London, 03 April 2009 -- Moody's Investors Service has today downgraded the subordinated and hybrid
debt instruments issued by the two large banking groups in the UK with
government shareholdings: Royal Bank of Scotland Group (RBS) and
Lloyds Banking Group (Lloyds).
The subordinated or hybrid instruments of the following banks have been
affected by this action:
• Royal Bank of Scotland: Subordinated debt rating downgraded
to Baa3 from A1, and hybrid debt to Ba1 from A2, except the
National Westminster Ba1 rated non cumulative preference shares with voting
rights which is downgraded to Ba2; ratings are under review for further
possible downgrade pending the completion of the review on the bank's
C- BFSR
• Royal Bank of Scotland Group: Subordinated debt rating downgraded
to Ba1 from A2, and hybrid debt to Ba2 from A3, except the
Ba2 rated non cumulative preference shares with voting rights which are
downgraded to Ba3; ratings are under review for further possible
downgrade pending the completion of the review on RBS' C-
BFSR
• Lloyds TSB Bank: Subordinated debt rating downgraded to A3
from A1 (negative outlook), and hybrid debt to Baa1 from A2 (remains
under review for possible downgrade)
• Lloyds Banking Group: Subordinated debt rating downgraded
to Baa1 from A2 (negative outlook), and hybrid debt to Baa2 from
A3 (remains under review for possible downgrade)
• Bank of Scotland: Subordinated debt rating downgraded to
Baa1 from A1, and hybrid debt to Baa2 from A2; ratings are
under review for further possible downgrade pending the completion of
the review on Bank of Scotland's C- BFSR
• HBOS: Subordinated debt rating downgraded to Baa1 from A2,
and hybrid debt to Baa2 from A3; ratings are under review for further
possible downgrade pending the completion of the review on Bank of Scotland's
C- BFSR
The rating action was prompted by the rating agency's concern that
systemic support may not be extended to these instruments in the case
of financial distress. The 2009 Banking Act explicitly provides
a broad remit to allow the restructuring of financial institutions with
losses to subordinated and hybrid debt holders, and this has increasingly
been the practice in the recent restructuring of a number of financial
institutions in the UK. Therefore, it is Moody's opinion
that the ratings of subordinated and hybrid instruments should be closely
aligned to the bank's BFSR and no longer benefit from the support that
is expected for senior creditors and depositors of these two large,
systemically important institutions.
In its Special Comment entitled "Moody's Assesses Bank Hybrid Securities
in the Context of the Current Credit Crisis", dated December 2008,
Moody's began a dialogue with market participants regarding a potential
change to its bank hybrid notching practices. The proposal explored
the possibility of removing systemic support from bank hybrid ratings
and considered wider notching based on the hybrid's risk characteristics.
This process continues for banks generally, but as Moody's noted
in its Special Comment, subordinated and hybrid ratings will be
adjusted as appropriate should circumstances warrant as is the case for
the subordinated and hybrid debt of these two banks.
Moody's current ratings on banks' subordinated and hybrid securities generally
reflect the assumption that if a government extends financial support
to a bank in difficulty, that support would also benefit subordinated
and hybrid investors. Moody's has observed that UK systemic support
to banks has recently been limited to senior debt and deposits only.
In the restructuring of the Dunfermline, Bradford & Bingley,
and Northern Rock none of the subordinated or hybrid debt instruments
benefit from government support measures, resulting in possible
losses to investors; furthermore, the 2009 Banking Act has
specifically provided a legal framework that enables such differentiating
measures. Moody's therefore believes that the risk to such
instruments is more closely aligned to the banks' other unsupported
obligations, as indicated by the Bank Financial Strength Rating
("BFSR") which maps into the alphanumerical Baseline Credit
Assessment ("BCA").
Until now, Moody's has notched the ratings of these banks' subordinated
and hybrid debt from the supported senior debt rating by one and two notches,
respectively. Due to the potential lack of systemic support for
these instruments, the anchor for subordinated and hybrid debt ratings
issued by these institutions will be the BCA which maps from the intrinsic
strength of the bank as indicated by our published BFSR. Notwithstanding,
in its rating of these subordinated and hybrid debt instruments Moody's
continues to include the benefit of parental support for Bank of Scotland
and HBOS.
