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Rating Action:

Moody's places HSH Nordbank AG's Baa3 debt and deposit ratings on review for upgrade following announcement of ownership change

28 Feb 2018

HSH's hybrid debt ratings placed on review for downgrade on higher loss expectations for instruments

Frankfurt am Main, February 28, 2018 -- Moody's Investors Service has today placed on review for upgrade the Baa3/P-3 deposit and issuer ratings of HSH Nordbank AG (HSH) and its rated branches, where applicable, as well as the bank's Baa3 senior unsecured and senior senior unsecured debt ratings. The outlook on the long-term ratings has been changed to Ratings under Review from Developing. Furthermore, Moody's placed on review for upgrade HSH's (P)B2 subordinate program rating, the bank's b3 Baseline Credit Assessment (BCA) and b1 Adjusted BCA and its Baa3(cr)/P-3(cr) Counterparty Risk Assessments (CR Assessments).

The rating action was triggered by the announcement made by HSH's current owners, the City State of Hamburg and the Land of Schleswig-Holstein, that an agreement to sell the bank to a group of private investors was signed on 28 February 2018. The rating agency expects to complete its review by Q3 2018, once the main steps to close the sale have been taken. These steps include, but are not necessarily limited to, an approval of the sale by the current owners' local parliaments.

By placing HSH's ratings and rating inputs on review for upgrade, the rating agency is taking into account its expectations that the bank will have a significantly improved standalone credit profile and principally unchanged liability structure that benefits from continued rating uplift from Moody's Advanced Loss Given Failure (LGF) analysis. This will largely offset the anticipated removal of ratings uplift from the combined affiliate and government support assumptions due to HSH's membership in Sparkassen-Finanzgruppe's (S-Group, corporate family rating Aa2 stable, BCA a2) institutional protection scheme. This membership will be phased-out over the medium-term following the change of ownership to a private investor group. Subject to all necessary approvals being forthcoming and further information obtained during the ratings review, Moody's anticipates that HSH's long-term deposit and senior senior debt ratings may potentially be upgraded by a maximum of one notch, while its senior unsecured debt and issuer ratings may at the minimum be confirmed at their current low investment grade level. This will depend on the ultimate liability structure following the bank's ownership change.

At the same time, Moody's placed HSH's Ca(hyb)-rated hybrid bond instruments issued by various funding vehicles on review for downgrade due to an expected increase of their expected loss rate.

The bank's and its assumed entities' backed senior and backed subordinate debt ratings that benefit from grandfathered guarantees of the bank's current owners are unaffected by today's rating actions.

For a list of all affected ratings, please refer to the end of this press release.

RATINGS RATIONALE

RECENT DEVELOPMENTS REGARDING THE ANNOUNCED SALE OF HSH

On 28 February 2018, the City State of Hamburg and the Land of Schleswig-Holstein announced that they had signed a sales contract that foresees a full transfer of ownership for a consideration of approximately €1 billion to a group of investors led by Cerberus Capital Management L.P. and J.C. Flowers & Co.

As part of the sale, the investors will also acquire an asset portfolio that is carved out of HSH. This portfolio consists of the bulk of the bank's remaining non-performing legacy assets as well as a portion of its performing shipping loan book. In parallel, HSH has agreed with its current owners an early full settlement of a €10 billion asset guarantee scheme that had been designed to absorb losses on HSH's underperforming assets. However, the guarantee had also rendered the bank's asset, liability and capital structure more complex and opaque than that of its banking peers.

Because HSH will be owned by private investors, the bank will need to leave the public-sector S-Group and its institutional protection scheme after a multi-year transition period. Thereafter, HSH will become, subject to the approval of the Bundesverband deutscher Banken (BdB), a full member of the voluntary deposit guarantee fund for Germany's private banks. This fund protects the claims of retail and small- and medium enterprise investors that exceed the coverage of the statutory deposit guarantee scheme and to a lesser extent also covers deposits of select institutional investors.

Moody's understands that an expedited closing of the transaction is targeted, likely within the third quarter of 2018, and this closing is contingent upon the receipt of approvals from the local parliaments of the current owners, as well as the approval of regulatory bodies, including the European Commission for closing state aid procedures and the European Central Bank (ECB) as the direct supervisor of HSH. Moody's expects the necessary approvals to be obtained by Q3 2018.

REVIEW FOR UPGRADE OF HSH'S BCA AND ADJUSTED BCA REFLECT SIGNIFICANT RELIEF FROM LEGACY ISSUES, MORE THAN OFFSETTING THE REMOVAL OF AFFILIATE SUPPORT ASSUMPTIONS

Moody's considers the overall impact of the planned sale to be very beneficial for the bank's standalone financial profile, as expressed by the review for upgrade initiated on its b3 BCA, with the potential for a multi-notch upgrade to a higher sub-investment grade level. The rating agency expects the bank to be significantly de-risked and simplified, which will allow it to display asset quality metrics more in line with its peers and to reduce its cost base. In particular, the carve-out of non-performing assets will, in conjunction with the continuously improved capitalisation of the bank, result in an improved overall solvency profile. Key medium-term challenges include achieving adequately diversified funding sources and extending the maturity profile of its liabilities, with a greater focus on the years after the end of the transition period towards its definite exit from the S-Group sector support scheme.

