S&P lowers ratings on hybrid capital securities
May 21, 2009 - Standard & Poor's Ratings Services said yesterday that it lowered its ratings by three or more notches on hybrid capital securities of the following European banking groups: ABN AMRO Holding N.V.; Allied Irish Banks PLC; Anglo Irish Bank Corp. Ltd.; Bank of Ireland; Dexia S.A.; Fortis Bank Nederland (Holding) N.V.; Lloyds Banking Group PLC; Northern Rock PLC; and The Royal Bank of Scotland Group PLC. At the same time, we removed many of the issue ratings from CreditWatch. (See list of the issues affected below.) The downgrades follow our review of the ratings on the hybrid securities of certain European financial institutions that have received state aid or that are likely, in our opinion, to receive state aid in the near future. We concluded that the likelihood of suspension of payments on the issues has increased. We did not change any of the issuer credit ratings (ICRs) on the banking groups affected by these hybrid securities rating actions.
We placed many of these hybrid securities on CreditWatch with negative implications earlier this year due in part to uncertainty regarding European Commission (EC) policy in applying European Union (EU) state aid rules. The EC announcement of May 7, 2009, on the recapitalization of Commerzbank AG (A/Negative/A-1) removed some uncertainty by specifying that Commerzbank's business plan include measures aimed at keeping state aid to a minimum, including "the suspension of dividend and interest payments to holders of hybrid capital." This announcement prompted rating actions by Standard & Poor's on the hybrid capital securities of the Commerzbank group (see "Various Commerzbank, Dresdner, And Eurohypo Hybrid Capital Instruments Cut To 'CCC' And Kept On Watch Negative," published May 11, 2009, on RatingsDirect).
The EC announcement about Commerzbank clarifies (to some degree) the EC's position on hybrid capital securities of state-supported banks. In our view, the announcement increases the potential that banking groups receiving EU state aid will suspend payments on their hybrid securities. While the EC has neither concluded reviews nor has made similar unequivocal statements regarding banking groups whose hybrids are affected by today's rating actions, we believe that the EC's position is that state funds granted to struggling banks should be retained to strengthen capitalization and should not be paid out to shareholders or holders of other capital instruments, including hybrid securities. Despite this position, it appears that the EC will respect the terms of the hybrid capital instruments and not alter the terms of hybrid securities that link payments to financial performance, notably earnings, distributable income, or specified capital levels.
The rating actions also reflect our view that European sovereign governments over the medium term may be more willing than in the past to encourage or force banks to suspend payments on hybrid securities to preserve cash and build capital. We believe that hybrid capital securities of European (and U.S.) banking groups whose creditworthiness is supported by already-received and potential future government aid are relatively more vulnerable to payment deferral than the hybrid securities of banking groups whose ratings are more closely aligned with their stand-alone credit profiles (see "Issue Ratings Lowered On Hybrid Instruments Of Some European Banks On Heightened Deferral Risk," published Jan. 28, 2009).
Moreover, the recession and difficult operating environment, in our view, increase the vulnerability of banks in Europe (and in other regions in the world) that have not received state aid to payment deferrals on hybrid securities due to pressure on retained earnings and capital. EC policy with respect to state aid is an additional factor, but not the primary reason, for EU banks to suspend payments on hybrid securities. Earlier in 2009, Standard & Poor's took widespread actions on hybrid securities of many European and U.S. banking groups due to our assessment of this vulnerability (see "Hybrid Securities Of Over 60 European Financial Institutions Downgraded Following S&P Review," published March 31, 2009, and "Review Results In Changes To Certain U.S. Financial Institutions' Hybrid Capital Issue Ratings," published Feb. 24, 2009).
From a rating perspective, we generally widen the gap between the hybrid rating and the ICR of the issuing entity to three or more notches when we consider the potential for payment deferral has increased (see "Franchise Stability, Confidence Sensitivity, And The Treatment Of Hybrid Securities In A Downturn," published Dec. 1, 2008, and "Hybrid Capital Handbook," published Sept. 15, 2008).
