TEXT-S&P cuts Banco de Sabadell hybrid rating to 'C'

Wed Sep 5, 2012 11:55am EDT

Sept 5 - OVERVIEW
     -- On Sept. 3, 2012, Spain-based Banco de Sabadell S.A. 
(Sabadell) announced an offer to repurchase series I/2006 preferred securities
and series I/2006 and I/2010 nondeferrable subordinated securities.
     -- We consider the offer a "distressed exchange" under our criteria.
     -- We are therefore lowering our issue ratings on Sabadell's preferred 
stock to 'C' from 'B-' and on the nondeferrable subordinated debt to 'D' from 
'B+'.
     -- The rating action does not affect our counterparty credit ratings on 
Sabadell or the other issue ratings.


RATING ACTION
MADRID (Standard & Poor's) Sept. 5, 2012--Standard & Poor's Ratings Services 
said today that it had lowered its issue ratings to 'C' from 'B-' on the 
series I/2006 preferred stock issued by Spain-based Banco de Sabadell S.A. 
(Sabadell; BB+/Negative/B), and to 'D' from 'B+' on its series I/2006 and 
I/2010 nondeferrable subordinated debt.

RATIONALE
The downgrades follow Sabadell's announcement on Sept. 3, 2012, that it had 
offered to repurchase part of its outstanding preferred stock and 
nondeferrable subordinated debt, including the abovementioned series. As of 
today, the rated securities subject to this offer have a nominal value of EUR736
million.

The rating action reflects our view that the offer constitutes a "distressed 
exchange" under our criteria. This is because we believe that investors will 
receive less value than the promise of the original securities as the offer 
will likely imply a repurchase below par value. 

We take into account the fact that the long-term rating is speculative grade 
and believe there is a heightened perception on the part of investors that 
payments on hybrid instruments and nondeferrable subordinated debt issued by 
Spanish banks are uncertain, particularly after the announcement of the 
conditions of the memorandum of understanding governing the planned EUR100 
billion bail-out of the wider Spanish banking sector. These uncertainties make 
it highly likely, in our view, that investor acceptance of Sabadell's offer 
could be driven by a perception that they might be required to absorb losses 
in the case of any recapitalization by the government, even though it remains 
unclear at this stage which banks will receive state capital support under the 
terms of the bailout. 

We lowered our ratings on the two types of instruments to different levels, 
reflecting the different features that we understand are incorporated in the 
hybrid capital instruments, compared with the nondeferrable subordinated 
instruments. As explained in our criteria, an exchange offer on an equity 
hybrid instrument may reflect the possibility that, absent the exchange offer 
taking place, the issuer might exercise the coupon deferral option, in 
accordance with the terms of the instrument. In such instances, the rating on 
the hybrid would go to 'C', rather than the 'D' rating used for nondeferrable 
debt.

These rating actions do not affect our counterparty credit ratings on Sabadell 
or any other issue ratings. According to our criteria, an 'SD' rating is 
assigned when we believe that the obligor has selectively defaulted on a 
specific issue or class of obligations, excluding those that qualify as 
regulatory capital. Since the notes subject to the repurchase offer qualify as 
regulatory capital, the downgrade of the preferred stock and subordinated debt 
instruments has no implications on our counterparty credit ratings on 
Sabadell. (For details, see paragraph 15 of our criteria article "Timeliness 
of Payments: Grace Periods, Guarantees, And Use Of 'D' And 'SD' Ratings," 
published Dec. 23, 2010, on RatingsDirect on the Global Credit Portal).

On completion of the tender offer, we will review our ratings on any 
untendered preferred stock and nondeferrable subordinated debt.


RELATED CRITERIA AND RESEARCH
     -- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
     -- Rating Implications Of Exchange Offers And Similar Restructurings, 
Update, May 12, 2009
     -- Timeliness of Payments: Grace Periods, Guarantees, And Use Of 'D' And 
'SD' Ratings, Dec. 23, 2010
     -- Credit FAQ: Applying The Bank Hybrid Capital Criteria To Specific 
Instruments, Dec. 20, 2011




RATINGS LIST

Downgrade
                                      To          From
Banco de Sabadell S.A.
Preferred Stock                             
  EUR32.4 mil var rate fxd/fltg 
  rate callable perp pfd stk          C           B-    
 
Subordinated Debt     
  EUR230.5 mil fltg rate sub        
  callable nts due 05/25/2016         D           B+
  EUR473.35 mil 6.25% med-term 
  nts due 04/26/2020                  D           B+



Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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