DEPFA's baseline credit assessment upgraded to ba3
Frankfurt am Main, October 19, 2016 -- Moody's Investors Service has today upgraded to Baa2 from Ba1 the long-term
senior unsecured debt ratings of DEPFA Bank plc (DEPFA), and to
Baa2/Prime-2 from Ba1/Non-Prime the deposit ratings of DEPFA
and its fully-owned subsidiary DEPFA ACS BANK (DEPFA ACS).
Concurrently, Moody's upgraded the Counterparty Risk Assessments
of the two banks to Baa2(cr)/P-2(cr) from Baa3(cr)/P-3(cr),
and their baseline credit assessments (BCAs) to ba3 from b2. The
outlook on DEPFA's long-term debt and deposit ratings and
on DEPFA ACS's long-term deposit ratings is stable.
Today's rating actions reflect Moody's assessment that DEPFA's and DEPFA
ACS's fundamental credit profiles benefit from improving capitalisation
and a stable funding profile owing to their progress in unwinding DEPFA
group's assets and preserving capital in the process. The upgrade
also takes account of the additional positive impact on the group's
credit profile that the rating agency expects from the EUR5.3 billion
asset sale which DEPFA group announced on 14 October 2016, and which
Moody's understands will be concluded within the next few weeks.
Given DEPFA's focus on a capital preserving run-down of its
balance sheet, Moody's expects that the transaction will enhance
the group's capitalisation and reduce market risk linked to the
portfolios that will be sold.
In addition, Moody's affirmed the Ca(hyb) ratings of the backed
hybrid securities issued by DEPFA Funding II LP and DEPFA Funding III
LP, and upgraded the backed hybrid instrument issued by DEPFA Funding
IV LP to Caa2(hyb) from Ca(hyb), based on its assumptions for the
future impairment of these perpetual instruments from skipped coupons.
A full list of affected ratings can be found at the end of this press
release.
RATINGS RATIONALE
THE BCA UPGRADES DRIVE THE UPGRADE OF THE GROUP'S LONG TERM RATINGS
The upgrade of DEPFA's debt and deposit ratings, as well as DEPFA
ACS' deposit ratings, reflects the upgrade of their BCAs by two
notches to ba3. In particular, this is due to a combination
of DEPFA's:
(1) Good progress in unwinding the group's balance sheet and risk-weighted
assets during 2015 and 2016 to date, combined with the prospect
of a material acceleration on the run-down through asset sales
later in Q4 2016, which Moody's expects will be capital-accretive;
(2) Sustained efforts to contain operating losses, which will help
the group to continue the unwinding of its balance sheet in a capital-preserving
fashion; and
(3) The group's improved funding profile, which benefits from
committed, unsecured funding support from its German owner,
the government agency FMS Wertmanagement (FMS-WM, long-term
issuer and debt ratings Aaa stable).
HIGHER GOVERNMENT SUPPORT OFFSETS EXCLUSION OF MOODY'S LOSS GIVEN
FAILURE ANALYSIS
Moody's said that it has factored into the group's debt and deposit
ratings higher government support of four notches (instead of two notches
previously), and excluded from the group's rating architecture
the result of its Advanced Loss Given Failure (LGF) analysis. The
LGF analysis, which takes into account the severity of loss faced
by the different liability classes in resolution, had previously
resulted in two notches of rating uplift for DEPFA's and DEPFA ACS's
long-term ratings. The two changes had a neutral effect
on the group's ratings.
DEPFA group's debt and deposit ratings now take into account:
(1) the ba3 BCA, which reflects the group's improving financial
profile, but also the banks' mono-line, highly
concentrated asset profile that weighs on the ratings; and (2) four
notches of rating uplift from Moody's government support assumptions.
The higher government support factored into DEPFA's ratings takes
into account Moody's assessment of FMS-WM's ongoing,
strongly supportive assistance in the group's unwinding, which
aims at avoiding distress and subsequent resolution and ensuring a smooth
run-down of DEPFA's assets and liabilities. This assistance
is illustrated by FMS-WM's direct funding support,
as well as its systematic purchase of DEPFA group's liabilities
in order to facilitate an accelerated run-down.
Against the background of the substantial financial assistance from FMS-WM
to date, Moody's takes the view that resolution measures,
including the use of bail-in tools are -- although not ruled
out -- unlikely to be applied to DEPFA. As a result,
Moody's no longer applies its Advanced LGF analysis to DEPFA.
