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Rating Action:

Moody's withdraws deposit ratings and BFSR of Chelsea Building Society

22 Apr 2010

Chelsea's long-term debt upgraded to Baa1 upon assumption by Yorkshire Building Society

London, 22 April 2010 -- Moody's Investors Service has withdrawn the Baa3/Prime-3 bank deposit ratings as well as the E+ bank financial strength ratings of Chelsea Building Society ("Chelsea"). This follows the completion of the merger earlier in April of Chelsea with Yorkshire Building Society ("Yorkshire", rated Baa1/Prime-2/D+ with a negative outlook). This merger has resulted in Chelsea being folded into Yorkshire and ceasing to exist as a separate legal entity. Furthermore, the outstanding senior debt of Chelsea has been assumed by the Yorkshire and as result is upgraded to Baa1 with a negative outlook to reflect this transfer. In the same rating action, Moody's has downgraded Chelsea's subordinated debt ratings of Caa3 to Ca and will subsequently withdraw these ratings to reflect their conversion into Yorkshire's subordinated convertible notes which took place at the time of the merger completion.

Marjan Riggi, a Senior Credit Officer/Vice President at Moody's said, that the upgrade of the senior unsecured debt ratings of Chelsea reflect the transfer of the assets and liabilities of the Chelsea to the Yorkshire by way of a transfer of engagements pursuant to Building Society Act 1986. As such, the ratings of the outstanding senior debt obligations of Chelsea are now aligned with that of the Yorkshire. While the Chelsea brand will continue to exist for some time, the Chelsea building society no longer exists as separate legal entity, therefore, Moody's has withdrawn its deposit, financial strength and short term ratings.

Moody's said that the terms of the merger included the exchange of the full GBP200 million outstanding principal amount of Chelsea's lower tier 2 subordinated debt for GBP100 million of subordinated lower tier 2 convertible notes issued by the Yorkshire. The convertible notes which will rank pari passu with other Yorkshire subordinated debt, will convert into profit participating deferred shares ("PPDS") if Yorkshire's core tier 1 capital falls below 5%.

Commenting on the downgrade and subsequent withdrawal of the ratings of Chelsea's subordinated securities, Moody's noted that the transaction will be considered a "distressed exchange" given the economic loss of the principal amount at a 50% discount to the securities' par value, representing an immediate loss for these investors. Based on Moody's recovery analysis these instruments are now rated Ca. Moody's has withdrawn the rating of these instruments as a result of their exchange into contingent convertible notes with regulatory capital triggers, securities which we no longer rate.

The negative outlook on the ratings is aligned with that of Yorkshire's reflecting Moody's concern on the continuous negative pressure on the asset quality of the society, as well as integration risks associated with the merger of Chelsea, a much a weaker society, into Yorkshire's operations -- both of which are likely to result in increased pressure on underlying profitability.

The principal methodologies used in rating these issuers 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 ratings Methodologies Sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodology Sub-directory on Moody's website.

The last rating action on Chelsea was on December 2, 2009 when all its ratings of Baa3/P-3 were put on review for upgrade.

Chelsea building society, headquartered in Cheltenham, U.K., had total assets of GBP13 billion as at end-June 2009. Yorkshire building society is headquartered in Bradford, U.K, and had total assets of GBP22 billion as at end-June 2009. With total assets of GBP35 billion, the combined entity is now the second largest Building Society in the United Kingdom.

London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Marjan Riggi
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's withdraws deposit ratings and BFSR of Chelsea Building Society
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