On May 19, 2009, Bank of Ireland made a tender offer for six of its preference share issues. We characterize the tender offer as distressed and consequently lowered the ratings on the six issues to 'C' from 'BB'. The ratings on Bank of Ireland's three hybrid securities not subject to the tender offer were lowered to 'B' (one issue) and 'B-' (two issues) from 'BB'. All ratings were removed from CreditWatch with negative implications, where they were originally placed on Nov. 14, 2008. (See "Bank of Ireland Hybrid Securities Downgraded On Announced Tender Offers," published today on RatingsDirect.)
HOW STANDARD & POOR'S DIFFERENTIATES EUROPEAN BANK HYBRID SECURITIES BY RATINGS CATEGORY
Standard & Poor's broadly characterizes the rated hybrid securities of European banking groups by rating category. While we cite general characteristics by category, we note that the ratings on individual hybrid securities may differ due to the specific terms of the security and the particular credit profile and national jurisdiction of the issuing group.
For bank hybrid securities rated in the 'CCC' category, there is, in our view, a clear and present risk of payment deferral or principal reduction. The hybrid securities in question include those of wholly nationalized banks such as Northern Rock and Anglo Irish Banks as well as those of government-supported groups whose earnings are under severe pressure, such as Commerzbank and KBC Group N.V.
We also rate preference shares with voting rights issued by Lloyds Banking Group and Royal Bank of Scotland Group PLC 'CCC+', one notch below their other perpetual deferrable instruments, to reflect the "nationalization risk" of the preference shares of these two banking groups. In the U.K. and Ireland, perpetual preferred shares that grant voting rights to the holders in certain circumstances have been included in nationalizations of a troubled financial institution for the purpose of giving the government full control of the institution. This happened to Northern Rock and Anglo Irish Banks.
Bank hybrid securities rated in the 'B' category are, in our view, vulnerable to a potential further deterioration in the operating environment that could result in significant losses at the issuing group and necessitate further state aid from the applicable sovereign government. The European banking groups whose hybrid securities are in the 'B' category typically have received material direct support from their governments, and their creditworthiness relies to an important extent on potential future government aid. The hybrid securities of Allied Irish Banks, Fortis Bank Nederland, Lloyds Banking Group, and Royal Bank of Scotland/ABN AMRO are part of this group. Dexia's hybrids are also in this group, primarily due to the large amount of government aid the Dexia group has received and less due to vulnerability of Dexia's earnings to a more stressed environment.
While this article addresses the hybrid securities of European banking groups, the characterization of the 'B' category also broadly fits the hybrid securities of government-supported financial institutions in other mature markets. For example, we rate the hybrid capital securities of Bank of America Corp. in the U.S. in the 'B' category.
European bank hybrid securities in the 'BB' category are, in our view, relatively less vulnerable to deterioration in the operating environment than the bank hybrids in the 'B' category, but for reasons of reliance on future state aid or the fundamental credit profile of the issuing group, the hybrid securities have some speculative characteristics. The banking groups whose hybrid securities are in the 'BB' category are in two groups:
--Banking groups that have received some direct support from their governments, and with creditworthiness that relies to some extent on potential future government aid, such as Swedish banks Swedbank AB and Skandinaviska Enskilda Banken AB; and
--Banking groups that have an ICR in the 'BBB' category, such as the major Greek banks, NIBC Bank N.V. of the Netherlands, and Italian banking group Veneto Banca Holdings S.C.P.A.
RATINGS LIST
Downgraded
To From
ABN-AMRO Capital Funding Trust V (1)
US$1.25 bil 5.9% callable perp non-cum gtd trust pfd secs
B BB
ABN-AMRO Capital Funding Trust VI (1)
US$200 mil 6.25% non cum trust pfd secs callable
B BB
ABN-AMRO Capital Funding Trust VII (1)
US$1.8 bil 6.08% non cum gtd trust pfd secs callable
B BB
Ratings Affirmed
ABN AMRO Bank N.V.
£750 mil var rate fxd/fltg rate callable perp sub (upper Tier 2) nts ser 752
EUR1 bil var rate step-up/fxd callable perp secs (Tier 1)
BB/Watch Dev
(1) Guaranteed by ABN AMRO Holding N.V.
