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Rating Action:

Moody's downgrades various hybrid ratings of Commerzbank Group entities

11 May 2009

Eurohypo's senior debt and bank financial strength ratings affirmed

New York, May 11, 2009 -- Moody's Investors Service today downgraded its ratings on various hybrid instruments of different Commerzbank Group entities. At the same time, it affirmed Eurohypo AG's D bank financial strength rating (BFSR), A1 senior unsecured debt and deposit ratings and A2 subordinated debt rating. The outlook on these ratings remains negative. Eurohypo AG's Prime-1 rating for short-term liabilities was also affirmed.

Today's rating actions followed announcements that the European Commission has given approval for state aid under certain preconditions, including that (i) Commerzbank should dispose of Eurohypo AG within five years and (ii) Commerzbank and its subsidiaries should only make any profit-related payments on hybrid capital instruments such as silent participation and profit-participation certificates if they are obliged to do so without reversing accruals or special reserves under 340g of the German Commercial Code.

Moody's says that the announcement regarding the divestment of Eurohypo has no impact on the ratings of Commerzbank AG. Although Commerzbank will need to divest a business that currently exerts downward pressure on its own BFSR of C-, the rating agency argues that positive credit implications from this divestment, if any, will only be determined closer to the time of the sale, and will depend on the terms and conditions of the transaction.

EUROHYPO'S D BFSR AND SENIOR DEBT RATINGS

Despite Moody's expectation that Eurohypo is subject to a future divestment, the rating agency has not changed the bank's A1 senior unsecured debt and deposit ratings which remain subject to a negative outlook. The current rating level reflects Moody's view on ongoing parental support which is underpinned by a profit & loss transfer agreement obliging Commerzbank to absorb Eurohypo's losses (based on local GAAP accounting) until at least mid-2012. This should offer Eurohypo assistance through a period that Moody's expects to be very challenging for the bank, given the sharp deterioration in international commercial real estate markets.

However, the A1 senior debt and deposit ratings and the A2 rating for subordinated debt face heightened pressure in the medium term as the probability of parental support (currently "high") is expected to diminish after 2012, potentially reducing the uplift that the ratings receive from Eurohypo's current Ba2 baseline credit assessment (which maps directly from the D BFSR). Moreover, Moody's will closely monitor Eurohypo's scaling down of its core businesses, which over time may result in a lowering of the rating agency's assessment of the currently high probability of the bank receiving systemic support in the event of need. That said, Eurohypo's prominent position as an issuer of German covered bonds (Pfandbriefe) would make it a likely candidate to receive systemic support in the medium term, assuming that both of its main business lines, i.e. commercial real estate and public sector finance, will remain part of Eurohypo AG.

DOWNGRADE OF HYBRID INSTRUMENTS RATINGS

Following the previous downgrade of Commerzbank Group's hybrid capital instruments on 2 March 2009, Moody's today further downgraded the ratings on the silent participation and profit participation certificates of Commerzbank and its subsidiaries. The ratings on the various hybrid instruments now range from Baa3 to Caa1 reflecting Moody's instrument-by-instrument assessment of the various underlying terms and triggers.

For all instruments except those issued by HT1 Funding Trust GmbH and UT2 plc, Moody's understands based on issuer feedback that coupons for financial year 2008 have been -- or will be -- paid in full, and that the major risk of coupon deferrals or omissions applies to financial years 2009 and 2010. Moody's also understands that any (special) reserves on the balance sheets of Commerzbank and Eurohypo will be reversed, as necessary, in order to prevent the potential triggering of principal write-downs. These reversals would not be acceptable to avoid coupon deferrals or omissions for the years 2009 and 2010 under the agreement with the European Commission in the context of the approval for state aid that has been or will be given to Commerzbank.

1) The Tier I instruments (silent partnership certificates) issued by Commerzbank Capital Funding Trust I, II and III were downgraded to B2 from Ba3, reflecting Moody's revised expectation of likely to be missed coupons for 2009 and 2010. All instruments have distributable profits (balance sheet) coupon non-payment triggers and are non-cumulative. The rating agency recognises that substantial reserves are available on the non-consolidated balance sheet of Commerzbank AG (which will be well in excess of EUR9.0 billion following planned recapitalisation measures in 2009) that principally offer a buffer to trigger breaches. However, Moody's understands that these are unlikely to be used for reversal to ensure interest payments for the next two years.

2) Commerzbank's deeply subordinated upper Tier II instruments ("Genussscheine") that mature in December 2009 were downgraded to Ba3 from Ba1 and those that mature in December 2010 to B2 from Ba3. The Ba3 ratings reflect Moody's current estimate of non-payment of the final coupon, but no principal write-down for the year 2009. The B2 ratings reflect the rating agency's assumption of the omission of two coupons that will come due before or at final maturity. Although these instruments are cumulative, the relatively short time-to-maturity is in Moody's view unlikely to allow enough time to generate sufficient profits to pay deferred coupons.

