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TEXT - S&P may still cut Dexia Municipal Agency covered bonds
January 9, 2013 / 3:57 PM / 5 years ago

TEXT - S&P may still cut Dexia Municipal Agency covered bonds

(The following statement was released by the rating agency)

OVERVIEW
     -- On July 12, 2012, we stated that we would resolve the CreditWatch 
placements on our ratings on Dexia Municipal Agency's public-sector covered 
bonds by Jan. 11, 2013, the transition date for the implementation of our 
updated covered bonds counterparty criteria.
     -- We have reviewed the impact on the ratings of our updated criteria, 
but continue to review our assessment of the issuer's creditworthiness in 
light of the imminent sale of Dexia Municipal Agency to NEC, a new 
government-sponsored bank.
     -- On Dec. 31, 2012, the Dexia group outlined the shareholding structure 
and the deadline for the closing of the sale on Jan. 31, 2013. 
     -- In our view, these developments may affect our assessment of the 
issuer's creditworthiness, from which we uplift the covered bond ratings. Our 
assessment of counterparty risk currently caps the covered bond ratings at one 
notch above our assessment of the issuer's creditworthiness. 
     -- The covered bond ratings remain on CreditWatch negative to reflect the 
fact that our assessment of the issuer's creditworthiness may change following 
the sale, as well as execution risk associated with the timing of the sale. We 
aim to resolve the CreditWatch placements by Feb. 15, 2013.
  
LONDON (Standard & Poor's) Jan. 9, 2013--Standard & Poor's Ratings Services 
today kept on CreditWatch negative its credit ratings on Dexia Municipal 
Agency's public-sector covered bond program and related series of covered 
bonds (obligations foncieres) issued under the program (see list below).

Our ratings on Dexia Municipal Agency's public-sector covered bond program and 
related series remain on CreditWatch negative to reflect a possible impact on 
our assessment of counterparty risk due to a possible change to our assessment 
of the issuer's creditworthiness following the sale. The ongoing CreditWatch 
placement also reflects execution risk associated with the timing of the sale 
of Dexia Municipal Agency to a new government-sponsored bank. We aim to 
resolve the CreditWatch placements by Feb. 15, 2013, by which time we expect 
to have completed our review of the effect of the executed sale on the 
issuer's creditworthiness. The deadline for the closing of the sale is Jan. 
31, 2013.

On July 12, 2012, we lowered our ratings on Dexia Municipal Agency's covered 
bonds to 'AA+' from 'AAA', as our updated criteria for assessing counterparty 
risk in covered bonds became effective (see "Various Rating Actions Taken On 
Eight European Covered Bond Programs Following Counterparty Criteria Update," 
and "Covered Bonds Counterparty And Supporting Obligations Methodology And 
Assumptions," published on May 31, 2012). We kept our ratings on the covered 
bonds on CreditWatch negative to reflect counterparty risk and related cash 
flow risk resulting from hedges that would not support the maximum achievable 
ratings. The CreditWatch placements also reflected updates in our assessment 
of the issuer's creditworthiness in the context of Dexia Municipal Agency's 
restructuring. 

We stated that we would resolve the CreditWatch placements on our ratings on 
these covered bonds by Jan. 11, 2013, the transition date for the 
implementation of our updated counterparty criteria. We have now reviewed the 
ratings, but are currently reviewing our assessment of the issuer's 
creditworthiness in light of the imminent sale of Dexia Municipal Agency to a 
new government-sponsored bank. In our view, the sale may affect our assessment 
of the issuer's creditworthiness, from which we uplift the covered bond 
ratings. 

Our assessment of counterparty risk is the key constraint on the ratings. We 
understand that there are derivative agreements in place with unsubordinated 
termination payments and no replacement framework exists, that is consistent 
with current or previous Standard & Poor's counterparty criteria. The total 
notional amount of these derivative agreements represents significantly more 
than the 5% materiality threshold under our criteria. We see a risk that a 
swap counterparty could default while in-the-money, and be owed a substantial 
termination payment, which would be due immediately and would rank pari passu 
with covered bond payments. As of Dec. 31, 2012, this risk existed on 
derivative agreements with 23 different counterparties, and the largest 
exposure for a potential termination payment due to a single counterparty was 
approximately EUR1.4 billion. 

As a result of this risk, we would, in accordance with our counterparty 
criteria, cap the covered bond ratings at the higher of one notch above our 
assessment of Dexia Municipal Agency's creditworthiness or the issuer credit 
rating of the lowest rated counterparty. As there are some counterparties with 
low or no Standard & Poor's ratings, we would effectively cap the covered bond 
ratings at one notch above our assessment of Dexia Municipal Agency's 
creditworthiness. We are not taking immediate rating action to reflect this 
cap as we are reviewing our assessment of the issuer's creditworthiness in 
light of the imminent sale of Dexia Municipal Agency.