Downgraded; CreditWatch/Outlook Action
To From
Allied Irish Banks PLC
US$175 mil non-cum pfd stk
EUR200 mil var/fixed rate sub perp nts hybrid due 11/29/2049
EUR500 mil step-up callable perp resv cap instruments hybrid
£400 mil var rate perp callable sub upper Tier 2 hybrid
B BB/Watch Neg
AIB UK 1 LP (2)
EUR1 bil var rate /fltg non-cum perp callable pfd secs
B BB/Watch Neg
AIB UK 2 LP (2)
EUR500 mil var rate fxd/fltg rate jr sub non cum perp callable pfd secs
B BB/Watch Neg
AIB UK 3 LP (2)
£350 mil var rate fxd/fltg rate jr sub non cum perp callable pfd secs
B BB/Watch Neg
(2) Guaranteed by Allied Irish Banks PLC.
Downgraded; CreditWatch/Outlook Action
To From
Anglo Irish Asset Finance plc (3)
£200 mil var rate callable perp jr sub nts
£250 mil var rate fxd/fltg rate callable perp jr sub nts
CCC B/Watch Neg
Anglo Irish Capital U.K. (2) LP (3)
EUR600 mil var rate fxd/fltg rate callable perp jr sub dtd 03/04/2008 due 02/15/2037 nts
CCC B/Watch Neg
Anglo Irish Capital U.K. (3) LP (3)
£350 mil var rate fxd/fltg-rate non-cum callable perp pfd stk
CCC B/Watch Neg
Anglo Irish Capital U.K. LP (3)
EUR600 mil var rate callable perp fxd/fltg rate non-cum pfd stk
CCC B/Watch Neg
(3) Guaranteed by Anglo Irish Bank Corp.
Downgraded; CreditWatch/Outlook Action
To From
Bank of Ireland
US$150 mil 6.187% hybrid
B BB/Watch Neg
EUR63.49 mil
£18.76 mil 12% non-cum pfd stk
B- BB/Watch Neg
BOI Capital Funding (No.1) LP (4)
EUR600 mil 6.25% fxd/var non-cum perp callable
C BB/Watch Neg
BOI Capital Funding (No.2) LP (4)
US$800 mil var rate /fltg rate gtd non-voting non-cum callable perp pfd secs
C BB/Watch Neg
BOI Capital Funding (No.3) LP (4)
US$400 mil var rate /fltg rate gtd non-voting non-cum callable perp pref secs
C BB/Watch Neg
BOI Capital Funding (No.4) LP (4)
£500 mil var rate fxd/fltg rate gtd non-voting non-cum perp pref secs
C BB/Watch Neg
Bank of Ireland UK Holdings PLC
£350 mil 6.25% callable perp pfd secs hybrid
EUR600 mil step-up callable perp pfd secs hybrid
C BB/Watch Neg
(4) Guaranteed by Bank of Ireland.
Downgraded; CreditWatch/Outlook Action
To From
Dexia Bank S.A.
EUR228.674 mil var rate undtd sub nts
B BB/Watch Neg
Dexia Banque Internationale a Luxembourg
EUR225 mil var rate perp cap nts
B BB+/Watch Neg
Dexia Credit Local
EUR700 mil var rate fxd/fltg-rate undated deeply sub perp nts
B BB/Watch Neg
Dexia Funding Luxembourg S.A. (5)
EUR500 mil var rate jr sub fxd to fltg rate callable perp non-cum gtd secs
B BB/Watch Neg
Dexia Overseas Ltd. (6)
US$50 mil fltg rate nts ser 150
US$100 mil fltg rate nts
¥5 bil var rate nts
B BB/Watch Neg
(5) Guaranteed by Dexia S.A.
(6) Guaranteed by Dexia Bank S.A.
Downgraded; CreditWatch/Outlook Action
To From
Fortis Bank Nederland (Holding) N.V.
