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Rating Action:

Moody's takes rating actions on RBS hybrid and junior subordinated debt

22 Dec 2009

London, 22 December 2009 -- Moody's has today taken rating actions on certain hybrid and junior subordinated capital instruments of Royal Bank of Scotland Group ("RBSG"). The rating actions incorporate the impact of the European Commission ("EC") requirement for the Royal Bank of Scotland Group ("RBSG") to skip coupons for two years from a date starting not later than 30 April 2010 on those hybrid instruments where the terms allow for such a coupon skip. The deferral requirement was part of RBSG's State Aid Commitment Deed entered into by RBSG with HM Treasury on 26 November 2009 containing undertakings given by RBSG to HM Treasury for the purposes of obtaining EC State aid approval. RBSG received formal EC State aid approval on 14th December 2009.

However, one factor which Moody's considers to remain uncertain and which could affect the eventual outcome as to which securities will pay and which will not pay in 2010-2012 is the availability of distributable profits. Certain non-cumulative preference shares (which also act as a dividend pusher for certain UT2 and LT2 securities) are only able to pay subject to the availability of distributable profits. At June 2009 the holding company of RBSG had distributable profits of GBP5.5bn, but losses in H209 could erode these reserves. In the 2008 financial statements RBSG had sufficient distributable profits to pay coupons only because it entered into a transaction which resulted in the proceeds of the October 2008 GBP14.3bn capital raising moving from the Merger Reserve to Retained Earnings. We understand RBSG is entering into a similar transaction in 2009 on the back of the December 2009 capital raising. But as the accounting for the proceeds of its rights offering in such a way may not fit in with the notion of "burden sharing" which the EC seems to promote (as coupon payments on RBSG's hybrid instruments could indirectly stem from funds raised from shareholders rather than from profits generated by the bank's own activities), we believe that there is a risk as to whether the current Must-Pay securities will be accepted as such by the European Commission. Therefore, we will not finalise the rating of certain instruments until the availability of distributable profits is more certain.

The attached document sets out all RBSG securities with deferral features rated by Moody's. The securities that are expected to skip coupon payments ("May Pay" securities) based on language providing fully optional deferral will continue to be rated on an expected loss basis, which factors in the anticipated period of coupon non-payments and the loss severity. The securities that could potentially not skip coupons if RBSG has sufficient distributable profits ("potential Must Pay" securities) would be notched down from the Baseline Credit Assessment ("BCA"), in line with Moody's revised methodology for hybrids. If distributable profits turned out to be not sufficient, then Must Pay securities would be rated at the same level as May Pay securities.

To view the full list of ratings, please click here.

Non-cumulative preference shares "May Pay" --affirmed at B3, outlook changed to negative -- List A:

The B3-rated non-cumulative preference shares which will skip two years of coupons over the two- year period (May Pay) in line with Moody's previous expectations, are rated on an expected loss basis and are affirmed at B3, but the outlook has changed from stable to negative. The negative outlook highlights the fact that downward pressure on the BFSR (which already has a negative outlook) would lead to a lower rating.

See List A in the attached document for further details.

Non-cumulative preference shares "potential Must Pay" -- B3 on review for possible upgrade-- List B:

The B3-rated non-cumulative preference shares/ preferred securities which do not have optional coupon skip but have mandatory coupon skip tied to the breach of distributable profit triggers, have been placed on review for possible upgrade. The review will be concluded once it is clear whether RBSG has sufficient distributable profits in 2010. Those ratings would likely be upgraded to Ba2 (negative outlook) for securities issued by Nat West plc, and Ba3 (negative outlook) for securities issued by RBSG plc, if there are sufficient distributable profits, and rated B3 (negative outlook) if there were insufficient distributable profits. This would place the instruments at three notches below the Baa2 BCA of Nat West plc, with an additional notch for structural subordination at the holding company level. See List B in the attached document for further details.