Because the ultimate loss of its membership in the domestically systemic S-Group is inevitable once the sale have been successfully closed, Moody's expects to reduce, or eventually remove, its affiliate support assumptions from S-Group, that is currently reflected in a two notch uplift to HSH's b1 adjusted BCA. At the same time, Moody's expects that the significant multi-notch upward pressure from the improvement in the bank's standalone credit profile has the potential to more than offset the concurrent loss of affiliate support benefits. This is reflected in also placing the adjusted BCA on review for upgrade.

POTENTIAL FOR UPGRADE OF HSH'S LONG-TERM DEPOSIT AND SENIOR UNSECURED RATINGS DEPENDENT ON IMPROVING STANDALONE CREDIT PROFILE AND BENEFICIAL LIABILITY STRUCTURE REMAINING UNCHANGED

Because HSH will eventually leave the S-Group and its sector support scheme, Moody's anticipates removing the one notch of rating uplift that is currently applicable due to the government support to HSH's ratings. The uplift is directly related to our assessment of the systemic importance of the public sector S-Group in Germany's financial sector and therefore benefits all S-Group members rated by Moody's. Under the envisaged private sector ownership, the rating agency is likely to attribute only low systemic support assumptions to HSH, resulting in no ratings uplift.

Notwithstanding, Moody's expects the anticipated BCA and adjusted BCA upgrades, in conjunction with unchanged loss-given-failure results under its Advanced LGF analysis, to lead to upgrades for the bank's deposit and senior senior unsecured debt ratings. This would also lead to upgrades of all of the bank's short-term programme, issuer and deposit ratings, that are mapped to these as a result of provisions in the German insolvency ranking that came into effect in 2017.

Additionally, HSH's Baa3 long-term senior unsecured ratings have also been placed on review for upgrade, because Moody's may upgrade these ratings as a result of the expected multi-notch BCA upgrade. However, the senior unsecured ratings could also be confirmed at their current Baa3 level should the bank's future liability structure include less subordinated debt than at present. This could lead to a lower outcome than at present under Moody's Advanced LGF analysis for senior unsecured debt. Accordingly, a senior unsecured debt ratings upgrade is less certain than for the deposit ratings, because the latter benefit from a significantly higher level of subordination, partly provided by the senior unsecured debt layer. In Germany, senior unsecured debt is legally subordinated to deposits on the basis of the insolvency ranking.

REVIEW FOR DOWNGRADE OF HSH'S HYBRID INSTRUMENTS DRIVEN BY EXPECTED FULL-YEAR 2017 LOSS AND EXTENDED COUPON SUSPENSION

Moody's placed HSH's Ca(hyb)-rated hybrid instruments, issued by funding vehicles, on review for downgrade, because the rating agency expects these instruments to face an additional principal write-down on the basis of the 2017 full-year local GAAP results of HSH. In addition, HSH announced on 28 February that it expects coupons on these instruments to remain suspended for at least four more years. The extended loss of coupon and the severity of principal writedown could exceed the 35% to 65% loss expectation range currently reflected in the Ca(hyb) ratings.

FOCUS OF THE REVIEW

Moody's will focus on the bank's progress towards passing the regulatory and owners' approvals for the ownership change to take effect later this year. These milestones comprise the closing of the European Commission's state aid case against HSH, approval by the ECB and other regulatory bodies as well as local parliamentary endorsement of the sale by the German states of Hamburg and Schleswig-Holstein.

During the rating review period, Moody's will also put a particular focus on monitoring the development of the bank's financial profile and liability structure. Based on the rating agency's current expectations, the announced transformational measures will lead to a significant improvement of the bank's standalone strength. Moody's will closely monitor HSH's financials until the closure of the rating review in order to confirm the continued applicability of its current expectations. In parallel, the bank's funding activities and changes to its funding profile will be vital inputs that inform Moody's assessment of HSH's future funding and liquidity profile, as well as its view of the bank's liability structure. This latter point is of particular relevance for the ultimate determination of whether HSH's long-term senior unsecured debt ratings will be confirmed at Baa3, or whether they will be upgraded in line with the deposit ratings.

Separately, Moody's expects to close its review for downgrade of the bank's Ca(hyb)-rated hybrid debt instruments once the definite writedown amount for the silent participations driving the performance of the rated obligations has been communicated based on the 2017 local GAAP result of HSH.

