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Rating Action:

Moody's takes actions on 4 Spanish banking groups due to restructuring framework

05 Oct 2012

Updates on ongoing review of the wider Spanish banking sector

NOTE: On October 16, 2012, the press release was revised as follows: A hybrid indicator (hyb) has been added to all junior subordinated debt and the preferred stock ratings; under the list of affected ratings, for all Multiple Seniority Medium-Term Note Programs, except for Bankia, the reference to "Junior Subordinate" has been removed; also removed listings for Caymadrid International Ltd’s Multiple Seniority Medium-Term Note Program (Subordinate) that was withdrawn on October 5, 2012. Revised release follows.

Madrid, October 05, 2012 -- Moody's Investors Service has today taken rating actions on the subordinated and hybrid ratings of four Spanish banking groups, which are owned by the government's Fund for Orderly Bank Restructuring (FROB) and subject to restructuring, namely Bankia and its parent Banco Financiero y de Ahorros (BFA), Catalunya Banc, NCG Banco and Banco de Valencia S.A. (categorised as Group 1 institutions under the Memorandum of Understanding signed by the euro area members on 20 July 2012). The senior subordinated debt and the hybrid instruments of all four groups have been downgraded to C reflecting the very high expected losses, as the government plans to impose losses on holders of these instruments.

At the same time, Moody's has downgraded the senior debt and deposit ratings of Banco de Valencia to Caa1 (outlook developing) from B3 (review for downgrade), to reflect the higher risk for senior creditors arising from the fact that this entity will go through an orderly resolution process as expressed in the Royal Decree 24/2012.

The remaining debt ratings as well as the standalone credit assessments of Group 1 banks remain on review for downgrade, aligned with Moody's review for downgrade of Spain's Baa3 government bond rating. In concluding the review of Bankia, BFA, Catalunya Banc and NCG Banco, Moody's will take into account the conclusion of the review of Spain's sovereign rating as well as the impact of the restructuring framework for these banks.

Today's rating actions are unrelated to the ongoing review of Spain's sovereign rating by Moody's.

RATINGS RATIONALE

SUBORDINATED DEBT AND HYBRID RATINGS

Moody's downgrade of the subordinated debt and hybrid instruments of these four banking groups (which are currently controlled by the FROB) reflect the fact that losses will be imposed on subordinated and hybrid creditors of Group 1 banks. The restructuring framework contemplates that such "burden-sharing" will be applied to banks that are deemed to require public-sector capital.

Ratings at C are applied to debt instruments that are typically in default, with little prospect for recovery of principal or interest. The C rating also reflects an estimated recovery rate of less than 35%, which is commensurate with the large discount at which most of these instruments have been trading in the secondary market.

BANCO DE VALENCIA

The three-notch downgrade of Banco de Valencia's standalone credit assessment to ca follows the approval of Royal Decree 24/2012 on 31 August 2012, whereby those entities that are currently subject to a restructuring process governed by article 7 of Royal Decree 9/2009 will be subject to orderly resolution. Consistent with Moody's definitions, the lower standalone credit assessments reflect the rating agency's view that Banco de Valencia has highly speculative intrinsic, or standalone, financial strength and is expected to avoid default through the provision of extraordinary support, which the Spanish government has committed to provide .

The one-notch downgrade of the senior debt and deposit ratings of Banco de Valencia to Caa1 reflects (1) the further deterioration of its standalone credit profile, as discussed above; (2) uncertainty around the timing and process for orderly resolution; and (3) whether future support will be needed and the availability and degree of such potential support during the resolution process. In recent months, Moody's believes that it has become increasingly clear that the creditors of those Spanish banks unable to meet the stricter regulatory requirements -- absent extraordinary support -- are exposed to increased uncertainty and reduced predictability about the recovery of principal and interest for the bank's outstanding debt.

For the industry-wide Spanish bank restructuring framework, the above mentioned uncertainties are exacerbated by political considerations and the involvement of the Eurogroup (comprising the ECB, EBA, European Commission) and other supra-national entities. Their involvement bolsters the Spanish sovereign's otherwise limited ability to support banks, but the associated terms and conditionality add complexity and uncertainty for creditors. Whilst the Eurogroup has thus far shown a greater inclination to share the burden of recapitalisation only with subordinated bondholders, the risk has increased that senior bond holders of Spanish banks may similarly be subject to "burden-sharing" if future support is required.

Moody's believes that the above-described uncertainties for Banco de Valencia's senior creditors are appropriately reflected in senior debt and deposit ratings in the Caa range.

MOODY'S COMMENTS ON EXISTING REVIEW OF SPANISH BANKS

In concluding the review process initiated on 25 June 2012 of the debt ratings and standalone credit assessments of those banks who were not identified as having capital shortfalls in the evaluation performed by Oliver Wyman (Group 0 banks), Moody's will take into account i) how the conclusion of the review of the Spanish government's debt ratings may impact the standalone credit strength and debt ratings of these banks; and ii) any other developments that may affect the creditworthiness of these banks, such as the mergers that are ongoing in a few cases.

Moody's expects to address the standalone credit assessments along with the senior debt and deposit ratings of Group 1 banks after Spanish authorities submit restructuring or resolution plans for these entities to the European Commission. These plans will allow Moody's to better assess the credit profile of the banks post capital infusion, and in view of the potential transfer of toxic assets to the government sponsored bad bank. In addition, Moody's will take into account the conclusion of the review of Spain's sovereign rating.

