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Rating Action:

Moody's places on review for downgrade two Austrian regional mortgage banks

06 Mar 2015

Action follows payment moratorium on Heta Asset Resolution's debt

Frankfurt am Main, March 06, 2015 -- Moody's Investors Service has today placed on review for downgrade all ratings of two Austrian regional mortgage banks (Landeshypothekenbanken) -- namely Hypo Tirol Bank AG (Hypo Tirol) and Vorarlberger Landes- und Hypothekenbank AG (VLH). The rating action follows the initiation of resolution measures by the Austrian Financial Market Authority (FMA) on 1 March 2015 for Heta Asset Resolution AG (Carinthian-state-guaranteed debt rated Ca, negative) and enforcement of a temporary payment moratorium until 31 May 2016. The moratorium results in the immediate triggering of the statutory liability scheme for Pfandbriefbank (Oesterreich) AG which holds a significant amount of Heta debt. Pfandbriefbank's liabilities benefit from a statutory multi-recourse liability scheme by its member banks (the Landeshypothekenbanken), and their current or previous owners, the Austrian federal states.

The following rating actions have been taken:

- Initiation of review for downgrade of Hypo Tirol's D- standalone Bank Financial Strength Rating (BFSR) (equivalent to a Baseline Credit Assessment (BCA) of ba3), Baa2 and Prime-2 long-term and short-term debt and deposit ratings, as well as Baa1 backed long-term debt and deposit ratings, and B1 backed subordinate debt ratings.

- Initiation of review for downgrade of VLH's D+ standalone BFSR (equivalent to a BCA of baa3), A2 and Prime-1 long-term and short-term debt and deposit ratings, as well as A1 backed long-term debt and deposit ratings, and Ba1 backed subordinate debt ratings.

The rating actions on Hypo Tirol and VLH are triggered by the crystallisation of contingent liabilities for both banks, and reflect Moody's view of the significantly increased risks to each bank's earnings and capitalisation in light of the limited capital and profitability buffers for additional loss absorption in a downside scenario.

During the review period, Moody's expects (1) to gain additional clarity on the implications on each bank's financial profile caused by the immediate financial support provided to Pfandbriefbank; and (2) to assess the resilience of both banks' credit profiles under scenario analysis capturing further downside risks caused by greater-than-expected losses arising from a Heta resolution and subsequent threats to Pfandbriefbank. Further, the rating agency will reassess the value attributed to deficiency guarantees supporting outstanding backed debt issues of the affected issuers, following the moratorium of Heta's deficiency guaranteed debt.

Please refer to the end of this press release for a list of all affected ratings.

RATINGS RATIONALE

--- HYPO TIROL'S AND VLH'S FINANCIAL STRENGTHS ARE CHALLENGED BY THE MAGNITUDE OF SUPPORT MEASURES FOR PFANDBRIEFBANK

The review for downgrade of Hypo Tirol's standalone D- BFSR and VLH's D+ BFSR -- and subsequently all of their long-term ratings -- reflects Moody's assessment of the risk implications for these banks' overall creditworthiness resulting from significant financial assistance these banks will have to provide to Pfandbriefbank under a statutory multi-recourse scheme. As of 30 June 2014, Pfandbriefbank held EUR1.2 billion of Heta claims which are subject to a payment moratorium imposed by the FMA on 1 March 2015 in the context of resolution measures initiated on Heta under the Federal Banking Restructuring and Resolution Act (BaSAG), i.e., the national implementation law of the European Bank Recovery and Resolution Directive (BRRD), effective since 1 January 2015.

Pfandbriefbank, as an issuing vehicle for its member banks (including Heta), relies on the full performance of all its claims to service its own liabilities. The Heta moratorium therefore immediately affects the liquidity and, prospectively, the solvency of Pfandbriefbank. Any liquidity emergency measures will have to ensure the repayment of about EUR600 million in bonds maturing by mid-June 2015. Based on total Heta claims of EUR1.2 billion and a high likelihood of the application of bail-in measures to Heta debt in the order of 35% up to 65% (reflected in the Ca rating for Carinthian-state-guaranteed senior unsecured debt), Moody's estimates that Hypo Tirol and VLH may face the crystallisation of losses ranging from EUR60 million to EUR111 million each. These losses reflect the estimated pro-rata share for both banks under the joint and several liability scheme for Pfandbriefbank's liabilities, and represent a significant near-term burden relative to Hypo Tirol's and VLH's financial strengths.