WHAT COULD CHANGE THE RATING - UP / DOWN

As indicated by the rating review for upgrade, Moody's expects to upgrade, by one notch, HSH's Baa3 long-term deposit and senior senior unsecured ratings and the Baa3(cr) CR Assessment once all remaining hurdles to the closing of the entity's signed ownership change are cleared, and the ratings agency's assumptions in relation to the anticipated stronger credit profile of the bank are met. The former is contingent upon the required regulatory and parliamentary approvals of the sale.

The rating agency may also upgrade HSH's Baa3 long-term senior unsecured debt ratings, if the transaction results in an unchanged extremely low loss-given-failure result for the senior unsecured liability class under Moody's Advanced LGF analysis.

The magnitude of these rating changes may be more (or less) pronounced should the bank's standalone financial profile evolve significantly better (or worse) than planned by the company, or if the outcome of the bank's Advanced Loss Given Failure analysis result is more (or less) beneficial for individual debt classes than currently anticipated by Moody's.

Whereas Moody's currently considers it unlikely, as indicated by the rating review for upgrade, a pronounced negative deviation of HSH's future financial performance from the solvency and liquidity metrics, or liability structure, that Moody's currently anticipates could result in a downgrade of HSH's rating. Downside risks may arise from a materially adverse scenario for ship lending or inability of HSH to execute on its transition plan for its funding profile.

In the event that HSH's sale does not materialise, Moody's would reassess the bank's financial profile and rating components with a focus on the bank's, its owner's and S-Group's ability to swiftly adopt alternative steps that comply with the requirements of the European Commission's roadmap for the bank's future development.

LIST OF AFFECTED RATINGS

The following ratings were placed On Review for Upgrade:

Issuer: HSH Nordbank AG

....LT Bank Deposits (Local & Foreign Currency), currently Baa3, Outlook changed To Rating Under Review From Developing

....ST Bank Deposits (Local & Foreign Currency), currently P-3

....LT Issuer Rating (Local & Foreign Currency), currently Baa3, Outlook Changed to Rating Under Review from Developing

....LT Senior Unsecured (Local & Foreign Currency), currently Baa3, Outlook Changed to Rating Under Review from Developing

....Senior Unsecured MTN (Local Currency), currently (P)Baa3

....LT Senior Senior Unsecured (Local & Foreign Currency), currently Baa3, Outlook changed To Rating Under Review From Developing

....ST Issuer Rating (Local & Foreign Currency), currently P-3

....LT Senior Senior Unsecured MTN (Local Currency), currently (P)Baa3

....Subordinate MTN (Local Currency), currently (P)B2

....Other Short Term (Local Currency), currently (P)P-3

....Adjusted Baseline Credit Assessment, currently b1

....Baseline Credit Assessment, currently b3

....LT Counterparty Risk Assessment, currently Baa3(cr)

....ST Counterparty Risk Assessment, currently P-3(cr)

Issuer: HSH Nordbank, New York Branch

....LT Bank Deposits (Local Currency), currently Baa3, Outlook changed To Rating Under Review From Developing

....Commercial Paper (Local Currency), currently P-3

....LT Counterparty Risk Assessment, currently Baa3(cr)

....ST Counterparty Risk Assessment, currently P-3(cr)

Issuer: HSH Nordbank, Luxembourg Branch

.Commercial Paper (Foreign Currency), currently P-3

....LT Counterparty Risk Assessment, currently Baa3(cr)

....ST Counterparty Risk Assessment, currently P-3(cr)

The following ratings were Placed on Review for Downgrade:

Issuer: HSH N Funding I

.Backed Pref. Stock Non-Cumulative, currently Ca(hyb)

Issuer: HSH N Funding II

.Junior Subordinate, currently Ca(hyb)

Issuer: RESPARCS Funding Limited Partnership I

.Backed Pref. Stock Non-Cumulative, currently Ca(hyb)

Issuer: RESPARCS Funding II Limited Partnership

.Backed Pref. Stock Non-Cumulative, currently Ca(hyb)

Outlook Actions:

Issuer: HSH Nordbank AG

....Outlook, Changed to Rating under Review from Developing

Issuer: HSH Nordbank, New York Branch

....Outlook, Changed to Rating under Review from Developing

Issuer: HSH Nordbank, Luxembourg Branch

....Outlook, Changed to Rating under Review from Developing

Issuer: HSH N Funding I

....Outlook, Changed to Rating under Review from No Outlook

Issuer: HSH N Funding II

....Outlook, Changed to Rating under Review from No Outlook

Issuer: RESPARCS Funding Limited Partnership I

....Outlook, Changed to Rating under Review from No Outlook

Issuer: RESPARCS Funding II Limited Partnership

....Outlook, Changed to Rating under Review from No Outlook

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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.

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.

Bernhard Held
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

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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