3) The non-cumulative Tier I hybrid instruments (silent partnership certificates) issued by Dresdner Funding Trust I, II, III and IV were downgraded to Baa3 from A3, which continues to recognise their very weak coupon non-payment triggers, but also reflects the heightened risk that even these instruments could potentially be subject to coupon omissions for the years 2009 and 2010. Based on issuer feedback, Moody's understands that the 4% and 8% regulatory capitalisation triggers were not breached in 2008 and coupons are paid accordingly. While the regulatory capital ratios of Commerzbank will be the reference for these instruments going forward, which should translate into a low probability that the triggers will be breached, Moody's factors in an increasing probability of regulatory intervention which may be determined in light of Commerzbank's actual performance over the next two years.

4) The Tier I instruments issued by HT1 Funding Trust GmbH, which represents a "repacked silent participation" in Dresdner Bank AG, were affirmed at Ba2. This reflects Moody's unchanged assumptions: (i) the occurrence of a trigger breach in 2008 (the distributable profits, i.e. 'balance sheet'-coupon non-payment triggers were breached) and the resulting partial loss of the coupon and principal write-down for 2008, which amounted to 15.75%; (ii) that the principal will be written back on a five-year time horizon since the security has a perpetual maturity; and (iii) that the coupon payment for 2008 will be made for 84.25% thanks to the indemnity of Allianz to pay coupons on the (remaining) principal amount of the underlying silent participation.

Moody's understands that Allianz's obligation to pay coupons on these instruments when coupon non-payment triggers are breached will continue even after the merger of Dresdner Bank with Commerzbank and will remain in place for the life of these instruments. However, as is typical for Tier I instruments, the coupon payments are non-cumulative, and therefore those parts of coupons that are not paid (corresponding to the proportion of the principal written down) will be lost and not subject to payment at a later date.

5) The dated upper Tier II securities (profit participation certificates) issued by UT2 Funding plc, Ireland, were also affirmed at Ba2, reflecting (i) the occurrence of a trigger breach in 2008 and the resulting deferral of one full coupon and principal write-down for 2008, which amounted to 15.75%, (ii) coupon deferrals for 2009 and 2010, but no principal write-downs, and (iii) Moody's expectation of a high probability that the coupons will be paid retroactively before maturity in 2016 thanks to the cumulative nature of these instruments.

6) The Tier I instruments (trust preferred securities) issued by Eurohypo Capital Funding Trust I and II were downgraded to Caa1 from B2, reflecting Moody's view of a higher probability of a depletion of reserves on the unconsolidated balance sheet of Eurohypo (which are considerably lower than those of Commerzbank) and resulting likely trigger breaches that Moody's considers possible will result in the loss of two or more coupons on a five-year horizon. Moody's applies a high probability to the loss of two coupons and a medium probability to the loss of a third. As coupon payments are non-cumulative, they would not be subject to payment at a later date.

7) The upper Tier II instruments ("Genussscheine") issued by Hypothekenbank in Essen (which was merged onto Eurohypo in Q3 2008), to B3 from Ba1, as these instruments will mature in 2009 and 2013, respectively. For the instrument due in 2009, Moody's expects a (final) coupon loss and a reduced principal repayment at maturity. The Genussschein due in 2013 is exposed to the risk of further coupon deferrals and principal write-downs in 2010 and beyond, however this is partly mitigated by the possibility of a principal write-up and repayment before maturity due to the cumulative nature of the instrument.

The outlook on all these instruments is stable as the ratings are based on an expected loss calculation and are not notched off from the senior unsecured debt ratings of Commerzbank and Eurohypo.

RATING HISTORY AND MOODY'S METHODOLOGIES

The last rating action on Commerzbank was on 2 March 2009, when Moody's downgraded the BFSRs of Commerzbank, Dresdner Bank and Eurohypo and affirmed their senior unsecured debt and deposit ratings at Aa3 for Commerzbank and Dresdner Bank and at A1 for Eurohypo, at the same time changing the outlook on these ratings to negative from stable. In addition, various hybrid ratings of instruments issued by Commerzbank and its subsidiaries were downgraded, as outlined in the respective press release.

The principal methodologies used in rating the entities of Commerzbank Group are "Bank Financial Strength Ratings: Global Methodology", "Incorporation of Joint Default Analysis into Moody's Bank Ratings: A Refined Methodology" as well as "Guidelines for Rating Bank Junior Securities", which can be found on www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies sub-directory. 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.

Domiciled in Frankfurt, Germany, Commerzbank reported, based on preliminary financials, total assets of EUR625 billion as at 31 December 2008 and a pre-tax loss for the year of EUR403 million.

Headquartered in Eschborn, Germany, Eurohypo is a fully owned subsidiary of Commerzbank. Based on preliminary results at the end of 2008, Eurohypo reported total assets of EUR292 billion and a pre-tax loss of EUR1.4 billion for the full year.

Frankfurt
Katharina Barten
Vice President - Senior Analyst
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt
Carola Schuler
Managing Director
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades various hybrid ratings of Commerzbank Group entities
No Related Data.
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