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Rating Action:

Moody's downgrades six Belgian sub-sovereign entities following sovereign downgrade

19 Dec 2011

London, 19 December 2011 -- Moody's Investors Service has today downgraded the long-term ratings of three Belgian regions and communities as well as the ratings of three of their government-related issuers.

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

Today's rating actions were prompted by:

(i) Moody's decision to downgrade Belgium's sovereign bond ratings to Aa3 from Aa1 on 16 December 2011;

(ii) The linkages between the federal government and the federated entities in Belgium, reflected in the high fiscal transfers from the higher-tier government;

(iii) The low growth prospects for the national economy as a whole, which will add pressure on sub-sovereigns' finances going forward and will make their fiscal consolidation goals more difficult to achieve.

RATINGS RATIONALE

Today's rating actions follow the downgrade of Belgium's sovereign rating to Aa3 from Aa1 and conclude the review for downgrade initiated on 10 October 2011 for all Belgian sub-sovereign entities. For further information on the sovereign downgrade, please see Moody's press release http://www.moodys.com/research/Moodys-downgrades-Belgiums-credit-ratings-to-Aa3-negative-outlook--PR_233667.

The sub-sovereign downgrades reflect the strong fiscal linkages between the federal government and sub-sovereign entities in Belgium, which in Moody's view prevent sub-sovereigns from being rated more than one notch above the sovereign.

- ENTITIES RATED ABOVE THE SOVEREIGN

The downgrade of the Flemish Community by two notches to Aa2 with negative outlook from Aaa largely reflects the same economic pressures that prompted the sovereign rating downgrade. Nevertheless, Moody's views positively the region's expected return to a balanced budget position as early as this year and a rapid stabilisation in its debt metrics expected going forward. Additionally, the rating agency considers that the decision-making process in Belgium constitutionally protects regions from adverse decisions at the federal level -- such as sharp cuts in transfers -- which thereby allows the Flemish Community to retain sufficient credit strength to maintain its rating one notch above that of the sovereign. Furthermore, the Flemish Community's manageable borrowing needs in the next five years (direct debt redemptions below 5% of the entity's operating revenue on average or 0.5% of the regional GDP) will, in Moody's view, limit the impact of difficult market conditions on its financial performance.

The downgrade of Aquafin NV to Aa2 with negative outlook from Aaa reflects the entity's strong links with its sponsoring government, the Flemish Community.

- ENTITIES RATED AT OR BELOW THE SOVEREIGN LEVEL

The downgrade of the Communaute Francaise de Belgique (CFB) by two notches to Aa3 with negative outlook from Aa1 reflects Moody's opinion that CFB does not have the required fiscal manoeuvrability to maintain its rating above that of the sovereign. Indeed, most of the community's expenditure is dedicated to the payment of wages (including education's payroll), the growth in which is decided at the sovereign level and 95% of its revenue stems from federal government's transfers. As such, CFB's rating is intrinsically linked to that of the sovereign.

The downgrade of the Walloon Region to A1 with negative outlook from Aa2 primarily reflects the ordinal ranking of the region's credit quality relative to the sovereign and its national peers. The rating action also reflects the weakening of the region's financial performance over the last few years, together with the rapid increase in its net direct and indirect debt (expected to reach around 200% of revenue in 2011 from 140% in 2007). Owing to its weaker position at the onset of the financial crisis in 2007-08 and more limited financial manoeuvrability as a result, the recent worsening in Belgium's economic growth prospects will weigh more heavily on Walloon's risk profile than its peers. As a result, Moody's views the region's financial performance and overall debt metrics as comparing more adequately with its international peers positioned in the single-A rating category.

The downgrade of Societe Publique de Gestion de l'Eau and Fiwapac to A1 with negative outlook from Aa2 reflects their strong links with their sponsoring government, the Walloon Region.

OTHER FACTORS CONSIDERED

Separately, Moody's currently views the new financing structure for Belgian sub-sovereign entities as credit-neutral. Although the new financing scheme will transfer EUR17 billion worth of responsibilities from the federal government, it has been designed to remain financially neutral for sub-sovereigns for the first few years. Going forward, Moody's will monitor the trend in regions and communities' revenue and expenditure to assess the exact impact of the reform on their creditworthiness.

Moody's also notes that the negative impact of the recent announced dismantling of Dexia Group should be fully factored into regions' finances by the end of this year (including the liquidation of the Holding Communal). Please see the Issuer Comment http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_137023 . This implies that no further contingent liabilities related to Dexia are likely to be assumed by regions going forward.

RATIONALE FOR THE NEGATIVE OUTLOOK

The outlook is negative for all Belgian sub-sovereigns, reflecting (i) the negative outlook at the sovereign level; and (ii) the weakening of Belgium's economic growth prospects. Both factors are likely to maintain some pressure on sub-sovereign revenue in the future.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Stabilisation of the outlooks or an upgrade to the ratings would require (i) the stabilisation or upgrade of the sovereign rating; and (ii) a significant improvement in sub-sovereigns' financial trajectory, leading to a substantial easing of their debt ratios over time.

Further deterioration of the macroeconomic environment in Belgium and Europe which would add substantial pressure on the sovereign rating would also negatively impact Belgian sub-sovereigns' ratings. In addition, the failure of any sub-sovereigns to implement in a timely fashion fiscal consolidation measures, thereby leading to further increase in its debt metrics would add pressure to that their ratings.

RATINGS AFFECTED

The following ratings are affected by today's rating action. In each case, short-term ratings were affirmed at P-1 (except Fiwapac which has no short-term rating):

Regional governments:

- Community of Flanders: long-term debt rating downgraded to Aa2 from Aaa; outlook negative

- Communaute Francaise de Belgique (Federation Wallonie Bruxelles): long-term issuer and debt ratings downgraded to Aa3 from Aa1; outlook negative

- Walloon Region: long-term debt rating downgraded to A1 from Aa2; outlook negative

Government-related issuers:

- Aquafin NV: long-term issuer and debt ratings downgraded to Aa2 from Aaa; outlook negative

- Societe Publique de Gestion de l'Eau: long-term issuer rating downgraded to A1 from Aa2; outlook negative

- Fiwapac: backed senior unsecured rating downgraded to A1 from Aa2, in line with the Walloon Region's downgrade; outlook negative

The methodologies used in this rating were Regional and Local Governments Outside the US published in May 2008, The Application of Joint-Default Analysis to Regional and Local Governments published in December 2008 , and Government-Related Issuers: Methodology Update published in July 2010. 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, parties not 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.

Nicolas Fintzel
Associate Analyst
Sub-Sovereign Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

David Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades six Belgian sub-sovereign entities following sovereign downgrade
No Related Data.
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