EUR2 bil mandatory convertible securities perp hybrid
B+/Watch Dev BB-/Watch Dev
Downgraded
To From
Lloyds Banking Group PLC
EUR500 mil 7.875% callable perp Tier 1 hybrid
CCC+ B+
US$1.25 bil 7.875% callable perp Tier 1 hybrid
CCC+ B+
US$1 bil fxd/fltg rate non-cum perp callable non step-up pref shares
CCC+ B+
US$750 mil 6.413% callable non-cumulative fixed-to-floating rate pref shares prep ser A
CCC+ B+
US$750 mil 5.92% callable non-cumulative fixed-to-floating rate pref shares prep ser B
CCC+ B+
US$750 mil 6.657% callable non-cumulative fixed-to-floating rate pref shares prep
CCC+ B+
£600 mil fxd/fltg rate non-cum perp callable non step-up pref shares
CCC+ B+
£750 mil 6.0884% callable non-cumulative fixed-to-floating rate pref shares prep
CCC+ B+
£100 mil 9.75% non-cumulative irredeemable pref shares prep
B- BB-
£350 mil 6.3673% callable non-cumulative fixed-to-floating rate pref shares prep
CCC+ B+
£198.07 mil 6.475% callable non-cumulative pref shares prep
B- BB-
£300 mil 9.25% non-cumulative irredeemable pref shares prep
B- BB-
£500 mil var rate reset perp callable jr sub bnds (7)
B BB
HBOS PLC
EUR97.20 mil fltg rate jr sub step-up perp nts nts
B- BB-
¥42.5 bil jr sub step-up perp nts
B- BB-
EUR111.55 mil 6.05% fxd/fltg rt callable perp nts
B- BB-
EUR750 mil fxd/fltg rate perp nts ser HBOS 0016
B- BB-
US$1 bil var rate fxd/fltg rate perp jr sub nts
B- BB-
EUR750 mil var rate callable perp jnr sub bnds ser HBOS 0018
B- BB-
EUR500 mil var rate callable perp jnr sub bnds ser HBOS 0019
B- BB-
£6.98 mil jr sub step-up perp nts
B- BB-
£30.06 mil 5.75% undated jr sub step-up perp callable nts
B- BB-
£8.5 mil step up sub perp nts
B- BB-
£14.05 mil step up perp jnr sub fxd to fltg rate callable ser HBOS 0023/04 bnds
B- BB-
Bank of Scotland PLC
¥17 bil var rate sub perp nts
B BB
US$300 mil var rate 7% reset jr sub
B BB
£100 mil 12% perp sub bnds
B BB
£100 mil 8.75% perp sub bnds
B BB
£150 mil 8.375% undated instruments
B BB
£75 mil 13.625% perp sub bnds
B BB
£50 mil 9.375% perp sub bnds
B BB
£250 mil cum perp jr sub bnds ser BOS0009
B BB
£150 mil cum perp jr sub bnds ser BOS0010
B BB
£150 mil step up callable perp regulatory Tier One Secs ser A
B BB
£150 mil step up callable perp regulatory Tier One Secs ser B
B BB
£150 mil 7.375% jr sub callable perp med-term nts ser BOS 0006
B BB
£100 mil var rate callable perp hybrid(8)
B BB
£64.37 mil var rate callable perp hybrid(8)
B BB
Bank of Scotland Capital Funding L.P.
£250 mil class A non-cum perp callable pfd secs (9)
B- BB-
£150 mil class B non-cum perp pfd secs(9)
B- BB-
HBOS Capital Funding L.P.
US$750 mil 6.071% FX/FRN callable perp jr sub hybrid ser HBOS 0021(8)
B- BB-
£600 mil 6.461% non-voting non-cum perp callable pfd secs ser A (10)
B- BB-
HBOS Capital Funding No 1 LP
US$1 bil 6.85% non-voting non-cum perp callable pfd secs (8)
B- BB-
HBOS Capital Funding No 2 LP
US$750 mil 6.071% non-voting non-cum perp callable pfd secs (8)
B- BB-
HBOS Capital Funding No 3 LP
EUR750 mil var rate non-cum fxd/fltg rate perp callable pfd secs (8)
B- BB-
HBOS Capital Funding No 4 LP
£750 mil var rate callable fxd/fltg perp hybrid (8)
B- BB-
Halifax Group Euro Finance (Jersey) L.P.
EUR415 mil fxd/fltg rate gtd non-voting non-cum perp pfd secs(10)
B- BB-
Halifax Group Sterling Finance (Jersey) L.P.
