Lloyds TSB's BFSR placed on review for possible downgrade
London, 02 June 2009 -- Moody's Investors Service has today downgraded the hybrid instruments
issued by the two large banking groups in the UK in which the government
has shareholdings: Royal Bank of Scotland Group (RBS) and Lloyds
Banking Group (Lloyds). In addition, Lloyds TSB Bank plc's
C+ BFSR has been placed on review for possible downgrade, reflecting
the rating agency's concerns about a further weakening in the group's
financial performance.
There has been no change to the senior debt of either group (Aa3 for Royal
Bank of Scotland plc, and Aa3 for Lloyds TSB Bank plc), or
the Aaa government-guaranteed debt issued by the banks.
Elisabeth Rudman, Senior Credit Officer at Moody's Investors
Service, commented that "Moody's wider notching of the
hybrid instruments from the banks' Baseline Credit Assessment (BCA),
was prompted primarily by the following two concerns: firstly,
the fact that the banks are likely to remain loss-making in the
near-to-medium term increases the possibility of coupons
being missed. And secondly, our assessment of the probability
that EU approval for the support package received by these banks could
be contingent upon the suspension of coupons on these instruments.
This has been seen in other cases where state aid was approved by the
EU, and Moody's considers this could apply to optional deferral
as well as mandatory deferral triggers."
DOWNGRADE OF PREFERENCE SHARES AND JUNIOR SUB DEBT OF RBS AND LLOYDS
The instruments of the following banks have been affected by this action:
Royal Bank of Scotland plc:
- Non-cumulative (Tier 1) preference shares downgraded to
B3 from Ba1 (the Ba2 rated National Westminster non-cumulative
preference shares with voting rights downgraded to B3); stable outlook;
- Cumulative junior subordinated debt downgraded to Ba1 from Baa3;
remains on review for further possible downgrade pending the completion
of the review on the bank's C- BFSR.
Royal Bank of Scotland Group:
- Non-cumulative (Tier 1) preference shares downgraded to
B3 from Ba2 and from Ba3 (for the instruments with voting rights);
stable outlook;
- Cumulative (Tier 1) preference shares downgraded to Ba3 from
Ba2; remain on review for downgrade pending the completion of the
review on RBS plc's BFSR
- Cumulative junior subordinated debt downgraded to Ba1 from Baa3;
remains on review for downgrade pending the completion of the review on
RBS plc's BFSR.
Lloyds TSB Bank:
- Non-cumulative (Tier 1) preferred securities downgraded
to B3 from Baa1; stable outlook;
- Cumulative (Tier 1) preferred securities downgraded to Baa2 from
Baa1; remain on review for possible downgrade pending the completion
of the review on Lloyds's BFSR;
- Cumulative junior subordinated debt downgraded to Baa1 from A3;
remains on review for downgrade pending the completion of the review on
Lloyds's BFSR.
Lloyds Banking Group:
- Non-cumulative (Tier 1) preference shares downgraded to
B3 from Baa2; stable outlook;
Bank of Scotland:
- Non-cumulative (Tier 1) preference shares downgraded to
B3 from Baa2; stable outlook;
- Cumulative (Tier 1) preference shares remain at Baa2; remain
on review for possible downgrade pending the completion of the review
on Bank of Scotland's BFSR;
- Cumulative junior subordinated debt remains at Baa1; remains
on review for downgrade pending the completion of the review on Bank of
Scotland's BFSR.
HBOS:
- Non-cumulative (Tier 1) preference shares downgraded to
B3 from Baa2; stable outlook;
- Cumulative junior subordinated debt downgraded to Baa2 from Baa1;
remains on review for downgrade pending completion of the review of Bank
of Scotland's BFSR.
Scottish Widows/Clerical Medical Finance:
- Subordinated debt rating of Scottish Widows plc (SW) downgraded
to Baa1 from A3; remains on review for further possible downgrade
pending completion of the review of Lloyd's BFSR;
- Subordinated debt ratings of Clerical Medical Finance plc (CMF)
(guaranteed by Clerical Investment Group Ltd) remain at Baa1; remains
on review for further possible downgrade pending completion of the review
of Bank of Scotland's BFSR.