The actual notching for subordinated and hybrid debt relative to the anchor
will remain unchanged reflecting the characteristics of the instruments,
i.e. their relative subordination vis-a-vis
each other in
case of bankruptcy, apart from the non-cumulative preference
shares with voting rights discussed below.
The subordinated debt and hybrid issuance of Royal Bank of Scotland plc
(and its holding company Royal Bank of Scotland Group), and Bank
of Scotland plc (and its holding company HBOS plc) remain on review for
further downgrade pending the completion of the review of the BFSRs of
these entities, as the ratings will move in line with the BFSR.
DOWNGRADE OF NON-CUMULATIVE PREFERENCE SHARES WITH VOTING RIGHTS
Moody's has downgraded the non-cumulative preference shares
with voting rights of the Royal Bank of Scotland Group from Ba2 to Ba3
at the holding company level, and from Ba1 to Ba2 at the operating
bank level. The preference shares of Lloyds Banking Group were
downgraded from A3 to Baa2 at the holding company level, and from
A2 to Baa1 at the operating company level. These securities remain
under review for possible downgrade, and the securities that are
identified as non-cumulative preference shares with voting rights
in certain circumstances and those that can get voting rights through
a substitution for non-cumulative preference shares, will
most likely be downgraded to Ba2 at the holding company level and Ba1
at the main operating company level. The lower rating of the RBS
instruments reflects the higher percentage of government ownership and
lower BFSR of RBS than Lloyds.
As reflected in our earlier downgrade of these instruments of RBS on 11
March 2009, Moody's considers that whereas the nationalisation
of these instruments is not our central scenario, the potential
loss to investors in such a situation, would be very high.
Furthermore, we are also concerned about the possibility of a distressed
exchange -- whereby the bank would stop making coupon payments and
offer to exchange these instruments into equity so that hybrid investors
would share the risk of recapitalizing the bank with taxpayers.
Moody's considers that the announcement by both banks of their participation
in the UK Government's Asset Protection Scheme and the issuance
of B-shares to the government, confirms our core assumption
that the UK government will try to avoid full nationalisation of these
banks. In addition, we consider that the larger than expected
scope of the APS will provide protection for holders of debt and hybrid
instruments.
Nevertheless, given the possibility of the UK government increasing
its economic interest in both banks to high levels, the risk of
full nationalisation in the future has increased. The Treasury
has not provided guidance on its approach to potential losses for hybrid
debt holders in case of 100% government ownership, but ultimately
we would expect to see a very high level of loss for holders of non-cumulative
preference shares with the above voting right features in the case of
the nationalisation, such as we observed at Northern Rock.
A full list of the securities affected by the rating action on the non-cumulative
preference shares will be published separately.
Downgrades:
..Issuer: Bank of Scotland Capital Funding L.P.
....Preferred Stock Preferred Stock,
Downgraded to Baa2 from A2
..Issuer: Bank of Scotland plc
....Junior Subordinated Regular Bond/Debenture,
Downgraded to Baa1 from A1
....Multiple Seniority Medium-Term
Note Program, Downgraded to Baa1 from A1
....Preference Stock Preference Stock,
Downgraded to Baa2 from A2
....Subordinate Regular Bond/Debenture,
Downgraded to Baa1 from A1
..Issuer: Cheltenham & Gloucester plc
....Junior Subordinated Regular Bond/Debenture,
Downgraded to A3 from A1
....Multiple Seniority Medium-Term
Note Program, Downgraded to A3 from A1
..Issuer: HBOS CAPITAL FUNDING NO. 3 L.P.
....Preferred Stock Preferred Stock,
Downgraded to Baa2 from A3
..Issuer: HBOS Capital Funding No. 1 L.P.
....Preferred Stock Preferred Stock,
Downgraded to Baa2 from A3
..Issuer: HBOS Capital Funding No. 4 L.P.
....Preferred Stock Preferred Stock,
Downgraded to Baa2 from A3
..Issuer: HBOS Group Euro Finance (Jersey)
....Preferred Stock Preferred Stock,
Downgraded to Baa2 from A3
..Issuer: HBOS Group Sterling Finance L.P.