Hypo Tirol reported a transitional Common Equity Tier 1 (CET1) ratio of 10.4% and EUR429 million CET 1 capital under IFRS at end-June 2014, which, in the light of its elevated problem loan ratio and weak internal capital generation, gives the bank only limited leeway to absorb credit losses beyond Moody's previous expectations.

VLH reported a transitional CET1 ratio of 9.3% and EUR777 million CET 1 capital under IFRS at end-September 2014, which represents a limited capital buffer to absorb potential losses in a stressed economic environment. VLH's stable profitability level, which ranged between EUR60 million and EUR70 million during the period 2009 to 2013, may provide some flexibility to the bank in order to buffer the impact of potential obligations that arise from Pfandbriefbank.

During the review, Moody's will assess Hypo Tirol's and VLH's loss-absorption capacity and resilience against further downside risks, and whether the banks' current rating levels are still consistent with these challenges.

-- REASSESSMENT OF HYPO TIROL'S AND VLH'S STATE-GUARANTEED RATINGS

The review for downgrade of Hypo Tirol's and VLH's backed long- and short-term debt and deposit ratings was triggered by the review for downgrade on its non-backed long-term senior ratings. These (backed) ratings benefit from a deficiency guarantee from their respective guarantors, the State of Tyrol (unrated) and the State of Vorarlberg (unrated). During the review, Moody's will reassess the positioning of these backed ratings which are currently positioned one notch above each bank's non-guaranteed senior unsecured debt rating; these backed ratings also currently benefit from some value the rating agency attaches to the guarantors' deficiency guarantee. Under the new resolution legislation (BaSAG), there is a strong likelihood that deficiency guarantees could not be enforced upon a full or partial cancellation of bailed-in debt because of their accessory nature.

WHAT COULD MOVE THE RATINGS UP/DOWN

There is currently no upward rating pressure on Hypo Tirol's and VLH's backed and non-backed long-term ratings as reflected by the review for downgrade.

A downgrade of Hypo Tirol's and VLH's BFSR could be triggered if Moody's were to conclude that the contingent liabilities of Hypo Tirol and VLH under a support plan for Pfandbriefbank had a material impact on the banks' financial credit strength.

A downgrade of Hypo Tirol's or VLH's long-term debt and deposit ratings could be triggered by any of the following (1) a change in its standalone BFSR; (2) a deterioration in creditworthiness of the Austrian Federal States of Tirol or Vorarlberg; (3) a weakening of the banks' relationship with the respective state or a perceived weakening of implicit support; (4) a change in ownership; or (5) the evolution of systemic support prospects in Austria and in the EU, in light of developments associated with resolution mechanisms and burden sharing for European banks.

A downgrade of Hypo Tirol's and VLH's state-guaranteed long-term debt and deposit ratings could be triggered (1) by a downgrade of the banks' long-term senior ratings; and (2) if Moody's removed any value previously assigned to the guarantors' deficiency guarantee.

LIST OF ALL AFFECTED RATINGS

The following ratings of Hypo Tirol were placed on review for downgrade:

- D- standalone BFSR, equivalent to a BCA of ba3

- Baa2 long-term debt and deposit ratings

- (P)B1 subordinated MTN program

- Prime-2 short-term deposit ratings

- Baa1 state-guaranteed long-term debt and deposit ratings

- B1 state-guaranteed subordinated debt ratings

- Prime-2 state-guaranteed short-term deposit ratings

The following ratings of VLH were placed on review for downgrade:

- D+ standalone BFSR, equivalent to a BCA of baa3

- A2 long-term debt and deposit ratings

- (P)Ba1 subordinated MTN program

- Prime-1 short-term deposit ratings

- A1 state-guaranteed long-term debt and deposit ratings

- Ba1 state-guaranteed subordinated debt ratings

- Prime-1 state-guaranteed short-term deposit rating

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Banks published in July 2014. 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.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

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.

Swen Metzler
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
SUBSCRIBERS: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's places on review for downgrade two Austrian regional mortgage banks
No Related Data.
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