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Rating Action:

Moody's takes actions on Dexia Group further to proposed restructuring plan

 The document has been translated in other languages

14 Oct 2011

Dexia Credit Local's BFSR and subordinated debt downgraded to E+ and Ba3 respectively

Paris, October 14, 2011 -- Moody's Investors Service has today taken rating actions on the standalone bank financial strength ratings (BFSRs) of Dexia's three key operating subsidiaries following the restructuring plan announced by the Dexia Group on 10 October 2011. The proposed restructuring could eventually result in the dismantling of the group, involving a change in ownership for some of Dexia's key operating subsidiaries that Moody's rates, hence the need for the rating agency to reassess the individual entities' creditworthiness.

Given the current level of visibility surrounding the actual restructuring process as well as related challenges and execution risks, Moody's has not adjusted any senior long-term debt ratings, which remain on review. However, the rating agency believes that the risks have materially increased on certain subordinated and hybrid securities issued by Dexia Credit Local (DCL), which have therefore been downgraded. The ratings for the subordinated and hybrid securities issued by Dexia Bank Belgium (DBB) and Dexia Banque Internationale à Luxemburg (DBIL) remain on review, reflecting the planned disposal of both entities. In view of the more advanced sale process for DBB, there may be some near-term upside for current ratings on certain long-term senior and subordinated ratings of the bank, which have therefore been placed on review with direction uncertain, having previously been on review for downgrade.

The short-term debt ratings for all entities were unchanged and remain on review for downgrade.

Today's rating actions reflect Moody's view that the high inter-company support, which had previously prevailed within the centrally managed Dexia Group, will reduce due to the restructuring. Consequently, the group's three main operating companies can no longer have the same level of BFSR and senior long- and short-term ratings, but instead merit a more individualised approach.

OVERVIEW OF RATING ACTIONS

The rating actions are as follows:

- Dexia Credit Local (DCL): Moody's has downgraded DCL's BFSR by two notches to E+, mapping to B2 on Moody's long-term scale, from D/Ba2 previously. The BFSR remains on review for further possible downgrade, reflecting continued concerns related to DCL's liquidity and the negative impact that the anticipated dissolution of the group structure may have on DCL's operating profile. Additionally, the rating agency has downgraded DCL's dated subordinated debt to Ba3 from Baa1. Moody's is maintaining its review for downgrade on the BFSR, the A3 long-term debt and deposit ratings, the Prime-1 short-term debt ratings, and the subordinated debt. Moody's has also downgraded the entity's preferred stock security rating to Ca (hyb) with a negative outlook, from Caa1 (hyb), previously under review for downgrade.

- Dexia Bank Belgium (DBB): In order to reflect the possibility that the break-up of the group structure may result in a de-risking of the entity under the anticipated ownership of Belgium (Aa1, review for downgrade), Moody's has changed the status of some of DBB's ratings that had been on review for downgrade to review with direction uncertain to reflect this upside. The affected ratings are DBB's D BFSR (which maps to Ba2 on Moody's long-term scale), its A3 long-term debt and deposit ratings, its Baa1 subordinated debt rating and its Ba1 (hyb) junior subordinated debt ratings. Separately, Moody's is maintaining the review for downgrade on the Prime-1 short-term debt rating and on DBB's B2 (hyb) junior subordinated debt rating.

- Dexia Banque Internationale à Luxembourg (DBIL): In view of the announced intention to sell DBIL, Moody's has placed on review with direction uncertain the D BFSR, mapping to Ba2 on Moody's long-term scale, as well as the Ba1 (hyb) junior subordinated debt rating and B3 (hyb) preferred stock rating. These ratings had previously been on review for downgrade. Given the limited visibility regarding DBIL's future ownership, the rating agency has also announced that it is maintaining the review for downgrade of DBIL's A3 long-term debt and deposit ratings, Baa1 subordinated debt rating and Prime-1 short-term debt rating.

- Dexia Funding Luxembourg (DFL): Moody's has downgraded DFL's 4.892% EUR500 million non-cumulative preferred stock to Ca (hyb) with a negative outlook from B3 (hyb) under review for downgrade previously.

RATINGS RATIONALE

- DEXIA CREDIT LOCAL (DCL)

The downgrade of DCL's BFSR was driven by Moody's view that DCL's stand-alone liquidity and capital characteristics are more appropriately reflected by a BFSR of E+, mapping to a Baseline Credit Assessment (BCA) of B2.

Moody's believes that DCL has the greatest liquidity gap issues within the Dexia Group given its structural reliance on wholesale funding and the fact that it continues to carry the largest part of the legacy portfolio on a short-term funded basis. As such, on a standalone basis, DCL would be hardest hit by the deterioration in the overall group's liquidity position, as discussed by Moody's in its press release dated 3 October 2011. The rating agency believes that, in the absence of external support, DCL would very likely have defaulted.

