Fitch Downgrades 3 German Landesbanken's Lower Tier 2 Debt Ratings

Tue Jan 28, 2014 1:47pm EST

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(The following statement was released by the rating agency) FRANKFURT/LONDON, January 28 (Fitch) Fitch Ratings has downgraded Bayerische Landesbank's (BayernLB) and Landesbank Baden-Wuerttemberg's (LBBW) lower Tier 2 debt instruments to ‘BB’ and ‘BB+‘, respectively, from ‘BBB+ and removed them from Rating Watch Negative (RWN). At the same time, Fitch has downgraded HSH Nordbank AG’s (HSH) lower Tier 2 debt instruments to ‘B-‘ from ‘BBB-‘ and revised the Rating Watch to Evolving (RWE) from Negative. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The Landesbanken’s lower Tier 2 debt instruments have been downgraded to one notch below their respective Viability Ratings (VR) as the anchor rating. The downgrade stems from revised state aid rules that came into effect on 1 August 2013. Fitch believes that the rules will make it difficult for federal states to support their respective Landesbanken without some form of burden-sharing affecting subordinated debtholders. We therefore consider it is no longer appropriate to use an Issuer Default Rating (IDR) based on state support as the anchor rating for Landesbankens’ lower Tier 2 subordinated debt ratings. Fitch's understanding is that a Landesbank that receives state aid will be required by the European Commission (EC) to impose losses on subordinated debtholders, most likely through a liability management exercise. In Fitch's view, there is a clear political intent to enforce burden-sharing onto banks in the EU in receipt of state aid according to the European Commission's "Proposal for a directive establishing a framework for the recovery and resolution of credit institutions and investment firms" of 28 June 2013 and its "Communication from the commission on the application, from 1 August 2013, of state aid rules to support measures in favour of banks in the context of the financial crisis" dated 12 July 2013. RATING SENSITIVITIES As the VR is the new anchor rating for Landesbanken BayernLB's, LBBW's and HSH's lower Tier 2 subordinated debt ratings they are sensitive to any change in the banks’ respective VRs. In line with HSH’s VR, its subordinated debt ratings have been placed on RWE. At end-June 2013, HSH restored the existing guarantee shield on its portfolio to its initial level of EUR10bn, from EUR7bn. Fitch views it as uncertain whether the recent capital support measures by the federal state owners will be approved by the EC or whether EC approval would require broader restructuring measures by the bank. Fitch will resolve the RWE once there is greater clarity about the EC's decision and respective potential compensatory requirements. Fitch expects this to become clear by 2H14. The rating actions are as follows: Bayerische Landesbank: EUR1bn 5.75% Lower Tier 2 subordinated notes (XS0326869665) downgraded to 'BB' from ‘BBB+’; off RWN EUR100m variable rate notes (DE000BLB24U6) downgraded to 'BB' from ‘BBB+’; off RWN EUR750m Lower Tier 2 subordinated notes (XS0285330717) downgraded to 'BB' from ‘BBB+’; off RWN Landesbank Baden-Wuerttemberg: EUR21m floating rate notes (USU122163020) downgraded to 'BB+' from ‘BBB+’; off RWN EUR29mn 7.5% notes (USU122162030) downgraded to 'BB+' from ‘BBB+’; off RWN HSH Nordbank: EUR1bn step up callable subordinated notes (DE000HSH2H23) downgraded to 'B-‘/RWE from ‘BBB-‘/RWN EUR750m variable rate subordinated notes (DE000HSH2H15) downgraded to 'B-‘/RWE from ‘BBB-‘/RWN Contact: Primary Analyst Christian van Beek Director +49 69 768 076 248 Fitch Deutschland GmbH Taunusanlage 17 60325 Frankfurt am Main Secondary Analyst Michael Dawson-Kropf Senior Director +49 69 768 076 113 Committee Chairperson Erwin van Lumich Managing Director +34 93 323 8403 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria 'Global Financial Institutions Rating Criteria', dated 15 August 2012 and 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 5 December 2012 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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