The conclusion of the ratings review of the three rated banks falling into Groups 2 and 3 (Banco Popular Español rated Ba1/D/ba2/NP, review for downgrade; Ibercaja Banco and Liberbank both rated Ba2/D-/ba3/NP, review for downgrade), i.e. for whom a capital shortfall has been identified in last week's publication, will take into consideration the recapitalisation or restructuring plans that these institutions will need to present in October. The review conclusion will also incorporate the level of the sovereign rating and any impact this may have on these banks' standalone and supported credit profiles. If any of these three banks are considered unable to meet capital shortfalls from private means (Group 2) the rating actions would likely be taken shortly after their placement in this group is confirmed and restructuring plans are submitted. Moody's would expect subordinated debt and hybrid ratings of any Group 2 bank to reflect the very high likelihood that the Spanish government will impose losses on these instruments, consistent with the actions today on Group 1 banks.

For Group 3 firms, the rating reviews will be concluded later in 2012 or in 2013, after the details of the recapitalization plans are disclosed. Moody's will examine the prospects for successful implementation of such plans, the impact on the banks' credit profile if implemented as planned, the structure and amount of any external support, as well as the potential crystallization of losses for shareholders and junior creditors of the bank. Moody's will assess any "burden-sharing" exercises with regards to whether they constitute distressed exchanges, and thus default events, under Moody's definition.

In some instances, the ratings may remain on review where ongoing merger or restructuring procedures prevent sufficient visibility to conclude on the final ratings.

WHAT COULD MOVE THE RATINGS UP/DOWN

The execution of the restructuring or resolution plans will likely improve the affected banks' standalone credit strength. The initiatives included in these plans could lead to upgrades of standalone credit assessments, which could also affect debt and deposit ratings. Increased clarity about the banks' standalone strength post-restructuring and/or an increase in the extent, likelihood or predictability of support could also have positive rating implications.

Conversely, if any of the four banks enters liquidation with little prospect for recovery of principal and interest, the standalone credit assessments will likely fall to 'c' and senior debt and deposit ratings will decline to Caa or lower.

For Banco de Valencia specifically, the outlook on the senior debt and deposit ratings is developing, indicating that they could move in either direction during the resolution. Upwards pressure on these ratings could develop if Banco de Valencia is acquired by a stronger peer that assumes the then-outstanding obligations. However, Moody's says that further downwards pressure could result if a liquidation of Banco de Valencia was executed in a manner that reduced the prospects for the recovery of principal and interest on its outstanding debt.

RESEARCH REFERENCES

Research reports:

- Moody's Rating Symbols and Definitions, 31 Aug 2012

- Banking System Outlook: Spain, 17 Aug 2012

- Spanish Banks Restructuring Plan Is Credit Negative for Junior Bondholders, 16 Jul 2012

- Announcement: Moody's comments on timing for assessing the impact of Spain's downgrade on Spanish banks' ratings, 19 Jun 2012

- Key Drivers of Spanish Bank Rating Actions, 17 May 2012

- Spain's New Initiative, While Supportive, Leaves Banks Vulnerable to Rising Loan Delinquencies, 14 May 2012

Websites:

- Moody's Bank Ratings 2012

- European Credits Under Pressure

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: Bancaja Capital, S.A. Unipersonal

....Pref. Stock Non-cumulative Preferred Stock, Downgraded to C(hyb) from Ca(hyb)

..Issuer: Bancaja Emisiones, S.A. Unipersonal

....Junior Subordinated Regular Bond/Debenture, Downgraded to C(hyb) from Caa1(hyb)

..Issuer: Banco De Valencia S.A.

....Subordinate Regular Bond/Debenture, Downgraded to C from Caa2

....Senior Unsecured Deposit Rating, Downgraded to Caa1, Caa1 from B3, B3

..Issuer: Banco Financiero y de Ahorros

....Junior Subordinated Regular Bond/Debenture, Downgraded to C(hyb) from Ca(hyb)

....Multiple Seniority Medium-Term Note Program (Subordinate), Downgraded to (P)C from (P)Caa3

....Subordinate Regular Bond/Debenture, Downgraded to C from Caa3

..Issuer: Bankia

....Multiple Seniority Medium-Term Note Program (Junior Subordinate and Subordinate), Downgraded to (P)C from a range of (P)Caa1 to (P)B3

..Issuer: Caixa Catalunya Preferential Issuance Ltd.

....Pref. Stock Non-cumulative Preferred Stock, Downgraded to C(hyb) from Caa3(hyb)

..Issuer: Caixa Galicia Preferentes, S.A.

....Pref. Stock Non-cumulative Preferred Stock, Downgraded to C(hyb) from Caa3(hyb)

..Issuer: Caja Madrid Finance Preferred, S.A.

....Pref. Stock Non-cumulative Preferred Stock, Downgraded to C(hyb) from Ca(hyb)

..Issuer: Catalunya Banc SA

....Multiple Seniority Medium-Term Note Program (Subordinate), Downgraded to (P)C from (P)B3

....Subordinate Regular Bond/Debenture, Downgraded to C from B3

..Issuer: NCG Banco S.A.

....Junior Subordinated Regular Bond/Debenture, Downgraded to C(hyb) from Caa1(hyb)

....Subordinate Regular Bond/Debenture, Downgraded to C from B3

Issuer: BVA Preferentes, S.A.

....Pref. Stock Non-cumulative Preferred Stock, Downgraded to C(hyb) from Ca(hyb)

The principal methodology used in these ratings was Moody's Consolidated Global Bank Rating Methodology published in June 2012. 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 relevant 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 relevant 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 relevant 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.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Maria Cabanyes
Senior Vice President
Financial Institutions Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Johannes Wassenberg
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's takes actions on 4 Spanish banking groups due to restructuring framework
No Related Data.
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