RATIONALE FOR THE PREFERENCE SHARE AND JUNIOR SUB DEBT DOWNGRADES
The B3 ratings of the non-cumulative preference shares is based
on an expected-loss approach and reflects the rating agency's assumption
of a high probability of the omission of coupons and high loss severity
over a two-year period. The rating agency's assumption
is that EU requirements could lead to the banks exercising their right
for optional deferral on these instruments. The outlook for the
securities is stable, as it deems a longer period of omission to
be unlikely. Moody's has assigned the same rating to the
securities of both the operating companies and the holding companies,
as it deems the risk of omission to be similar.
The cumulative preference shares (with cumulative deferral and non-cash
settlement through ACSM), have been downgraded by 1 notch from their
current rating (i.e. 3 notches below the adjusted BCA,
which includes parental support where available). These securities
have largely the same features as junior subordinated debt on a going
concern basis, but have a preferred claim in liquidation.
Under a going concern assumption, the expected loss for investors
in these cumulative instruments should therefore be clearly lower than
for the non-cumulative preference shares. However,
given their categorisation as Tier 1 instruments by the regulators we
are concerned that the risk of coupon deferral is higher than for junior
subordinated debt.
Moody's previously assigned a lower rating to the preference shares
with voting rights due to the additional risk of loss to investors from
nationalisation. As the rating agency has stated before,
the announcement by both banks of their participation in the UK government's
Asset Protection Scheme (APS) and the planned issuance of B shares to
the government, confirms Moody's core assumption that the
UK government will try to avoid full nationalisation of these banks,
although this remains a low probability/high severity scenario.
Given today's downgrade of all non-cumulative preference
shares at the banks to the low single-B level, and the fact
that the Banking Act 2009 facilitates the absorption of losses by all
capital instruments in a restructuring of a bank, the possibility
of nationalisation is also incorporated in the current ratings.
Moody's downgrade of the junior subordinated debt instruments by
one notch from their current rating (i.e. now 2 notches
below the adjusted Baseline Credit Assessment) -- and therefore 1
notch lower than dated subordinated debt - reflects their junior
priority of claim to dated subordinated debt and the optional deferral
feature. Bank of Scotland plc's junior subordinated debt
has remained at Baa1 (on review for downgrade) as the rating agency has
aligned Bank of Scotland plc's debt ratings with those of Lloyds
TSB Bank, given the progressing integration between the two banks.
Following the decision to review for possible downgrade Lloyds TSB's
BFSR, Lloyd TSB's A3 dated subordinated debt is now also on
review for possible downgrade. In line with its approach to the
rating of Bank of Scotland's junior subordinated debt ratings (see
above), Moody's has also left Bank of Scotland plc's
dated subordinated debt at Baa1 (on review for downgrade), and will
align the rating with that of Lloyds TSB Bank plc.
The rating actions on the subordinated debt of SW and CMF reflect the
alignment of the insurance operations' subordinated ratings and
outlooks to the subordinated ratings and outlooks of the corresponding
banking operations within Lloyds. Moody's believes that Lloyds's
capital base is increasingly managed centrally. The revised ratings
and outlooks on the insurance subsidiaries therefore reflect Moody's view
that the insurance subordinated ratings of SW and CMF are constrained
by the ratings on the subordinated debt of the correspondent parent banking
companies within Lloyds.
REVIEW FOR POSSIBLE DOWNGRADE OF LLOYDS TSB BFSR
The review for possible downgrade of Lloyds TSB Bank plc's C+
BFSR reflects the rating agency's concerns about a further weakening
in the group's financial performance. The BFSR's downgrade
to C+ from B+ in February 2009 incorporated the adverse effects
on Lloyds of its acquisition of HBOS and Moody's expectation of
a significantly higher level of provisions. However, the
review will also take into consideration the following:
i) the period of time it could take Lloyds to return to profitability,
given further deterioration in the UK economy, pressure on margins
and restructuring costs;
ii) the impact on profitability and capital of the performance of key
asset classes, according to Moody's updated assumptions,
including a peak-to-trough house price decline of 40%
for its base scenario in the UK;
iii) as is the case for Bank of Scotland, the review will take into
account the benefit of the additional GBP15.6 billion capital
for the group from government-owned B shares and the APS,
which is expected to provide 90% insurance for GBP260 billion
of assets after a first loss of GBP25 billion; and
iv) in addition, the review will incorporate refinements to Moody's
approach to rating banks in this environment as discussed in a Special
Comment entitled "Calibrating Bank Ratings in the Context of the Global
Financial Crisis", which was published in February 2009.
