Doubt over systemic support for subordinated bank debt

Concern the UK government may not provide systemic support to the holders of subordinated and hybrid debt issued by Royal Bank of Scotland and HBOS Plc and their holding companies and other subsidiaries has led Moody's Investor Service to downgrade its ratings on such instruments. Specifically, the subordinated debt rating assigned to Royal Bank of Scotland has been lowered to 'Baa3' from 'A1' and hybrid debt to 'Ba1' from 'A2'. For the HBOS Plc the rating assigned to subordinated debt has been lowered to 'Baa1' from 'A2' and hybrid debt to 'Baa2' from 'A3'.

The ratings have been moved to more closely align with the banks' stand alone bank financial strength ratings. Moody's notes that the 2009 Banking Act explicitly provides a broad remit to allow the restructuring of financial institutions with losses to subordinated and hybrid debt holders, and this has increasingly been the practice in the recent restructuring of a number of financial institutions in the United Kingdom.

Royal Bank of Scotland has issued $1.9 billion of subordinated debt in the domestic market and HBOS Plc $600 million.  

Moody's has concluded the review for possible downgrade for the ratings assigned to BMW AG, initiated in February. BMW's long- and short-term credit ratings were lowered to 'A3/P2' from 'A2/P1'. The outlook is negative.

Standard & Poor's has resolved its CreditWatch with negative implications on Alumina Ltd., initiated in early February, and lowered its long-term credit rating to 'BBB-' from 'BBB+'. The outlook is negative.

S&P has concluded that the credit quality of around 30 per cent of the Australian real estate investment trusts (AREITS) that it rates has deteriorated. S&P has just completed a review of the sector.

As a result it lowered the long-term credit ratings assigned to Goodman Group (BBB/Negative/--) and Mirvac (BBB-/Stable/A-3) by one notch and revised the outlook on GPT Group (BBB/Negative/A-3). Ongoing refinancing pressures and sticky debt levels have contributed to S&P's more negative view of the AREIT sector, as has the sector's exposure to volatile development earnings, modest earnings coverage, high debt levels, and concerns over liquidity to meet forthcoming commitments and access to capital.

Following on from Moody's the week before last, Fitch Ratings and S&P both responded to the passing of the German Financial Market Stabilisation bill and the significance of that for Hypo Real Estate Bank AG. Fitch affirmed the 'A-/Stable/F1' long- and short-term issuer default ratings assigned to the Hypo Real Estate Group, as well as individual ratings of 'F'.

Fitch expects an extremely high probability of support from the German State for Hypo Real Estate Group to ensure its status as a going concern. Fitch's rating actions have no impact on DEPFA Pfandbriefbank's public sector covered bonds or on the mortgage and public sector covered bonds of Hypo Real Estate Bank.

S&P placed its 'BBB/A-2' long- and short-term counterparty credit ratings on the group on CreditWatch with positive implications. S&P expects the Hypo Real Estate Group to maintain its going-concern status but noted that, "Without tangible government support, it is likely that at least some members of the HRE group would not have been able to continue to operate, in our view." Ratings could remain unchanged or be raised by up to three notches, S&P said.

S&P lowered its long- and short-term counterparty credit ratings on ING Groep N.V. to 'A+/A-1' from 'AA-/A-1+', following the completion of its review of European global multi-line insurers. The downgrade reflects S&P's concern over significant pressures on group earnings in 2009, arising from investment-related losses in the insurance division. Bank earnings are expected to be pressured by higher credit losses too.

A negative outlook remains to reflect the downside risks to group performance in 2009 from the tough operating environment, including equity market weakness and volatility and heightened impairment risk, combined with low interest rates and elevated credit losses. S&P believes that this may result in a net loss at the group level.

As further details have become available on the break-up of ABN Amro Bank N.V. S&P has affirmed the 'A+/A-1' long- and short-term ratings on the bank's senior debt and has placed the 'A' rating on subordinated debt on CreditWatch Developing. The bank's subordinated debt has been economically allocated to the businesses acquired by the Dutch state, while all senior debt will be allocated to entities acquired by Royal Bank of Scotland.

The outlook on the senior debt has been revised to stable, mirroring the stable outlook on RBS. The businesses acquired by the Dutch state will be transferred to a Dutch bank to be created over the course of this year. The credit quality of that bank, when it is known, will determine the outcome of the CreditWatch Developing. A movement of no more than one rating notch in either direction is expected.  

ABN Amro Bank N.V. has $1.0 billion of senior debt outstanding in the domestic market and $750 million of subordinated debt.

Moody's lowered its bank financial strength rating (BFSR) on Northern Rock to 'E' from 'E+'. The BFSR maps into a Baseline Credit Assessment of 'Caa1'. In other words, this is Moody's assessment of Northern Rock's stand alone credit quality. The senior long-term and short-term ratings of A2/P-1 were affirmed with a developing outlook.

The downgrade of the BFSR highlights the severe deterioration in Northern Rock's intrinsic financial fundamentals reflected in reported pre-tax losses of £1.4 billion as of year-end 2008. The losses were largely the result of loan loss impairment of £0.9 billion and treasury write-downs of £0.3 billion. As a result, Northern Rock's Tier 1 capital is now negative.

Northern Rock has $800 million of March 2011 bonds outstanding in the domestic market.

S&P affirmed its 'BBB-/A-3' long- and short-term credit ratings assigned to Envestra Ltd and revised the rating outlook to stable from negative. The outlook change reflects reduced distributions and an equity raising undertaken in the last six months and the consolidation of Envestra Ltd and Envestra Victoria Pty Ltd into a combined security group to improve fungibility of cash flow. As a result of the latter, ratings on Envestra Victoria were withdrawn.

Envestra Victoria has $295 million of bonds outstanding in the domestic market with maturities ranging from May 2011 to October 2015. Envestra Ltd has $995 million of bonds outstanding in the domestic market with maturities ranging from November this year to July 2026. There is also US$175 million of bonds that were placed in the US Reg D market with maturities ranging from September 2015 to September 2033, according to our records.

While Moody's placed its 'A3' senior secured credit rating assigned to Transurban Finance Company Pty Ltd on review for possible downgrade, the week before last, S&P affirmed the 'A-' senior secured and 'BBB+' corporate credit ratings assigned to the company, with a stable outlook, although the affirmation is pending completion of the refinancing of Transurban Group's Hills M2 $459 million of non-recourse debt that matures in June 2009.

S&P notes that completion of the refinancing had been expected by the end of March but Transurban has assured it that commitments from its banks will be forthcoming shortly. S&P concludes that an inability by Transurban to conclude negotiations with its banks within the timeline represented could lead to negative pressure on the ratings.

Lion Nathan had its long-term issuer default rating from Fitch raised to 'BBB+' from 'BBB' while its 'F2' short term rating was affirmed. The outlook is stable.

A high level of arrears and losses in the New Zealand residential mortgage portfolio that underlies the Sapphire IV NZ Series 2007-1 Trust RMBS issue has led to charge-offs to the unrated notes and erosion of the credit support to rated notes. As a result, S&P lowered the ratings on the Class BZ and CA notes to 'B+' and 'CCC+' from 'BB/Watch Neg' and 'B/Watch Neg', respectively.

With sufficient credit support built up through amortisation, the ratings on the Class AA, AZ, MA, MZ and BA notes were affirmed and removed from CreditWatch with negative implications. These notes are expected to weather further deterioration in the performance of the underlying mortgage portfolio.