Cumulative preferred securities "May Pay" -- affirmed at Ba3 (negative outlook) -- List C:

The cumulative preferred securities of RBSG plc which are may pay securities have been affirmed at Ba3 (negative outlook) on an expected loss basis. See List C in the attached document for further details.

Cumulative preferred security "potential Must Pay" -- Ba3 on review for possible upgrade -- List D:

The cumulative preferred security of RBSG plc which due to dividend pusher language could be a Must Pay security if dividends are paid on List B non-cumulative preference shares, was rated Ba3 (negative outlook) and has been placed on review for possible upgrade. It would likely be upgraded to Ba2 (negative outlook) if there are sufficient distributable profits to pay the List B securities, and Ba3 (negative outlook) if there were insufficient distributable profits. The instrument would be placed at two notches below the Baa2 BCA of RBS plc, with an additional notch for structural subordination at the holding company level.

See List D in the attached document for further details.

Junior subordinated debt "potential Must Pay" -- remain at Ba1 (RUR) / affirmed at Ba2 (negative outlook) -- List E:

The Must Pay junior subordinated debt of RBS plc and Nat West plc which remains rated Ba1 (under review for possible downgrade), but which due to dividend pusher language could be Must Pay securities if dividends are paid on List B non-cumulative preference shares, would likely be confirmed at Ba1 (negative outlook) if there are sufficient distributable profits to pay the List B securities, but downgraded to Ba2 (negative outlook) if there were insufficient distributable profits. The instruments would be rated two notches below the adjusted BCA of RBS and Nat West instruments.

The Must Pay junior subordinated debt of RBSG which is rated Ba2 (negative outlook) remains at Ba2 (negative outlook), as the rating would remain at Ba2 (negative outlook) on both an expected loss approach (if it is a may pay security) or notching approach (if it is a must pay security).

Correction of RBS plc UT2 junior subordinated security (ISIN

XS0195231526) from Baa3 to Ba1:

Moody's has also corrected the rating of the RBS plc UT2 junior subordinated security (ISIN XS0195231526) from Baa3 to Ba1 (under review for possible downgrade). The security was identified as a junior subordinated instrument, however on 10 June 2009 instead of being downgraded with other junior subordinated securities from Baa3 to Ba1, the rating of this instrument was mistakenly affirmed at Baa3. The rating has now been corrected to Ba1.

See List E in the attached document for further details.

Downgrade of LT2 dated subordinated instruments with deferral features -- Lists F and G

RBSG has a number of LT2 dated subordinated instruments with deferral features. Moody's views these instruments which have a cumulative coupon skip mechanism as in line with an Upper Tier 2 securities that have similar features and has rated them at the same level.

The two RBS plc LT2 dated subordinated instruments that are May Pay securities, which have language that allows them to defer payment of interest if the FSA requires or requests them to do so (XS0123062886 and XS0201065496) have been downgraded from Baa3 to Ba2 (negative outlook), reflecting the expected loss for these instruments, and in line with where we would rate May Pay Upper Tier 2 securities issued by RBS plc. See List F in the attached document for further details.

The six RBSG LT2 dated subordinated instruments that are potential Must Pay securities due to dividend pusher language, have been downgraded from Ba1 to Ba2 (negative outlook), and the rating would remain at Ba2 (negative outlook) on both an expected loss approach (if they are may pay securities) or notching approach (if they are must pay securities). See List G in the attached document for further details.

PREVIOUS RATING ACTIONS AND METHODOLOGIES USED

The last rating action on RBSG was on 3 November 2009 when the Aa3 senior debt rating of RBS plc and A1 senior debt rating of RBSG were affirmed. The last rating action taken on the hybrid securities of RBSG was on 9 September 2009, when various instruments were placed on review for possible downgrade to reflect the increased probability of the EC requiring RBSG to skip coupons on those instruments.

The principal methodologies used in rating the entities are "Bank Financial Strength Ratings: Global Methodology" and "Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt", which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

London
Elisabeth Rudman
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
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

No Related Data.
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