TEXT-Fitch affirms Dexia & DCL at 'A+'; outlook negative
(The following statement was released by the rating agency)
Oct 05 - Fitch Ratings has affirmed Dexia's Long-term Issuer Default Rating (IDR) at 'A+', Short-term IDR at 'F1+', Support Rating at '1' and Support Rating Floor at 'A+'. The Outlook is Negative. At the same time, the agency has affirmed and withdrawn Dexia's Viability Rating (VR) of 'f'. Dexia's debt securities issued under the states' funding guarantees have been affirmed at 'AA'/'F1+'. A full list of rating actions is at the end of this comment.
RATING ACTION RATIONALE
Dexia's and Dexia Credit Local's (DCL) IDRs, Support Rating and Support Rating Floor continue to reflects Fitch's opinion that there would be an extremely high probability that the states of France ('AAA'/Negative), and Belgium ('AA'/Negative), would provide additional support to them, if required.
While the three states of France, Belgium and Luxembourg ('AAA'/Stable) have been involved in the successive support package provided to Dexia in 2008 and 2011 (i.e. a capital injection from various French and Belgian public entities in 2008, funding guarantees from the three states in 2008 and 2011), France and Belgium are, in Fitch's view the most likely source of additional support in case of need. Dexia's and DCL's Support Rating Floor are the same as those of systemically important French banks and the Negative Outlooks on Dexia's and DCL's Long-term IDRs continue to mirror that of the French state.
Dexia's VR, placed on 'f' in October 2011, indicates that the bank would in Fitch's opinion have defaulted had it not received extraordinary support. The withdrawal of Dexia's VR reflects the agency's view that Dexia, as an institution in run-off relying on extraordinary support from the central banks and states guarantee for its funding need, cannot be meaningfully analysed on a standalone basis.
As a core subsidiary to DCL and line with Fitch's criteria, Dexia Muncipal Agency's (DMA) Long-term IDR is aligned with that of its sole shareholder and therefore has been affirmed at 'A+'.
RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOORAny negative rating action on France's ratings would lead to a reduction in the French state's ability to provide support to Dexia and would therefore result in a negative rating action on Dexia's and DCL's Support Rating Floors and Support Ratings. Any decline in the states' willingness to support Dexia could also result in a downgrade of the banks' Support Rating Floors and Support Ratings.
RATING DRIVERS AND SENSITIVITIES - IDRs AND SENIOR DEBT
As Dexia's and DCL's Long-term IDRs and senior debt rating are support driven they would be sensitive to any change in Dexia's and DCL's Support Rating Floors (whose sensitivities are detailed above). The Negative Outlook on Dexia's Long-term IDR mirrors that of the French state.
The 'A+' rating assigned to Dexia's senior debt reflects Fitch's view that it is extremely unlikely that the European Commission (EC) would apply 'burden sharing' to Dexia's senior creditors, given the very negative impact on investor sentiment (and therefore ultimately on bank funding costs) and wider repercussions of such an unprecedented action. In this context, the July 2012 Memorandum of Understanding between Spain and the Euro Group concerning the Spanish banking sector includes proposed mandatory burden-sharing of losses by subordinated but not by senior debt holders.
The senior debt rating is highly sensitive to any form of 'burden sharing' that the EC could impose on senior bondholders among the restructuring measures for Dexia following state aid received (a final decision is expected in January 2013).
RATING DRIVERS AND SENSITIVITIES - SUBORDINATE DEBT AND HYBRID SECURITIES
The ratings of Dexia's subordinated debt and hybrid securities (issued by DCL and Dexia Funding Luxembourg ) reflect the substantial to exceptionally high levels of risk of potential non-performance and losses which are not captured by Dexia's and DCL's IDRs as the IDRs are entirely based on expcted state support.
The 'CCC' ratings assigned to two DCL lower Tier 2 subordinated debt (XS0307581883 and XS0284386306, with contractually mandatory coupon payment) continue to reflect the substantial credit risk caused by potential EC requirements as part of its 'burden sharing' concept. The 'C' ratings assigned to DCL (FR0010251421) and Dexia Funding Luxembourg (XS0273230572) hybrid Tier 1 securities reflect the coupons missed as part of the first restructuring plan, and the expected further coupon omission and poor recovery rates.
Following the first round of state aid received in 2008, the EC requested that Dexia pay coupons on its subordinated debt instruments only if deemed contractually mandatory until the end of 2011. Given the second round of state aid received in October 2011 and related on-going EC investigations, Dexia has decided to extend this in 2012. In Fitch's view, it is highly likely that the EC will, at least, renew the coupon payment ban on subordinated securities for the sake of the 'burden sharing' principle.
The ratings of the subordinated debt and hybrid securities are sensitive to the form of the burden sharing that will be imposed by the EC. In particular, the agency would consider a potential debt restructuring that would result in losses for subordinated bondholders as a "distressed debt exchange".
RATING DRIVERS AND SENSITIVITIES - GUARANTEED DEBT
The states of Belgium, France and Luxembourg provided Dexia with a several but not joint guarantee in 2008 (EUR20bn of guaranteed debt outstanding at 1st October 2012, no new issue under this guarantee) and a new similar one in 2011 (EUR51bn outstanding at the same date).
The ratings assigned to the securities issued under the states' guarantees (2008 and 2011) are aligned with the rating of the Belgian sovereign given it is the lowest-rated guarantee provider, the guarantee is several but not joint and Fitch rates on a 'first-dollar loss' basis. Each state is responsible for a share of the overall guarantee (60.5% for Belgium, 36.5% for France and 3% for Luxembourg). The 2011 guarantee has only received temporary approval from the EC for a maximum of EUR55bn; the final decision to increase the final guarantee amount to a maximum of EUR90bn is expected for January 2013 when the restructuring plan will be agreed with the EC.
The ratings assigned to the securities issued under the guarantees are sensitive to any rating action on the Belgian sovereign. The 'F1+' rating assigned to short-term securities issued under the guarantee would be downgraded to 'F1' if Belgium's Long-term IDR were to be downgraded below 'AA-'.
The rating actions are as follows: Dexia: Long-term IDR: affirmed at 'A+'; Outlook Negative Short-term IDR: affirmed at 'F1+' Viability Rating: affirmed at 'f'; withdrawn Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A+' DCL: Long-term IDR: affirmed at 'A+'; Outlook Negative Senior debt: affirmed at 'A+' Market linked notes: affirmed at 'A+emr' Subordinated debt: affirmed at 'CCC' Tier 1 hybrid securities: affirmed at 'C' Short-term IDR: affirmed at 'F1+' Commercial paper: affirmed at 'F1+' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A+' State guaranteed debt: affirmed at 'AA/F1+' Dexia Funding Luxembourg: Tier 1 hybrid securities: affirmed at 'C' Dexia Municipal Agency : Long-term IDR: affirmed at 'A+'; Outlook Negative Support Rating: affirmed at '1'
Covered bonds rated 'AAA'/Rating Watch Negative: unaffected by this rating action
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