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Rating Action:

Moody's will assign backed-Aaa ratings to debt securities covered by the Australian Government's guarantee

01 Dec 2008
Moody's will assign backed-Aaa ratings to debt securities covered by the Australian Government's guarantee

Sydney, December 01, 2008 -- Moody's Investors Service announced that it will assign backed-Aaa and backed Prime-1 ratings to eligible debt securities under the Australian Government's Guarantee Scheme for Large Deposits and Wholesale Funding, which are issued within the guarantee period.

The backed-Aaa and backed Prime-1 ratings reflect the irrevocable guarantee from the Aaa-rated Australian Government for Eligible Securities, in accordance with the Government's publicly stated aims of (i) maintaining public confidence in Eligible Institutions and foreign Authorised Deposit-taking Institutions that operate in Australia, and (ii) to maintain the stability of Australian wholesale debt markets.

The outlook for the backed-Aaa and backed Prime-1 ratings is stable, in line with that of the Australian Government.

Moody's will assign backed-Aaa and backed Prime-1 ratings, with a stable outlook, only to eligible debt securities of institutions which do not already carry such ratings for their non-guaranteed debt obligations. Backed ratings will be assigned to specific securities once the applicable Eligibility Certificate has been posted to www.guaranteescheme.gov.au.

To reflect the underlying credit profile of guaranteed institutions -- and the exposure of creditors once the guarantee is withdrawn -- Moody's will continue to publish non-backed ratings for all rated Australian financial institutions.

The new Guarantee Scheme replaced an Interim Government Guarantee on 28 November 2008.

Under the new Guarantee Scheme, the Australian Government undertakes to pay, after the expiry of the applicable grace period, any sums due under the terms of an Eligible Security that remain unpaid despite the Beneficiary having made a claim on the Eligible Institution, and upon receipt of documentary evidence. An Appropriation Bill has been passed to provide the Government with unlimited borrowing power to finance claims payments if necessary, and to ensure that timely payment of claims can be made.

Moody's regards the new Guarantee Scheme as providing positive support to the Bank Financial Strength Ratings of Eligible Institutions, as well as to the ratings of their non-guaranteed debt and non-guaranteed deposit obligations. The new Guarantee Scheme should reinforce market confidence in the liquidity of Eligible Institutions -- at least during the guarantee period.

In addition, the implementation of the new Guarantee Scheme does not threaten the Aaa rating of the Australian Government. The likelihood that a situation could unfold where a large-scale activation of the Guarantee would materially impair the Australian Government's balance sheet is sufficiently remote as not to weigh on its Aaa rating. Furthermore, Australia's low debt load provides the Government with significant financial flexibility to fund guarantee payments, as discussed in Moody's Special Comment "Moody's Australian Government Ratings Unaffected by Recent Measures to Support Banks", published 15 October 2008.

Blanket backed deposit ratings will not be assigned under the new Guarantee Scheme. Moody's deposit ratings are assigned at an institution level and address non-guaranteed, uninsured deposit obligations. Under the new Guarantee Scheme, not all deposits are automatically covered: deposits over AUD1 million are only guaranteed on a customer opt-in basis. Therefore, because some deposits will not be guaranteed, Moody's deposit ratings will remain at the non-guaranteed rating level.

In contrast, the Australian Government's Interim Guarantee covered all deposits. Following the introduction of the Interim Guarantee, Moody's had on 14 October 2008 assigned backed Prime-1 ratings, with a stable outlook, to the deposits of three institutions not already so-rated. They were Heritage Building Society, Newcastle Permanent Building Society and Investec Bank Australia Limited. (This was the most recent rating action affecting the Australian bank and building society sectors.)

Now that the Interim Guarantee has been replaced by the new Guarantee Scheme, and not all deposits are now necessarily guaranteed, these institution-level backed Prime-1 ratings will be withdrawn.

Moody's notes however that under the new Guarantee Scheme, Eligible Institutions may, on a case by case basis, offer specific deposit products which are fully Government-guaranteed and which do not offer a customer-by-customer opt-in/out feature. Moody's would consider such products to be government risk for the duration of the guarantee period, and will consider whether to assign product-specific backed-ratings if feasible.

There is no change to Moody's other ratings for the three institutions:

Heritage Building Society continues to carry a Bank Financial Strength Rating (BFSR) of C and non-backed debt and deposit ratings of A3/P-2 with a stable outlook

Newcastle Permanent Building Society continues to carry a BFSR of C+ and non-backed debt and deposit ratings of A2/P-1 with a negative outlook

Investec Bank (Australia) Limited's continues to carry a BFSR of C- and non-backed debt and deposit ratings of Baa1/P-2 with a stable outlook

The principal methodologies used in rating the Australian banks and building societies affected by the Australian Government's Guarantee Scheme for Large Deposits and Wholesale Funding were "Bank Financial Strength Ratings: Global Methodology", February 2007, and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", March 2007, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating these institutions can also be found in the Credit Policy & Methodologies directory.

Details of the Australian Government's Australian Government's Guarantee Scheme for Large Deposits and Wholesale Funding are available at www.guaranteescheme.gov.au.

Sydney
Patrick Winsbury
Senior Vice President
Financial Institutions Group
Moody's Investors Service Pty Ltd
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Sydney
Marina Ip
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Pty Ltd
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

No Related Data.
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