£245 mil 7.881% gtd non-voting non-cum perp pfd secs(10)
B- BB-
Lloyds TSB Bank PLC
EUR1.25 bil 5.625% sub callable step-up perp nts ser 69
B BB
EUR150 mil fltg rate sub callable step-up perp nts ser 70
B BB
US$750 mil fltg rate prim cap perp nts ser 1 due 06/29/2049
B BB
US$600 mil fltg rate prim cap nts ser 3 due 08/29/2049
B BB
US$500 mil fltg rate prim cap nts ser 2 due 11/29/2049
B BB
EUR750 mil 6.625% perp cap secs
B BB
EUR500 mil step up callable perp cap secs
B BB
US$1 bil 6.9% callable perp cap secs bnds
B BB
EUR750 mil var rate jr sub callable perp cap secs
B BB
EUR532.11 mil step up callable perp cap secs hybrid
B BB
£270 mil 6.5% sub callable step-up perp nts ser 72
B BB
£200 mil 8% step-up perp sub nts ser 35
B BB
£500 mil var rate callable perp jr sub upper tier 2 nts ser 1024
B BB
£784.61 mil step up callable perp cap secs hybrid ser A
B BB
£700.02 mil step up callable perp cap secs hybrid ser B
B BB
£410 mil 6.6625% sub callable step-up perp nts ser 71
B BB
£450 mil 6.5% sub callable step-up perp nts ser 73
B BB
Lloyds TSB Capital 1 L.P.
EUR430 mil var rate step-up non-voting non-cum perp pfd secs (11)
B- BB-
Lloyds TSB Capital 2 L.P.
£250 mil var rate step-up non-voting non-cum perp pfd secs (11)
B- BB-
Scottish Widows PLC
£560 mil var rate fxd- to step-up fltg-rate callable perp jr sub nts
B BB
Clerical Medical Finance PLC
EUR750 mil var rate callable perp jr sub nts (12)
B BB
Saphir Finance PLC
£600 mil. fixed/floating rate
non-cumulative perpetual callable non step-up debt (13)
CCC+ B+
(7)Guaranteed by Lloyds TSB Bank PLC.
(8)Guaranteed by HBOS PLC.
(9)Subordinated guarantee from Bank of Scotland PLC.
(10)Subordinated guarantee from HBOS PLC.
(11)Support from Lloyds TSB Bank PLC.
(12)Guaranteed by Clerical Medical Investment Group Ltd.
(13)Guaranteed by Lloyds Banking Group PLC.
Downgraded; CreditWatch/Outlook Action
To From
Northern Rock PLC
US$100 mil 8% upper tier 2 sub perp nts ser 155
£200 mil step-up perp upper tier 2 sub nts ser 158
£300 mil 8.399% step-up callable perp reserve tier 1 cap instruments
US$100 mil var rate upper tier 2 perp nts ser 200
£200 mil 7.053% Callable perp core tier one nts nts
US$700 mil 5.6% upper tier 2 perp callable jr sub nts
US$650 mil var rate fxd/ftg callable perp upper tier 2 jr sub hybrid
CCC B/Watch Neg
Downgraded
To From
Royal Bank of Scotland Group PLC (The)
US$1.2 bil var rate callable perp regulatory tier I hybrid ser 1
B- BB-
CAD600 mil var rate callable perp Tier 1 hybrid ser 2851
B- BB-
EUR1.25 bil 5.5% non-cum pfd perp secs ser 1
CCC+ B+
EUR1.25 bil 5.25% non-cum euro pfd perp secs ser 2
CCC+ B+
US$200 mil 7.375% reset cap secs
B- BB-
US$1.5 bil perp pref sh ser 1 + 2
B- BB-
US$50 mil 7.993% perp cap sec ser B
B- BB-
US$850 mil 5.75% callable exchgble cap secs ser B
B- BB-
US$1.6 bil 6.99% /fltg callable perp pref stk
B- BB-
US$200 mil
CCC+ B+
US$400 mil ser C
CCC+ B+
US$8 mil non-cum pref shrs ser F
CCC+ B+
US$300 mil perp non-cum pref shares ser H
CCC+ B+
US$225 mil 8.5% perp non-cum pref shares ser J
CCC+ B+
US$300 mil 8% perp non-cum pref shares ser I
CCC+ B+
US$925 mil 6.4% callable non-cum perp pref shares ser M