Moreover, although Moody's believes that the overall quality of DCL's assets remains reasonably good on a held-to-maturity basis, DCL's solvency is under further pressure given the high level of unrealized losses due to its holding of the largest part of the group's legacy portfolio, as well as the expected impairments on its exposure to Greek government bonds.

The rating agency also believes that DCL's franchise in the French public finance sector, which is its core business, is likely to undergo a rapid erosion once a planned joint venture project between La Caisse des Dépôts et Consignations (CDC) and La Banque Postale (LBP) for the origination of loans to the French local authorities is launched. In addition, Moody's believes that DCL's reputation among municipalities has suffered materially in recent weeks due to (1) the lack of financing capacity, (2) the restructuring of the group, and (3) the negative publicity surrounding certain highly structured loans made in the past which are now disadvantageous to the municipalities. Moody's is therefore maintaining DCL's E+ BFSR on review for further downgrade to assess the risk that the expected erosion of its franchise may effectively result in the entity diminishing over time.

Moody's is also maintaining DCL's A3 senior long-term debt rating on review for downgrade reflecting the review for downgrade on the BFSR and the potential for a diminution of systemic support due to the expected decline in the entity's weight in the French public finance sector, currently offset by the positive impact of the announced funding guarantee mechanism, as agreed by the Belgian, French and Luxembourg states for Dexia SA and DCL. During its review, the rating agency will consider the exact terms of the guarantee scheme once they have been clarified, and assess whether this mechanism could be a sufficient measure to support DCL's liquidity in the foreseeable future. If Moody's concludes that the scheme is unlikely to afford appropriate protection to existing creditors, a multi-notch downgrade of DCL's senior long-term debt rating cannot be excluded.

Moody's is additionally maintaining DCL's Prime-1 short-term debt rating on review for downgrade. On the one hand, the rating agency notes that the presence of high systemic support during the restructuring process of Dexia Group means that the risk of a default of DCL in the short term is very limited. On the other hand, a downgrade of the short-term debt rating could be triggered by a downgrade of DCL's senior long-term debt rating, hence the continued review of the short-term rating.

The decision to downgrade DCL's subordinated debt rating to Ba3 and maintain it on review for further downgrade was motivated by Moody's view that, while the central case is for a managed wind-down of DCL with support which would benefit both senior and subordinated creditors, the possibility of a split, change in law or other actions which could prejudice the interests of subordinated creditors is not entirely negligible. Given this risk, Moody's believes that an investment-grade rating is not appropriate for this instrument. Consequently, DCL's subordinated debt rating has been positioned six notches below the entity's senior long-term debt rating. A further downgrade of this rating could be triggered by a downgrade of DCL's intrinsic rating, or by Moody's perception of an increased risk of an action that could prejudice the subordinated creditors.

Lastly, DCL's 4.3% EUR700 million preferred stock rating was downgraded to Ca (hyb) with a negative outlook from Caa1 (hyb) on review for downgrade previously. This security continues to be rated on a expected-loss basis. Due to the current restructuring of the group, DCL's relatively low capitalisation and its reduced capacity to generate profits in the future, the rating agency believes that the risk of a continued ban by the EU commission on dividend payment has increased, which could result in further missed preferred coupons.

- DEXIA BANK BELGIUM (DBB)

Moody's has changed the review of DBB's BFSR of D, which maps to a BCA of Ba2, from review for downgrade to review with direction uncertain. This was driven by the rating agency's view that the de-linking of DBB from other Dexia Group entities as a result of its proposed acquisition by the Belgian state provides potential upside to its intrinsic financial strength. Moody's recognises DBB's sound fundamentals on a stand-alone basis with a solid franchise in both the Belgian public sector finance and retail banking businesses, a good deposit base and reasonable capitalisation. The rating agency believes that a separation of DBB from Dexia Group could help to improve its financial structure and creditworthiness, which are currently constrained by the need to finance the other group entities and potentially diminished client confidence in the Dexia name.

However, because Moody's believes that DBB's nationalisation is still subject to execution risk, the rating agency is maintaining the review for direction uncertain on the BFSR while it lacks a clearer view of the potential hurdles that could face the transaction. The review will focus in particular on the amount of intercompany balances with the rest of Dexia Group, which the rating agency assumes to be currently substantial given DBB's role as the treasury centre of the group, and on how these balances are intended to be settled in the reorganization. Moody's understands that around EUR20 billion of legacy assets will remain on DBB's balance sheet. The rating agency will review whether these assets could potentially affect DBB's creditworthiness.

The change of the review on DBB's A3 senior long-term debt rating to direction uncertain from the previous review for downgrade was driven by the change of the review on the BFSR. The Belgian government's offer to purchase DBB reflects its strong willingness to support the bank and argues for maintaining relatively high systemic support.

