TEXT - S&P affirms Deutsche Boerse AG ratings

Wed Jan 16, 2013 12:36pm EST

Related Topics

(The following statement was released by the rating agency)

     -- 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 
     -- 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 

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 

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' 

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 

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 

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 

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)
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.