....Preferred Stock Preferred Stock,
Downgraded to Baa2 from A3
..Issuer: HBOS plc
....Junior Subordinated Regular Bond/Debenture,
Downgraded to Baa1 from A2
....Multiple Seniority Medium-Term
Note Program, Downgraded to Baa1 from A2
....Subordinate Regular Bond/Debenture,
Downgraded to Baa1 from A2
..Issuer: Halifax plc
....Junior Subordinated Regular Bond/Debenture,
Downgraded to Baa1 from A1
....Subordinate Regular Bond/Debenture,
Downgraded to Baa1 from A1
..Issuer: Leeds Permanent Building Society
....Junior Subordinated Regular Bond/Debenture,
Downgraded to Baa1 from A1
....Subordinate Regular Bond/Debenture,
Downgraded to Baa1 from A1
..Issuer: Lloyds Banking Group plc
....Preference Stock Preference Stock,
Downgraded to Baa2 from A3
....Subordinate Regular Bond/Debenture,
Downgraded to Baa1 from A2
..Issuer: Lloyds TSB Bank Plc
....Junior Subordinated Regular Bond/Debenture,
Downgraded to a range of Baa1 to A3 from a range of A2 to A1
....Multiple Seniority Medium-Term
Note Program, Downgraded to A3 from A1
....Preferred Stock Preferred Stock,
Downgraded to Baa1 from A2
....Subordinate Regular Bond/Debenture,
Downgraded to A3 from A1
..Issuer: Lloyds TSB Capital 1 L.P.
....Preferred Stock Preferred Stock,
Downgraded to Baa1 from A2
..Issuer: Lloyds TSB Capital 2 L.P.
....Preferred Stock Preferred Stock,
Downgraded to Baa1 from A2
..Issuer: National Westminster Bank PLC
....Bank Financial Strength Rating,
Downgraded to C- from B
....Junior Subordinated Conv./Exch.
Bond/Debenture, Downgraded to Baa3 from A1
....Junior Subordinated Regular Bond/Debenture,
Downgraded to Baa3 from A1
....Multiple Seniority Shelf, Downgraded
to a range of (P)Ba1 to (P)Baa3 from a range of (P)A2 to (P)A1
....Preference Stock Preference Stock,
Downgraded to a range of Ba2 to Ba1 from a range of Ba1 to A2
....Subordinate Regular Bond/Debenture,
Downgraded to Baa3 from A1
..Issuer: RBS Capital Trust A
....Junior Subordinated Regular Bond/Debenture,
Downgraded to Ba3 from Ba2
..Issuer: RBS Capital Trust B
....Preferred Stock Preferred Stock,
Downgraded to Ba3 from Ba2
..Issuer: RBS Capital Trust C
....Preferred Stock Preferred Stock,
Downgraded to Ba3 from Ba2
..Issuer: RBS Capital Trust D
....Preferred Stock Preferred Stock,
Downgraded to Ba3 from Ba2
..Issuer: RBS Capital Trust I
....Preferred Stock Preferred Stock,
Downgraded to Ba3 from Ba2
..Issuer: RBS Capital Trust II
....Preferred Stock Preferred Stock,
Downgraded to Ba3 from Ba2
..Issuer: RBS Capital Trust III
....Preferred Stock Preferred Stock,
Downgraded to Ba3 from Ba2
..Issuer: RBS Capital Trust IV
....Preferred Stock Preferred Stock,
Downgraded to Ba3 from Ba2
..Issuer: Royal Bank of Scotland Group plc
....Junior Subordinated Regular Bond/Debenture,
Downgraded to a range of Ba2 to Ba1 from a range of A3 to A2
....Multiple Seniority Medium-Term
Note Program, Downgraded to Ba1 from A2
....Multiple Seniority Shelf, Downgraded
to a range of (P)Ba2 to (P)Ba1 from a range of (P)A3 to (P)A2
....Preference Stock Preference Stock,
Downgraded to a range of Ba3 to Ba2 from a range of Ba2 to A3
....Preferred Stock Preferred Stock,
Downgraded to a range of Ba3 to Ba2 from a range of Ba2 to A3
....Subordinate Regular Bond/Debenture,
Downgraded to Ba1 from A2
....Senior Subordinated Regular Bond/Debenture,
Downgraded to Ba1 from A2
..Issuer: Royal Bank of Scotland plc
....Junior Subordinated Regular Bond/Debenture,
Downgraded to Baa3 from A1
....Multiple Seniority Medium-Term
Note Program, Downgraded to Baa3 from A1
....Subordinate Regular Bond/Debenture,
Downgraded to Baa3 from A1
..Issuer: Royal Bank of Scotland plc, Australia
Branch
....Multiple Seniority Medium-Term
Note Program, Downgraded to Baa3 from A1
..Issuer: Scotland International Finance No.
