Massive banking losses continue to drive ratings

Last week it was the Royal Bank of Scotland's turn to flag massive losses and be the subject of rating actions from the three major rating agencies.

Fitch Ratings affirmed the 'AA-/F1+' long- and short-term issuer default ratings (IDRs) that it assigns to The Royal Bank of Scotland Group Plc, The Royal Bank of Scotland Plc and the main operating subsidiaries (RBS Group), with a stable outlook, after the bank said it expects to report operating losses of £7 billion to £8 billion and take a charge of £15 billion to £20 billion for goodwill impairment on the ABN Amro businesses that it acquired during the year.

At the same time, the bank announced that it would replace £5 billion of preference shares held by the British government with new ordinary shares, taking the government's shareholding in the bank to close to 70 per cent.

Fitch was able to affirm the IDRs because it increased the support rating for the bank to '1' from '5' and set the support rating floor at 'AA-' (in other words the IDR cannot fall below this). Support ratings apply to banks and a rating of '1' denotes an extremely high probability of external support and a rating of '5' flags that external support is possible but cannot be relied upon.

As for the individual rating or stand-alone rating on RBS Group, this was lowered to 'E' from 'B/C'. Again individual ratings apply only to banks and a rating of 'E' denotes a bank with very serious problems!

It is at this level that Fitch is signalling its concern over increasing risks and worsening operating outlooks for the group's main businesses, together with the unique challenges the group faces in integrating ABN AMRO businesses in increasingly difficult market conditions.

Fitch views the government actions to support RBS Group and the broader British banking system as positive for creditors, but notes the potential for restricted operational flexibility as a result of conditions that could be imposed by the British government, as the group's controlling shareholder. Fitch expects to see some significant changes to the group's strategic direction and priorities following completion of a strategic review.

Moody's Investor Services simply downgraded the senior unsecured ratings assigned to the holding company and the bank to 'A1' from 'Aa2' and to 'Aa3' from 'Aa1', respectively and assigned a negative outlook to the ratings. The Bank Financial Strength Rating was lowered to 'C-' from 'B', meaning the bank possesses adequate to modest "intrinsic financial strength", and left the rating on review for further downgrade.  

Moody's expects significant future losses beyond those indicated by the bank for 2008. The losses are likely to be driven by a combination of defaults on loans to lower-rated corporates and commercial property exposures, as well as residential property and other consumer lending exposures in the United States. The bank's underlying capital adequacy is considered to be in line with a BFSR in the D range but will be maintained at the current level until it becomes clearer how the UK government's Asset Protection Scheme will affect projected losses.

Standard & Poor's affirmed the 'A+/A-1' long- and short-term counterparty credit ratings assigned to the bank and related entities (RBSG) after having lowered the ratings only last month. The outlook is stable.

S&P considers RBSG to be of high systemic importance to the UK banking system and now explicitly factors four notches of uplift into the long-term counterparty credit rating on RBSG. It believes that RBSG's particular vulnerability to the economic downturn render its prospects for asset quality and earnings in 2009, and probably beyond, to be poor.

CIT Group Inc., which has $300 million of March 2011 bonds on issue in the domestic market via its Australian subsidiary, reported a Q4 loss of US$203 million, bringing losses for the year to US$2.9 billion. This prompted Moody's to lower its senior unsecured rating on the group to 'Baa2' from 'Baa1'. This rating along with the 'P-2' short term rating remains on review for further possible downgrade.

This action reflects concern over deteriorating trends in CIT's asset quality, increasing borrowing costs, and their effect on the firm's earnings. In Moody's view, these trends pose a heightened risk to CIT's ability to achieve a stable operating profile in the near future.

The review for further downgrade recognises the difficult funding and operating environment CIT continues to face that could further pressure revenues, asset quality and earnings, as well as the potential that reorganisation of CIT's business lines between CIT Bank and the parent holding company could weaken the position of holding company creditors.

Fitch also lowered its long-term issuer default rating on CIT Group to 'BBB' from 'A-' . The short term IDR of 'F2' was affirmed and the rating outlook is negative. Fitch expressed similar concerns to Moody's.

S&P affirmed its 'BBB+/Negative' ratings on the group, noting that US$2.7 billion (pre-tax) of the full year losses come from discontinued operations and that near term liquidity is less of a concern since CIT became a bank holding company in December last year and thereby qualified to issue government guaranteed debt.

S&P revised the rating on the 'BBB+' long-term credit rating that it assigns to Goodman Group to negative, from stable. S&P said the negative outlook reflects the increasingly challenging operating environment across the group's businesses, which is expected to adversely affect development revenues and reletting activities in the near term.

S&P noted however, that Goodman's credit quality is supported by the company's recurring property-investment revenues and experienced management team. The 'BBB+' rating anticipates that Goodman will continue to make progress in reducing gearing in calendar 2009 via the recycling of warehoused assets into self-managed funds and asset sales.

The triple A rated Dexia Municipal Agency still has some $1.9 billion of bonds on issue in the domestic market with maturities extending out to August 2015. Last week Moody's affirmed its 'Aaa' rating assigned to the obligations foncières (covered bonds) issued by DMA.

The ratings had been placed on review due to uncertainty surrounding the rating migration of parent, Dexia Credit Local. The rating on DCL, the sponsor bank for the covered bonds issued by DMA, has been stabilised at the 'A1' level with a negative outlook. The credit strength of the sponsor bank is a key driver of the rating of covered bonds.

The Australian subsidiary of the Swiss cement company, Holcim Ltd., has $260 million of August 2009 bonds outstanding in the domestic market. S&P lowered its long-term credit rating on the parent and related entities to 'BBB' from 'BBB+' to reflect considerably weakened credit metrics over the course of 2008 and expectations that improvement before 2010-2011 is unlikely. And while credit metrics could deteriorate further this year, expected robust cash flows support a stable rating outlook.

Fitch affirmed the 'AA-/F1+' long- and short-term issuer default ratings assigned to Fonterra Co-operative Group Limited with a stable outlook.
Fitch noted that Fonterra's ratings are underpinned by the financial flexibility that comes from payments to shareholder suppliers being effectively subordinated to other creditors. Furthermore, its conservative milk supply payment arrangements mitigate the risks associated with global commodity prices. Fonterra's market leading position in global dairy trade also supports the rating but these strengths are counterbalanced by constraints on equity capital raising linked to Fonterra's co-operative status and consequently, its reliance on debt funding.

In the structured finance sector, Moody's Australia announced multiple rating actions on RMBS issues on Friday.

As a result of Genworth Financial Mortgage Insurance Pty Ltd (Genworth Australia) being placed on review for possible downgrade on October 8, Moody's placed the 'Aaa' rated, Class A, notes issued by SMHL Warehousing Trust 2004-1, SMHL Private Placement Trust 2008-2 and RAMS Mortgage Securities Trust Series Unicredit (1) all on review for possible downgrade. A further 22 junior notes from various RMBS issues, for which Genworth Australia is the primary mortgage insurer, were also placed on review for possible downgrade.

Finally, another 75 junior notes that were already on review as a result of the downgrade of QBE Lenders Mortgage Ltd (formally PMI Mortgage Insurance Ltd) will remain on review pending the finalisation of the Genworth Australia review.
S&P raised its ratings on the Class D and E notes issued by Illawarra Series 2004-1 CMBS Trust to 'AA' from 'A' and to 'A' from 'BBB', respectively and at the same time affirmed the 'AAA' ratings on the transaction's Class A, B, and C notes. The rating upgrades reflect the strong asset performance of the underlying portfolio and increases in subordination at each rating level.