On Dec. 31, 2012, the Dexia group published a press release outlining a Jan. 
31, 2013, deadline for the closing of the sale of Dexia Municipal Agency to a 
new government-sponsored bank, to which Dexia has referred in its publication 
as "Nouvel Etablissement de Credit" (NEC). NEC will be owned initially by the 
French state (AA+/Negative/A-1+; shareholding of 75%); Caisse des Depots et 
Consignations (CDC; AA+/Negative/A-1+; shareholding of 20%); and La Banque 
Postale (LBP; A+/Negative/A-1; shareholding of 5%). LBP will have an option to 
increase its shareholding to up to 33%. However, the French government will 
remain the majority shareholder through the combination of its direct 
shareholding and that of CDC. On Dec. 28, 2012, the European Commission 
granted approval for the proposed sale of Dexia Municipal Agency to NEC.

As part of the CreditWatch resolutions, we will review our assessment of Dexia 
Municipal Agency's creditworthiness. We expect to resolve the CreditWatch 
placements on Dexia Municipal Agency's public-sector covered bonds by Feb. 15, 
2013. All else remaining the same, we would expect to cap the ratings at one 
notch above our assessment of the creditworthiness of Dexia Municipal Agency 
due to counterparty risk. The change to our assessment of DMA's 
creditworthiness is likely to be positive, and would therefore at least 
partially offset the negative rating impact of counterparty risk. 

In our view, there remains execution risk in the proposed sale of Dexia 
Municipal Agency to NEC. If the sale does not take place within the announced 
timeframe, we will resolve the counterparty criteria element of the 
CreditWatch placements based on our current view of Dexia Municipal Agency's 
creditworthiness. This would result in a downgrade of five notches to 'A-', 
assuming all else remains the same.

RELATED CRITERIA AND RESEARCH 

Related Criteria
     -- Counterparty Risk Framework Methodology And Assumptions, Nov. 29, 2012
     -- Covered Bond Ratings Framework: Methodology And Assumptions, June 26, 
2012
     -- Covered Bonds Counterparty And Supporting Obligations Methodology And 
Assumptions, May 31, 2012
     -- Global Investment Criteria For Temporary Investments In Transaction 
Accounts, May 31, 2012
     -- Assessing Asset-Liability Mismatch Risk In Covered Bonds: Revised 
Methodology And Assumptions For Target Asset Spreads, April 24, 2012
     -- Request For Comment: Methodology For Assessing Operational Risk In 
Structured Finance Transactions, Oct. 4, 2011
     -- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology 
And Assumptions, June 14, 2011
     -- Principles Of Credit Ratings, Feb. 16, 2011
     -- Advance Notice Of Proposed Criteria Change: Methodologies And 
Assumptions For Rating Certain Covered Bonds And CDOs, Aug. 5, 2010
     -- Methodology: Credit Stability Criteria, May 3, 2010
     -- Revised Methodology And Assumptions For Assessing Asset-Liability 
Mismatch Risk In Covered Bonds, Dec. 16, 2009
     -- Understanding Standard & Poor's Rating Definitions, June 3, 2009
     -- European Legal Criteria for Structured Finance Transactions, Aug. 28, 
2008
     -- CDO Spotlight: Rating Approach To Synthetic CDOs Of Sovereigns Or 
Local And Regional Governments, May 3, 2006
     -- Covered Bond Monitor: Technical Note, Feb. 14, 2006
     -- Surviving Stress Scenarios: Assessing Asset Quality of Public Sector 
Covered Bond Collateral, Sept. 30, 2003
     -- Standard & Poor's Develops Criteria for Rating Obligations Foncieres, 
May 5, 2000

Related Research
     -- Credit FAQ: What's Behind The Updates To The Counterparty Risk 
Criteria Framework And Related Criteria?, Nov. 29, 2012
     -- Various Rating Actions Taken On Eight European Covered Bond Programs 
Following Counterparty Criteria Update, July 12, 2012


RATINGS LIST 
                     Rating
Program/      To                From
Country: Covered bond type

Ratings Remaining On CreditWatch Negative

Dexia Municipal Agency 
              AA+/Watch Neg     AA+/Watch Neg

France: Legislation-Enabled Public-Sector Covered Bonds (Obligations Foncieres)

 (Caryn Trokie, New York Ratings Unit)

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