Moody's explains that, although the BFSR framework remains unchanged,
the weight attached to certain rating considerations, particularly
capital and future earnings prospects, has been increased to better
reflect the impact of the ongoing crisis.
Moody's expects to complete the review within the next few weeks
at the same time as completing the review of Bank of Scotland's
BFSR.
PREVIOUS RATING ACTIONS AND METHODOLOGIES USED
In its last rating action from April 3rd, 2009, Moody's
factored in the general lack of systemic support expected for hybrid securities
in the UK, and changed the anchor rating from the banks' long-term
debt and deposit ratings to the BCA in the following rating actions:
- 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 were downgraded to Ba2;
- 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 were downgraded to Ba3;
- Lloyds TSB Bank: subordinated debt rating downgraded to
A3 from A1 (negative outlook), and hybrid debt to Baa1 from A2 (remains
on 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 on review for possible downgrade);
- Bank of Scotland: subordinated debt rating downgraded to
Baa1 from A1, and hybrid debt to Baa2 from A2;
- HBOS: subordinated debt rating downgraded to Baa1 from
A2, and hybrid debt to Baa2 from A3.
The last rating actions on the above insurance subordinated debt ratings
were on 7 April 2009:
- Scottish Widows plc: subordinated debt to A3 from A2
- Clerical Medical Finance plc: subordinated debt to Baa1
from A3
The last rating action on Lloyds TSB Bank plc's BFSR was on 16 February
2009 when it was downgraded to C+ (negative outlook) from B+
(on review for possible downgrade).
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 these issuers can also
be found in the Credit Policy & Methodologies directory.
All the banks are headquartered in the United Kingdom.
Downgrades:
..Issuer: Bank of Scotland Capital Funding L.P.
....Preferred Stock Preferred Stock,
Downgraded to B3 from Baa2
..Issuer: Bank of Scotland plc
....Junior Subordinated Regular Bond/Debenture,
Downgraded to Baa2 from Baa1
....Preference Stock Preference Stock,
Downgraded to B3 from Baa2
..Issuer: HBOS CAPITAL FUNDING NO. 3 L.P.
....Preferred Stock Preferred Stock,
Downgraded to B3 from Baa2
..Issuer: HBOS Capital Funding No. 1 L.P.
....Preferred Stock Preferred Stock,
Downgraded to B3 from Baa2
..Issuer: HBOS Capital Funding No. 4 L.P.
....Preferred Stock Preferred Stock,
Downgraded to B3 from Baa2
..Issuer: HBOS Group Euro Finance (Jersey)
....Preferred Stock Preferred Stock,
Downgraded to B3 from Baa2
..Issuer: HBOS Group Sterling Finance L.P.
....Preferred Stock Preferred Stock,
Downgraded to B3 from Baa2
..Issuer: HBOS plc
....Junior Subordinated Regular Bond/Debenture,
Downgraded to Baa2 from Baa1
....Multiple Seniority Medium-Term
Note Program, Downgraded to Baa2 from Baa1
..Issuer: Halifax plc
....Junior Subordinated Regular Bond/Debenture,
Downgraded to B3 from Baa1
..Issuer: Leeds Permanent Building Society
....Junior Subordinated Regular Bond/Debenture,
Downgraded to B3 from Baa1
..Issuer: Lloyds Banking Group plc
....Preference Stock Preference Stock,
Downgraded to B3 from Baa2
..Issuer: Lloyds TSB Bank Plc
....Junior Subordinated Regular Bond/Debenture,
Downgraded to a range of Baa2 to Baa1 from a range of Baa1 to A3
....Multiple Seniority Medium-Term
Note Program, Downgraded to Baa1 from A3
....Preferred Stock Preferred Stock,
Downgraded to Baa2 from Baa1
..Issuer: Lloyds TSB Capital 1 L.P.
