May 20, 2014 / 5:03 PM / 3 years ago

Fitch Affirms Depfa at 'BBB+' On Announced Transfer to FMS WM

(The following statement was released by the rating agency) FRANKFURT/LONDON, May 20 (Fitch) Fitch Ratings has affirmed Depfa Bank plc's (Depfa) Long-term Issuer Default Rating (IDR) at 'BBB+' with a Negative Outlook, its Support Rating at '2' and its Support Rating Floor at 'BBB+'. Depfa's lower Tier 2 subordinated debt rating of 'B+' has been placed on Rating Watch Evolving. A full list of rating actions is available at the end of this rating action commentary. The affirmation of Depfa's ratings follows the official announcement that Depfa's ultimate owner, the Federal Republic of Germany (AAA/Stable), has abandoned its plans to sell the bank to third-party investors. Instead, the government intends to transfer the full ownership of Depfa from its current direct parent, the ultimately state-owned German real estate lender Hypo Real Estate Holding AG (HRE Holding; A-/Negative), to FMS Wertmanagement (FMS WM; AAA/Stable), the state-sponsored run-off institution in charge of winding down HRE's assets. We believe that Depfa will retain its banking licence, and will therefore continue to be subject to Irish regulatory requirements and remain under the remit of the Irish regulator during its wind-down. The ratings of HRE and FMS WM are unaffected by this rating action. KEY RATING DRIVERS - IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOOR The affirmation of Depfa's ratings reflects Fitch's view that Germany's support remains highly likely as the state will remain Depfa's indirect owner, and thus the bank's ultimate source of support. That support would then be likely to flow through FMS WM rather than hitherto through HRE does not affect Fitch's assessment of the government's propensity to support. Fitch's view of support is underpinned by the potential reputational damage to Germany of allowing Depfa to fail. Germany's ultimate responsibility for ensuring that FMS WM meets its obligations at all times is in the form of a statutory loss-absorption obligation contained in the German Financial Market Stabilisation Fund Act and FMS WM's statutes. This obligation is the basis of Fitch's 'AAA'/Stable Long-Term IDR on FMS WM. The IDR also takes into account the challenges that FMS WM will face to run down a covered bond issuer in view of the complexities of maintaining a robust operational platform while complying with related regulatory requirements. The timing and details of the liquidation process of Depfa at the end of its wind-down process are unclear. While we do not expect losses for senior unsecured creditors, we do not fully exclude the possibility that such liquidation could include the transfer of assets and liabilities to external third parties, most likely other banks. The Outlook on Depfa's Long-term IDR remains Negative to reflect the sensitivity of Depfa's ratings to developments around resolution and support for EU banks. Fitch expects the likelihood of state support for Depfa and its subsidiaries to remain high, even once the European Bank Recovery and Resolution Directive (BRRD) and Single Resolution Mechanism (SRM) are introduced and despite the bank's run-down status. However, progress with BRRD and SRM will weaken the likelihood of state support from its current level, which is why Depfa's Long-Term IDR retains its Negative Outlook. A revision of Depfa's SRF would likely be within the 'BBB' category. Depfa does not have a Viability Rating as the bank is in run-off mode and its on-going viability will be dependent on continued implicit or effective support from FMS WM and, ultimately, from the German government. The state-aid agreement with the European Commission prohibits Depfa from originating any new banking business while it is state-owned. RATING SENSITIVITIES - IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOOR Depfa's IDRs are sensitive to any change in Fitch's view of Germany's propensity to support banks and to the support dynamics between Germany, FMS WM and Depfa, in particular to significant changes in the relationship between Germany and FMS WM, although Fitch considers the latter scenario to be highly unlikely for the foreseeable future. Depfa's IDRs are also sensitive to Fitch's view of Germany's ability to support its banks, as signalled by Germany's sovereign rating. Given Depfa's domicile in the Republic of Ireland (BBB+/Stable), the bank's ratings also reflect the broad sovereign and associated banking sector risks in Ireland, not all of which are within the German owner's power to neutralise. Therefore Depfa's IDRs are also sensitive to the Irish sovereign rating. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The Rating Watch on Depfa's lower Tier 2 subordinated debt signals the potential implications on the German government's willingness to support this class of debt, as a result of both the bank's new ownership and the fact that plans to sell the bank to third parties, and thus restore and protect its franchise, have definitely been abandoned. We intend to resolve the Rating Watch when more details on FMS WM's intentions are available so that we can compare the non-performance risk of this instrument relative to the bank's senior unsecured instruments. Fitch has also affirmed Depfa's hybrid Tier 1 securities at 'C' to reflect the low likelihood that profit distribution from these instruments may be restored in the foreseeable future. The formal decision to wind down Depfa and the bank's uncertain future profitability resulting from this process create little incentive for the government to protect the bank's hybrid investors. The rating of the Tier 1 securities could be upgraded if FMS WM's wind-down strategy for Depfa increases the likelihood of profit distribution being restored. KEY RATING DRIVERS AND SENSITIVITIES - DEPFA ACS Bank AND HYPO PUBLIC FINANCE BANK DEPFA ACS Bank (DEPFA ACS) and Hypo Public Finance Bank (HPFB) are 100% subsidiaries of Depfa in Ireland. We believe that the transfer to FMS WM will not modify Depfa's group structure, ie that DEPFA ACS and HPFB will remain fully owned by Depfa and continue to be wound down in a similar way to Depfa. The alignment of the subsidiaries' ratings with those of their parent reflects their integration into Depfa, as well as the reputational risk to the German government of allowing a DEPFA subsidiary to fail. DEPFA ACS benefits from a declaration of backing from its parent, expressing Depfa's commitment to fulfil DEPFA ACS's contractual obligations in case of need. HPFB has not conducted any new business since 2008 and most of its remaining assets have been already transferred to FMS WM. Fitch believes that Depfa intends to voluntarily liquidate HPFB at some point. DEPFA ACS's and HPFB's ratings are sensitive to changes to Depfa's IDRs or to any move that could affect the strength of their integration into Depfa. The rating actions are as follows: Depfa Bank plc: Long-term IDR: affirmed at 'BBB+'; Outlook Negative Short-term IDR: affirmed at 'F2' Support Rating: affirmed at '2' Support Rating Floor: affirmed at 'BBB+' Commercial paper: affirmed at 'BBB+'/'F2' Senior unsecured: affirmed at 'BBB+'/'F2' Market-linked securities: affirmed at 'BBB+emr' Subordinated notes (lower Tier 2, ISIN: XS0229524128): 'B+'; placed on Rating Watch Evolving DEPFA ACS Bank: Long-term IDR: affirmed at 'BBB+'; Outlook Negative Short-term IDR: affirmed at 'F2' Support Rating: affirmed at '2' Senior unsecured: affirmed at 'BBB+'/'F2' Hypo Public Finance Bank: Long-term IDR: affirmed at 'BBB+'; Outlook Negative Short-term IDR: affirmed at 'F2' Support Rating: affirmed at '2' Depfa Funding II LP: hybrid capital instruments affirmed at 'C' Depfa Funding III LP: hybrid capital instruments affirmed at 'C' Depfa Funding IV LP: hybrid capital instruments affirmed at 'C' Contact: Primary Analyst Patrick Rioual Director +49 69 76 80 76 123 Fitch Deutschland GmbH Taunusanlage 17 60325 Frankfurt am Main Secondary Analyst Krista Davies Analyst +44 203 530 1579 Committee Chairperson Jens Hallen Senior Director +44 203 530 1326 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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