STABLE OUTLOOK REFLECTS MOODY'S EXPECTATION OF DEPFA'S CONTINUED
SMOOTH UNWINDING
The stable outlook on the Baa2 debt and deposit ratings reflects Moody's
expectation that over the next five years, DEPFA group's continued
efforts of preserving its financial resources will ensure satisfactory
or even very solid regulatory capital ratios and thereby an adequate capital
cushion to shield senior creditors against unexpected losses.
Moody's said that it does not rule out further fundamental improvements
during the unwinding, with potential positive implications on the
banks' ba3 BCAs; however, rating upside will remain constrained
by the long-term uncertainties linked to the group's structural
losses that will gradually reduce its capital resources over a potentially
very long time horizon.
AFFIRMATION OF TWO HYBRID RATINGS AND UPGRADE OF ONE HYBRID INSTRUMENT
Moody's affirmed the backed Ca(hyb) ratings of the Tier 1 preferred
securities of DEPFA Funding II and III LP, based on its expectation
that DEPFA will never pay any coupons on these non-performing,
perpetual instruments. The ratings reflect Moody's approach
of discounting expected coupon losses, in DEPFA's case for
a term of 15 years, to calculate the respective expected total impairment.
Moody's upgraded the backed rating of DEPFA Funding IV LP to Caa2(hyb)
from Ca(hyb) based on the same assumptions it made for DEPFA Funding II
and III LP, but taking into account the lower contractual coupon,
and therefore a lower present value of the impairment from coupon losses
of this instrument.
WHAT COULD CHANGE THE RATINGS UP/DOWN
The banks' long-term ratings could be up- (or down-)
graded due to revisions of the banks' BCAs and/or Moody's
assumptions for government support. A single-notch upgrade
(or downgrade) of the BCAs will not necessarily lead to higher (or lower)
long-term ratings, as Moody's may consider an offsetting
reduction (or increase) of government support.
The banks' BCAs could be upgraded due to: (i) a sustainable reduction
of operating losses; (ii) higher capital levels; and/or (iii)
measures that will materially shorten the expected duration of the banks'
unwinding.
The banks' BCAs could be downgraded due to: (i) a material deterioration
in its asset quality; and/or (ii) a failure to contain operating
losses, especially if these losses reduce capital levels faster
than currently anticipated.
LIST OF AFFECTED RATINGS
DEPFA Bank plc:
The following ratings, rating inputs and rating assessments assigned
to DEPFA Bank plc were upgraded:
- long- and short-term bank deposit ratings (local
and foreign currency): upgrade to Baa2 stable/Prime-2,
from Ba1 on review for upgrade/Non-Prime
- long-term senior unsecured debt ratings (local and foreign
currency): upgrade to Baa2 stable, from Ba1 on review for
upgrade
- the BCA and Adjusted BCA: upgrade to ba3 from b2
- long- and short-term Counterparty Risk Assessment:
upgrade to Baa2(cr)/Prime-2(cr), from Baa3(cr)/Prime-3(cr)
DEPFA ACS BANK:
The following ratings, rating inputs and rating assessments assigned
to DEPFA ACS BANK were upgraded:
- long- and short-term bank deposit ratings (local
and foreign currency): upgrade to Baa2 stable/Prime-2,
from Ba1 on review for upgrade/Non-Prime
- the BCA and Adjusted BCA: upgrade to ba3 from b2
- long- and short-term Counterparty Risk Assessment:
upgrade to Baa2(cr)/Prime-2(cr), from Baa3(cr)/Prime-3(cr)
DEPFA Bank Plc New York Branch:
The following ratings and rating assessments assigned to DEPFA Bank Plc
New York Branch were upgraded:
- long- and short-term bank deposit ratings (local
and foreign currency): upgrade to Baa2 stable/Prime-2,
from Ba1 on review for upgrade/Non-Prime
- long-term deposit note/CD program (local currency):
upgrade to Baa2 stable, from Ba1 on review for upgrade
- long- and short-term Counterparty Risk Assessment:
upgrade to Baa2(cr)/Prime-2(cr), from Baa3(cr)/Prime-3(cr)
DEPFA Funding II, III and IV LP:
The following ratings were affirmed:
- The backed Ca(hyb) ratings of the hybrid instruments issued by
DEPFA Funding II and III LP
The following ratings were upgraded:
- The backed hybrid instrument rating of DEPFA Funding IV LP:
upgrade to Caa2(hyb), from Ca(hyb)
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
January 2016. Please see the Rating Methodologies 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 credit rating action on the support provider and in relation to
each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
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.
Katharina Barten
Senior Vice President
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