2 B.V.
....Multiple Seniority Medium-Term
Note Program, Downgraded to Baa1 from A1
....Subordinate Regular Bond/Debenture,
Downgraded to Baa1 from A1
On Review for Possible Downgrade:
..Issuer: Bank of Scotland plc
....Bank Financial Strength Rating,
Placed on Review for Possible Downgrade, currently C-
Outlook Actions:
..Issuer: Bank of Scotland Capital Funding L.P.
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: HBOS CAPITAL FUNDING NO. 3 L.P.
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: HBOS Capital Funding No. 1 L.P.
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: HBOS Capital Funding No. 4 L.P.
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: HBOS Group Euro Finance (Jersey)
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: HBOS Group Sterling Finance L.P.
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: HBOS plc
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: Halifax plc
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: Lloyds Banking Group plc
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: Lloyds TSB Bank Plc
....Outlook, Changed To Rating Under
Review From Stable(m)
..Issuer: Lloyds TSB Capital 1 L.P.
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: Lloyds TSB Capital 2 L.P.
....Outlook, Changed To Rating Under
Review From Stable
..Issuer: RBS Capital Trust A
....Outlook, Changed To Rating Under
Review From Negative
..Issuer: RBS Capital Trust B
....Outlook, Changed To Rating Under
Review From Negative
..Issuer: RBS Capital Trust C
....Outlook, Changed To Rating Under
Review From Negative
..Issuer: RBS Capital Trust D
....Outlook, Changed To Rating Under
Review From Negative
..Issuer: RBS Capital Trust I
....Outlook, Changed To Rating Under
Review From Negative
..Issuer: RBS Capital Trust II
....Outlook, Changed To Rating Under
Review From Negative
..Issuer: RBS Capital Trust III
....Outlook, Changed To Rating Under
Review From Negative
..Issuer: RBS Capital Trust IV
....Outlook, Changed To Rating Under
Review From Negative
..Issuer: Royal Bank of Scotland Group plc
....Outlook, Changed To Rating Under
Review From Negative
..Issuer: Scotland International Finance No.
2 B.V.
....Outlook, Changed To Rating Under
Review From Stable
The last rating actions on the above banks' subordinated and hybrid debt
ratings are: • Royal Bank of Scotland, 11 March 2009,
non-cumulative preference shares downgraded to Ba1 • Royal
Bank of Scotland Group, 11 March 2009, non-cumulative
preference shares downgraded to Ba2 • Lloyds TSB Bank, 16 February
2009, subordinated and hybrid downgraded to A1/A2, stable
outlook • Lloyds Banking Group, 16 February 2009, subordinated
and hybrid downgraded to A2/A3, stable outlook • Bank of Scotland,
16 February 2009, subordinated and hybrid downgraded to A1/A2,
stable outlook • HBOS, 16 February 2009, subordinated
and hybrid downgraded to A2/A3, stable outlook The principal methodologies
used in rating the entities are "Bank Financial Strength Ratings:
Global Methodology" and "Guidelines for Rating Bank Junior Securities",
which can be found on www.moodys.com in the Credit Policy
& Methodologies directory, in the Ratings Methodologies subdirectory.
Other methodologies and factors that may have been considered in the process
of rating the issuers can also be found in the Credit Policy & Methodologies
directory. All the banks are headquartered in the United Kingdom.
London
Elisabeth Rudman
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades subordinated and hybrid debt issued by RBS and Lloyds