Moody's is maintaining DBB's Prime-1 short-term debt rating on review for downgrade due to the agency's perception that systemic support will remain high during the restructuring process of Dexia Group. The review for downgrade primarily reflects the risks related to a potential failure of the sale of DBB to the Belgian State.

The change of the review on DBB's Baa1 subordinated debt rating to direction uncertain from the previous review for downgrade was driven by the change of the review on the senior long-term debt rating.

Moody's is also maintaining the review for downgrade on the B2 (hyb) rating of the 6.25% non-cumulative junior subordinated debt issued by DBB. This security continues to be rated on an expected-loss basis. The rating agency believes that, in the context of a nationalisation of the bank, there is a high risk of an extension of the ban on DBB from paying dividends that was imposed by the EU Commission until the end of 2011. This risk offsets the upside related to the potential upgrade of DBB's BFSR.

The change of the review on the Ba1 (hyb) rating of the cumulative junior subordinated issues of Dexia Overseas Limited to direction uncertain from the previous review for downgrade is driven by the change in the review of DBB's BCA. Moody's anchors the rating of these securities from the Adjusted BCA which is equivalent to the Ba2 standalone credit strength in the absence of parental or cooperative support and adds one notch because the trigger for mandatory coupon suspension is insolvency, which means that these hybrids will likely not absorb losses until the bank is close to liquidation rather than as a "going" concern.

- DEXIA BANQUE INTERNATIONALE A LUXEMBOURG (DBIL)

Moody's has changed the review on DBIL's BFSR of D, mapping to a BCA of Ba2, to direction uncertain from the previous review for downgrade. This was driven by the rating agency's view that the potential exit of DBIL from Dexia Group (as supported by the announcement of advanced discussions between Dexia and a group of international investors including the Luxembourg state) provides potential upside to its intrinsic rating. In Moody's opinion, DBIL has good fundamentals on a stand-alone basis, with an established local retail franchise, a sound financial structure and a good capitalisation. A separation from Dexia Group is expected to relieve it from the pressure exerted by the funding needs of the group and allow it to recover client confidence.

Moody's notes that a binding offer by a potential group of buyers is expected to be submitted at the end of a two-week exclusivity period beginning on 10 October, which leaves some uncertainty in terms of the realisation of the transaction. In addition, it is Moody's understanding that DBIL will be sold without its participations in RBC Dexia and Dexia Asset Management. The rating agency will need to re-assess the level of intrinsic strength of DBIL without these stakes.

Moody's is maintaining DBIL's A3 senior long-term debt rating on review for downgrade. Despite placing DBIL's BFSR on review for direction uncertain, the rating agency currently sees little upside potential on the senior long-term debt rating. Although Moody's recognises the strong involvement of the Luxembourg government in the restructuring of Dexia, the level of systemic support that will be incorporated into DBIL's senior long-term debt rating will depend on its future ownership structure.

Moody's is also maintaining DBIL's Prime-1 short-term debt rating on review for downgrade because of its perception of high systemic support during the restructuring process of Dexia Group. The review for downgrade primarily reflects the risks related to a potential failure of the contemplated sale of DBIL.

Additionally, Moody's is maintaining DBIL's Baa1 subordinated debt rating on review for downgrade.

The change of the review on the B3 (hyb) rating of the 6.821% non-cumulative preferred stock issued by DBIL to direction uncertain from the previous review for downgrade was driven by the change in the review of the BCA. Since Moody's expects coupon payments on this hybrid to continue, the rating is positioned on the basis of normal notching. Due to its net loss trigger feature, which results in the suspension of coupons on a non-cumulative basis upon a trigger breach, the rating is positioned four notches below the Adjusted BCA.

Similarly, the change of the review on the Ba1 (hyb) rating of the cumulative junior subordinated issues of DBIL to direction uncertain from the previous review for downgrade was also driven by the change in the review of DBIL's BCA. Moody's anchors the rating of these securities from the Adjusted BCA and adds one notch because the trigger for mandatory coupon suspension is effectively insolvency, which means that these hybrids will likely not absorb losses until the bank is close to liquidation, rather than as a "going" concern.

- DEXIA FUNDING LUXEMBOURG (DFL)

Moody's has downgraded DFL's 4.892% EUR500 million non-cumulative preferred stock to Ca (hyb) with a negative outlook from B3 (hyb) on review for downgrade previously. Even though DFL paid a coupon on this security in 2010 and is expected to pay one in 2011 due to the capital increase by incorporation of reserves at Dexia SA (unrated) in both years, the rating agency considers the risk of a ban by the EU commission on future dividend payment to have become higher. This in turn increases the probability of suspension of the preferred coupon. The rating of this security is aligned with that of DCL's 4.3% preferred stock.

The methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007, and Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt published in November 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

List of affected ratings:

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_136678

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 rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating 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 entity or its related third parties within the three 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.

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.

Yasuko Nakamura
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Carola Schuler
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Moody's takes actions on Dexia Group further to proposed restructuring plan
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