceeds the anticipated
minimum MREL requirements in most cases. Consequently, Moody's
expects that German banks' liability structures will alter over
time. In particular, the expected shifts between the volume
of preferred and non-preferred senior unsecured debt obligations
has the potential to reduce the rating uplift available under Moody's
Advanced LGF analysis for junior senior debt instruments.
For backed instruments, ratings would change if the creditworthiness
of the guarantors improves or deteriorates.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
August 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_200292
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
• Person Approving the Credit Rating
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.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead rating analyst and the Moody's legal entity that has issued
the ratings.
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.
Goetz Thurm
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
Client Service: 44 20 7772 5454
Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
