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Rating Action:

Moody's places Royal Bank of Scotland's ratings on review for downgrade

Global Credit Research - 05 Jul 2013

Action follows UK government's announcement of decision to review Good Bank/Bad Bank options for RBS

London, 05 July 2013 -- Moody's Investors Service has today placed on review for downgrade Royal Bank of Scotland plc's (RBS) D+ standalone bank financial strength rating (equivalent to a baa3 baseline credit assessment), its A3 long-term debt and deposit ratings and the bank's subordinated debt and junior capital instruments. The firm's Prime-2 short-term ratings were affirmed. The long-term ratings of the holding company, Royal Bank of Scotland Group plc, were also placed on review for downgrade.

Concurrently, Moody's has placed on review for downgrade the standalone credit assessments and all other long-term ratings of National Westminster Bank (Natwest) plc and Royal Bank of Scotland NV. These ratings are aligned with those of RBS given the high degree of integration between RBS and these two entities.

Moody's action reflects the further uncertainty for bond holders resulting from the UK government's recent announcement that it is examining the merit of a possible breakup of RBS and how this could be achieved. Moody's understands that the government will consider a range of options for removing higher risk and/or impaired assets from RBS, and the ratings agency believes that some of these options may entail losses for creditors. The heightened level of uncertainty is likely to remain at least until the publication of the government's conclusion from its assessment, after which Moody's expects to conclude its ratings review.

RATINGS RATIONALE

The review for downgrade of RBS's ratings follows the announcement by the UK Chancellor of the Exchequer on 19 June of the commencement of a cost-benefit review to evaluate the merit of breaking up RBS in order to achieve the government's goals of (1) promoting economic growth; (2) maximizing value for taxpayers; and (3) accelerating RBS's return to the private sector. This course of action is in line with the recommendations of the UK Parliamentary Commission on Banking Standards published on the same day, and indicates that the political debate about the strategy for RBS is still very open, with a number of options under consideration.

In Moody's view, the probability of losses to RBS creditors remains low. However, there is potential for further capital impairment and the government has clearly indicated that it will not put additional taxpayer capital into RBS. As such, the government could consider options that might result in a higher risk of loss to bondholders, particularly junior bondholders, than is currently reflected in RBS's senior and subordinated ratings. The decision to affirm the short-term ratings reflects Moody's current view that a downgrade of the senior ratings of more than one or two notches is unlikely, especially given that burden sharing with creditors may be deemed to be in conflict with the above-stated Government objectives.

For example, the accelerated sale of assets, together with the crystallisation of losses could imply a faster erosion of capital than RBS can sustain. Alternatively, a full legal split of RBS, while being costly, complex and disruptive to management, would also have a negative impact on the Group's profitability, could pose a strain on its liquidity and might also result in a capital shortfall depending on the valuation of assets moved to the Bad Bank. Any of these options could therefore have credit negative implications for bondholders. At the same time, Moody's recognises that upon completion, the separation could bring long-term benefits to RBS's financial position, with credit-positive implications for creditors of its post-transition going-concern operations.

Moody's expects to conclude this ratings review following the completion of the government study on the merit of the breakup and the announcement of the decision on the future of RBS. The government has indicated that an announcement in this respect will be made in autumn.

WHAT COULD MOVE THE RATINGS UP/DOWN

The review could lead to the lowering of RBS's BCA and/or a downgrade of its debt ratings if: (1) Moody's were to assess that any decision on the future of RBS, for example in relation to its breakup, were to increase the risk of losses for some or all of its creditors; (2) uncertainties surrounding RBS's future direction were to further escalate in the coming months; or (3) further indications were to emerge of the UK government's reduced willingness to support the bank's senior creditors.

Given the review for downgrade, there is currently no upward ratings momentum. However, the standalone credit assessment could be stabilised if (1) certainty regarding the bank's future were to materialise without posing additional risks to its existing creditors; or (2) as a result of the government decision, the bank were to improve its financial standing (for example, through the removal of low-quality assets from its balance sheet with minimal negative capital effects).

RBS MAY-PAY SECURITIES

Moody's upgraded the ratings of some of RBS's May-Pay securities to Ba3 from B3 and placed them on review for possible downgrade, in line with other RBS ratings. These are instruments on which RBS omitted coupons due to European Commission restrictions following the receipt of state aid. On 12 June 2013 RBS announced its intention to resume dividend payments on three series of Trust Preferred Securities of RBS N.V. (RBS Capital Funding Trust V, CUSIP: 74928K208; RBS Capital Funding Trust VI, CUSIP: 74928P207; and RBS Capital Funding Trust VII, CUSIP: 74928M204). Moody's now considers that the risks for these instruments are in line with the Must-Pay instruments and the relevant ratings were upgraded to Ba3 from B3.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Banks published in May 2013. Please see the Credit Policy 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 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 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 rating action, and whose ratings may change as a result of this 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.

Andrea Usai
VP - Senior Credit Officer
Financial Institutions 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

Robert Franklyn Young
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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 places Royal Bank of Scotland's ratings on review for downgrade
No Related Data.

 

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