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Related Issuers
Commerzbank AG - Mortgage Covered Bonds (Hypothekenbank Frankfurt AG - Eurohypo AG - Mortgage Covered Bonds)
Commerzbank AG - Mortgage Covered Bonds (Hypothekenbank Frankfurt AG - Mortgage Covered Bonds (01/03/1998 - 06/05/2003))
Commerzbank AG - Mortgage Covered Bonds (Hypothekenbank Frankfurt AG - Mortgage Covered Bonds (04/01/2005 - 11/04/2008))
Commerzbank AG - Public-Sector Covered Bonds (Hypothekenbank Frankfurt AG - Eurohypo AG - Public Sector Covered Bonds (01/05/1999 - 06/22/2006))
Commerzbank AG - Public-Sector Covered Bonds (Hypothekenbank Frankfurt AG - Eurohypo AG - Public Sector Covered Bonds)
Commerzbank AG - Public-Sector Covered Bonds (Hypothekenbank Frankfurt AG - Public Sector Covered Bonds (03/22/1996 - 03/22/2005))
Commerzbank AG - Public-Sector Covered Bonds (Hypothekenbank Frankfurt AG - Public Sector Covered Bonds (03/30/2005 - 08/12/2008))
Commerzbank AG - Public-Sector Covered Bonds (Hypothekenbank Frankfurt AG - Public Sector Covered Bonds)
Commerzbank AG - Public-Sector Covered Bonds (Hypothekenbank Frankfurt AG - RHEINHYP Rheinische - Eurohypo AG - Public Sector Covered Bonds)
Commerzbank AG - Public-Sector Covered Bonds (Hypothekenbank Frankfurt AG (Old) - Hypothekenbank Frankfurt AG - Public Sector Covered Bonds)
Eurohypo AG (Old)
Eurohypo AG (Old) - Eurohypo AG - Mortgage Covered Bonds
Eurohypo AG (Old) - Mortgage Covered Bonds
Eurohypo AG (Old) - Public Covered Bonds
Eurohypo Capital Funding Trust I
Eurohypo Capital Funding Trust II
Hypothekenbank Frankfurt AG
Hypothekenbank Frankfurt AG - Mortgage Covered Bonds (06/06/2003 - 03/30/2005)
Hypothekenbank in Hamburg AG - Eurohypo AG - Public Covered Bonds
Rheinhyp Finance N.V.
RHEINHYP Rheinische Hypothekenbank AG
RHEINHYP Rheinische Hypothekenbank AG - Eurohypo AG - Mortgage Covered Bonds
Rating Action:

Moody's reviews Eurohypo's unsecured ratings for upgrade

19 Aug 2008

BFSR downgraded to C, with a negative outlook

Frankfurt, August 19, 2008 -- Moody's Investors Service has today placed on review for possible upgrade the A1 long-term debt and deposit ratings as well as the A2 subordinated debt ratings and the A3 rating for the silent participations of Eurohypo AG. At the same time, the rating agency has downgraded the Bank Financial Strength Rating ("BFSR") to C from C+ and changed the outlook on the BFSR to negative. The bank's Prime-1 short-term rating was affirmed. Moody's also affirms the Aaa ratings assigned to Eurohypo's Public Sector Pfandbriefe and Mortgage Pfandbriefe.

Moody's commented that the review for possible upgrade was triggered by the increasing integration of Eurohypo into its parent bank, Commerzbank AG (rated Aa3/Prime-1/C+), as further evidenced today by the merger of Essenhyp into Eurohypo (see separate Press Release on rating actions for Essenhyp released today). Over the past year -- since Commerzbank decided to obtain full ownership of Eurohypo -- the bank has been increasingly integrated into Commerzbank group as a centre of competence for Public Finance and Commercial Real Estate (CRE) lending as well as centralising the group's 'Pfandbrief' issuance, with unsecured funding and residential real estate activities centralised at the parent bank level.

"In addition to the operational integration, the ratings review will focus on explicit support agreements such as the comfort letter as well as the enforceability and potential timeliness of payment under the profit and loss transfer agreement between Commerzbank AG and Eurohypo AG. Any potential upgrade of Eurohypo's debt and deposit ratings would be limited to one notch, to reach an alignment with those of its parent, Commerzbank AG," says Katharina Barten, Frankfurt-based Moody's Vice President - Senior Analyst, and lead analyst for Eurohypo AG.

Moody's added that the downgrade of Eurohypo's BFSR primarily reflects: (i) the weak outlook on core risk-weighted profitability until 2010, (ii) deteriorating asset quality in CRE business, and (iii) the negative implications from the merger with Essenhyp (A1/P-1/C-).

Moody's said that the negative outlook on Eurohypo's risk-weighted profitability over the next few years is a function of Moody's expectation of lower fee and commission income, in turn driven by the sharply declining volumes of new business underwritten (and syndicated or securitised), and the other adverse factors mentioned above, deteriorating asset quality and the integration of Essenhyp.

The deterioration of asset quality primarily concerns a rise in risk charges compared to previous years, reported in the first half of 2008; the adverse developments in that period required additional provisioning on a single large CRE exposure in Continental Europe, and also contained a 30% rise year-on-year even if the provisioning related to the aforementioned single exposure were excluded. Furthermore, Moody's believes that the concentration risk relating to Eurohypo's exposures in Spain and the UK may prove challenging in the short-to-medium term, given the sharp deterioration of the operating environment for real estate business in these markets.

The rating agency points out that the adverse impact from the merger with Essenhyp, albeit not the main reason for the BFSR downgrade, adds pressure on the weak outlook on future profitability. Essenhyp posted a loss of EUR241 million in 2007, and its operations are expected to contribute negatively to group earnings during 2008 and 2009, which is due to a combination of restructuring charges, costs for closing EssenHyp's CDS book and charges relating to the closing of the bank's previous yield curve exposure, as the bank had previously engaged in funding long-term assets with short-term liabilities. Moreover, the long-term benefits from the transaction are considered to be modest.

On the positive side, Moody's recognises that Eurohypo's sound economic and regulatory capitalisation serves as an important mitigant to the critical factors mentioned above, and that Eurohypo has, in response to the ongoing deterioration in several core markets, further tightened its underwriting standards. Furthermore, Moody's believes that Eurohypo's strong franchise in the primary real estate markets should provide some revenue continuity throughout the real estate business cycle. However, the negative outlook on the bank's BFSR highlights the uncertainty about the degree of deterioration as well as the degree of correlation in some key real estate markets to which Eurohypo is exposed.

The previous rating action on Eurohypo was in May 2007, when the BFSR was affirmed, the senior unsecured debt and deposit ratings were upgraded to A1 from A2 and the ratings for subordinated debt (including for 'Genussscheine') were upgraded to A2 from A3.

Headquartered in Eschborn, Germany, Eurohypo is a fully owned subsidiary of Commerzbank. At the end of June 2008, the group had consolidated assets, according to IFRS, of EUR200 billion and reported a net loss of EUR83 million; the Tier-1 ratio was 9.1% -- now based on Basel II.

Frankfurt
Katharina Barten
Vice President - Senior Analyst
Financial Institutions Group
Moody's Deutschland GmbH
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 reviews Eurohypo's unsecured ratings for upgrade
No Related Data.
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