TEXT - S&P affirms Deutsche Boerse AG ratings
(The following statement was released by the rating agency) Overview -- On Jan. 9, 2013, Deutsche Boerse AG (DBAG) announced its decision to enter into settlement discussions with the U.S. authorities regarding their investigation of potential violations of Iran sanction regulations relating to securities transfers via Clearstream Banking S.A. (CBL) in 2008. -- According to DBAG, the U.S. authorities' preliminary view is that if they were to issue a civil pre-penalty notice based only on information currently available to them, the amount indicated would be about $340 million. -- We believe CBL's earnings in 2012 and 2013 would likely be sufficient to absorb any associated settlement costs and, if not, that DBAG would make up for any shortfall. Consequently, we don't expect CBL's capital position to deteriorate. -- We are therefore affirming our 'AA/A-1+' ratings on DBAG and CBL. -- The negative outlook on DBAG reflects the risks we perceive to its financial position amid difficult market conditions. -- The stable outlook on CBL reflects our classification of CBL as an insulated subsidiary of DBAG, meaning that we would affirm the ratings on CBL even if we lowered our ratings on DBAG by one notch. Rating Action On Jan. 16, 2013, Standard & Poor's Ratings Services affirmed its 'AA' long-term and 'A-1+' short-term counterparty credit ratings on Deutsche Boerse AG (DBAG). The outlook remains negative. At the same time, we affirmed our 'AA/A-1+' ratings on DBAG's fully owned Luxembourg-based subsidiary Clearstream Banking S.A. (CBL). The outlook is stable. Rationale The rating actions follow DBAG's announcement on Jan. 9, 2013, that it had decided to enter into settlement discussions with the U.S. Treasury Department Office of Foreign Assets Control (OFAC) regarding OFAC's investigation of potential violations of Iran-sanction regulations in relation to certain securities transfers within CBL's settlement system in 2008. We understand from DBAG that OFAC's preliminary view is that if OFAC were to issue a civil pre-penalty notice, based only on information currently available to it, the pre-penalty notice would indicate an amount of approximately $340 million (EUR260 million). However, the final figure could be much lower, depending on the outcome of the discussions with OFAC, which has not taken a final decision on whether there was a violation or the amount of any penalty. DBAG has stated that CBL believes it acted in accordance with applicable U.S. sanctions regulations. We believe that CBL's earnings in 2012 and 2013 should be sufficient to absorb potential settlement costs. CBL's pretax profit was EUR201 million in 2011. However, we estimate it to have been lower in 2012 (absent any provisions for litigation costs) due to lower interest rates and higher spending on information technology. For similar reasons, we believe pretax profit will also be lower in 2013. If, contrary to our expectations, earnings were insufficient to absorb these costs, we believe that DBAG would make up for the shortfall. This is because DBAG has publicly reiterated its commitment to providing all necessary support to its subsidiary in order for CBL to maintain its strong financial profile. Consequently, we do not expect CBL's capital position to deteriorate. Nevertheless, we continue to regard CBL's capital--and more generally that of Clearstream International (Clearstream; not rated), CBL's immediate parent--as the main rating weakness. We consider that Basel II ratios do not fully capture the group's inherent risk, especially legal and operational risks arising from substantial securities settlements and custody volumes. We don't anticipate the potential OFAC settlement having a material impact on CBL's franchise, but will still closely monitor CBL's market share in the quarters to come. Overall, we still assess CBL's stand-alone credit profile at the 'aa' level. DBAG has historically received a very large proportion of CBL's posttax profits through dividends (for example 87% of CBL's net profit for 2011). If CBL has to pay a sizable penalty, CBL will not be in a position to upstream such large dividends to DBAG as it has in the past. In our view, DBAG's gross debt could therefore rise from the EUR1.6 billion reported at the end of November 2012 because of cash needs to support its ambitious investment agenda. As a consequence, we see an increasing risk that DBAG's leverage--as measured by the ratio of gross debt to EBITDA--would rise to materially more than 1.5x in 2013, a level that would likely trigger a downgrade of DBAG. This is not our central scenario, however, because we anticipate that the group's capital policy will be less shareholder friendly in 2013 than it was last year. Outlook The negative outlook on DBAG reflects the risks we perceive to its financial position in the challenging market environment, marked by persistent low growth in Europe. We could lower the ratings if DBAG's profitability decreased materially (for example because trading volumes dip further) or if a continued aggressive capital policy, potentially combined with a major cash outflow associated with any settlement, caused a substantial increase in gross debt. A deterioration of the leverage ratio to materially above 1.5x would likely trigger a downgrade. We would also lower the ratings if, contrary to our expectations, financial safeguards were weakened by Eurex Clearing relaxing some of the conservative assumptions underpinning the new margining system PRISMA. We could revise the outlook to stable if DBAG's capital policy became more conservative, final litigation costs were much lower than the indicated figure, and at the same time, the group managed to capture significant market share in over-the-counter clearing without compromising the robustness of its financial safeguards. The stable outlook on CBL reflects our classification of CBL as an "insulated subsidiary". We would therefore expect to affirm the ratings on CBL even if we lowered our ratings on DBAG by one notch. The stable outlook also reflects our anticipation that Clearstream will gradually improve its capitalization, maintain a low risk profile, and sustain good core revenues and its market share as an international central securities depository, despite a highly competitive environment and structural changes in the European securities industry. Related Criteria And Research -- Deutsche Boerse AG, Dec. 21, 2012 -- Clearstream Banking S.A., Dec. 21, 2012 -- Deutsche Boerse Outlook Revised To Negative On Lower Profitability And More Aggressive Capital Policy, Dec. 20, 2012 -- Group Rating Methodology And Assumptions, Nov. 9, 2011 -- Standard & Poor's Updated Methodology For Rating Exchanges And Clearinghouses, July 10, 2006 Ratings List Ratings Affirmed Deutsche Boerse AG Counterparty Credit Rating AA/Negative/A-1+ Senior Unsecured AA Junior Subordinated A+ Commercial Paper A-1+ Clearstream Banking S.A. Counterparty Credit Rating AA/Stable/A-1+ Certificate Of Deposit AA/A-1+ Commercial Paper A-1+ (Caryn Trokie, New York Ratings Unit)
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