CCC+ B+
US$1 bil 6.35% non cum dollar pref shares callable ser N
CCC+ B+
US$550 mil 6.25% non-cum dollar callable perp pref shares ser P
CCC+ B+
US$675 mil 6.75% non-cum perp callable pref shares ser Q
CCC+ B+
US$650 mil 6.125% callable non-cum perp pref shares ser R
CCC+ B+
US$950 mil 6.6% callable perp pref shares ser S
CCC+ B+
US$1.45 bil 7.25% non cum perp callable pref stk ser T
CCC+ B+
EUR1.3 bil var rate callable non-cum perp pref stk ser 3
CCC+ B+
US$1.5 bil var rate callable non-cum perp pref stk ser U
CCC+ B+
£200 mil non-cum pref shares ser 1
CCC+ B+
£750 mil 8.162% callable non-cum perp pref stk ser 1
CCC+ B+
National Westminster Bank PLC
US$500 mil fltg rate hybrid ser C
B BB
US$500 mil var rate perp hybrid
B BB
US$500 mil var rate hybrid ser A
B BB
US$500 mil var rate hybrid ser B
B BB
US$500 mil 7.75% perp hybrid
B BB
EUR400 mil 6.625% sub perp hybrid due 10/29/2049
B BB
EUR100 mil fltg rate sub perp hybrid
B BB
£350 mil var rate hybrid
B BB
£67.86 mil 11.5% hybrid
B BB
£126.8 mil step-up sub perp hybrid
B BB
£161.73 mil step-up sub perp hybrid
B BB
US$300 mil non-cum pref shares ser C
B- BB-
£140 mil 9% ser A
B- BB-
RBS Capital Trust A (14)
EUR390.93 mil var rate non-cum trust pfd secs perp
B- BB-
RBS Capital Trust B (14)
US$485.858 mil 6.8% callable non-cum trust pfd secs perp
B- BB-
RBS Capital Trust C (14)
EUR166.38 mil 4.243% /fltg perp callable non-cum trust pfd secs
B- BB-
RBS Capital Trust D (14)
£92.55 mil 5.6457% /fltg perp callable non-cum trust pfd secs
B- BB-
RBS Capital Trust I (14)
US$850 mil 4.709% non-cum trust pfd secs callable perp
B- BB-
RBS Capital Trust II (15)
US$650 mil 6.425% /FRN callable non-cum trust pfd secs perp
B- BB-
RBS Capital Trust III (15)
US$950 mil 5.512% non-cum trust pfd secs callable perp
B- BB-
RBS Capital Trust IV (15)
US$550 mil fltg rate non-cum trust pfd callable secs perp
B- BB-
Royal Bank of Scotland PLC (The)
EUR152.45 mil jr sub step-up hybrid
B BB
EUR197.12 mil var rate fltg perp callable jr sub (Upper Tier II) hybrid ser 1587
B BB
EUR242.56 mil var rate callable perp jr sub (Upper Tier II) hybrid ser 1589
B BB
¥25 bil callable jr sub lower tier 2 fxd/fltg hybrid ser 1818
B BB
CAD700 mil var rate fxd/fltg step-up callable perp jr sub hybrid ser 2595
B BB
£150 mil fltg rate jr sub perp hybrid ser 60
B BB
£95.77 mil var rate jr sub perp hybrid ser 144
B BB
£200.53 mil var rate callable perp jr sub hybrid ser 253
B BB
£350 mil 5.625% jr sub perp callable hybrid
B BB
£173.84 mil 6.2% jr sub callable perp hybrid ser 352
B BB
£300 mil 5.625% callable upper tier II perp hybrid
B BB
£117.40 mil 6.25% perp callable jr sub hybrid ser 238
B BB
£178.12 mil 5.125% perp callable jr sub hybrid ser 619
B BB
£137.69 mil 6% callable upper tier II perp hybrid ser 1522
B BB
£190.05 mil var rate /fltg step-up callable perp jr sub hybrid ser 2538
B BB
Argon Capital PLC
£750mil 8.162% callable non-cum perp pref stk series 100(1)
CCC+ B+
(14) Guaranteed by Royal Bank of Scotland Group PLC (The).
(15) Guaranteed by Royal Bank of Scotland PLC (The).
NB: This list does not include all ratings affected.