....Preferred Stock Preferred Stock,
Downgraded to B3 from Baa1
..Issuer: Lloyds TSB Capital 2 L.P.
....Preferred Stock Preferred Stock,
Downgraded to B3 from Baa1
..Issuer: National Westminster Bank PLC
....Junior Subordinated Conv./Exch.
Bond/Debenture, Downgraded to Ba1 from Baa3
....Junior Subordinated Regular Bond/Debenture,
Downgraded to Ba1 from Baa3
....Multiple Seniority Shelf, Downgraded
to a range of (P)B3 to (P)Ba1 from a range of (P)Ba1 to (P)Baa3
....Preference Stock Preference Stock,
Downgraded to B3 from a range of Ba2 to Ba1
....Subordinate Regular Bond/Debenture,
Downgraded to Ba1 from Baa3
..Issuer: RBS Capital Trust A
....Junior Subordinated Regular Bond/Debenture,
Downgraded to B3 from Ba3
..Issuer: RBS Capital Trust B
....Preferred Stock Preferred Stock,
Downgraded to B3 from Ba3
..Issuer: RBS Capital Trust C
....Preferred Stock Preferred Stock,
Downgraded to B3 from Ba3
..Issuer: RBS Capital Trust D
....Preferred Stock Preferred Stock,
Downgraded to B3 from Ba3
..Issuer: RBS Capital Trust I
....Preferred Stock Preferred Stock,
Downgraded to B3 from Ba3
..Issuer: RBS Capital Trust II
....Preferred Stock Preferred Stock,
Downgraded to B3 from Ba3
..Issuer: RBS Capital Trust III
....Preferred Stock Preferred Stock,
Downgraded to B3 from Ba3
..Issuer: RBS Capital Trust IV
....Preferred Stock Preferred Stock,
Downgraded to B3 from Ba3
..Issuer: Royal Bank of Scotland Group plc
....Junior Subordinated Regular Bond/Debenture,
Downgraded to a range of Ba3 to Ba2 from a range of Ba2 to Ba1
....Multiple Seniority Medium-Term
Note Program, Downgraded to Ba2 from Ba1
....Multiple Seniority Shelf, Downgraded
to a range of (P)B3 to (P)Ba2 from a range of (P)Ba2 to (P)Ba1
....Preference Stock Preference Stock,
Downgraded to B3 from a range of Ba3 to Ba2
....Preferred Stock Preferred Stock,
Downgraded to a range of B3 to Ba3 from a range of Ba3 to Ba2
..Issuer: Royal Bank of Scotland plc
....Junior Subordinated Regular Bond/Debenture,
Downgraded to Ba1 from Baa3
....Multiple Seniority Medium-Term
Note Program, Downgraded to Ba1 from Baa3
....Multiple Seniority Medium-Term
Note Program, Downgraded to Ba1 from Baa3
..Issuer: Scottish Widows plc
....Junior Subordinated Regular Bond/Debenture,
Downgraded to Baa1 from A3
On Review for Possible Downgrade:
..Issuer: Cheltenham & Gloucester plc
....Bank Financial Strength Rating,
Placed on Review for Possible Downgrade, currently C+
....Multiple Seniority Medium-Term
Note Program, Placed on Review for Possible Downgrade, currently
A3
..Issuer: Lloyds TSB Bank Plc
....Bank Financial Strength Rating,
Placed on Review for Possible Downgrade, currently C+
....Subordinate Regular Bond/Debenture,
Placed on Review for Possible Downgrade, currently A3
..Issuer: Royal Bank of Scotland Group plc
....Preference Stock Preference Stock,
Placed on Review for Possible Downgrade, currently Ba3
Outlook Actions:
..Issuer: Cheltenham & Gloucester plc
....Outlook, Changed To Rating Under
Review From Stable
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 various hybrid instruments of RBS and Lloyds
