Not surprisingly most of the rating action last week centred on the latest banks to find themselves in difficulty, and in some cases, their rescuers as well. There was a little local activity too. Key among those of interest to local investors were: Wachovia; Citigroup; Hypo Real Estate Bank International; Glitnir Bank; Kaupthing Bank; Dexia Group; Genworth; Lendlease; Centro and Centro CMBS; Qantas; and yet again, Mobius NCM-03 Trust and Allco Max Securities and Mortgage Trust (2005-1T and 2006-1T issues).
Citigroup’s move to acquire the banking operations of Wachovia kicked off the rating actions for the week. Moody’s Investors Service and Fitch Ratings took a similar approach, placing the senior unsecured ratings assigned to Wachovia Corporation and the ‘Aa2/A+’ ratings assigned to Wachovia Bank on review but with the direction uncertain. Likewise Fitch placed its ‘AA-’ issuer default rating on Citigroup Inc on Rating Watch Negative and Moody’s placed the ‘Aa3/Aa1’ senior unsecured ratings assigned to Citigroup Inc and Citibank on review for possible downgrade.
Both Moody’s and Fitch acknowledged that their ratings assigned to Wachovia Bank could move up if their ratings assigned to Citigroup are affirmed. The transaction is seen as being strategically positive for Citi, increasing its retail and middle market franchise in the US.
However, Moody’s expressed concern over the integration challenges Wachovia poses at a time when Citi’s own asset quality is under pressure, while Fitch said it expects Citi to report further losses for the third quarter and if this continues into the fourth quarter of 2008 and beyond, it is likely to lower its ratings on the group by one notch.
The uncertainty over the direction for ratings assigned to Wachovia Corporation reflects the unknown financial structure, strategic plans etc., of the new holding company that is to be incorporated. Fitch expressed the view that the new entity, which will retain ownership of Wachovia Securities and Evergreen Asset Management, may not remain an independent entity for long (it looks like it was right – see below). It also differed from Moody’s in lowering its rating to ‘BB-’ from ‘A+’ while Moody’s left its ‘A1’ rating on Wachovia Corporation unchanged.
Standard and Poor’s took a different view on the transaction entirely, having separately placed the ‘AA-/AA’ long term credit ratings assigned to Citigroup and Citibank on CreditWatch with negative implications over concerns about the level of mark to market asset write downs and loan losses the bank has incurred and is likely to continue to incur. S&P flagged the possibility of a downgrade of up to two rating notches for both entities.
With this as the backdrop to Citi’s acquisition of Wachovia’s banking operations, S&P placed the ‘AA-’ rating on the bank also on CreditWatch with negative implications. S&P noted that Wachovia will not add materially to Citi’s credit risk profile as the transaction is structured as a clean bank acquisition.
The long-term credit rating assigned to Wachovia Corporation was immediately lowered to ‘BBB-’ from ‘A+’ and left on CreditWatch Negative. S&P will resolve the CreditWatch on Wachovia Corporation and Bank when the transaction is completed. Completion is scheduled for December 31, 2008 but is subject to the approval of Wachovia shareholders, among others.
However, much of this rating action was superseded on Friday night (our time) when Wells Fargo made a bid to acquire Wachovia in its entirety. Wells Fargo’s bid requires regulatory approval as well as that of Wachovia’s shareholders. Citigroup is claiming that the bid breaches the exclusivity agreement entered into with Wachovia earlier in the week. S&P changed the Credit Watch status of its Wachovia ratings to Developing.
Credit ratings assigned to the Hypo Group of banks were variously lowered or placed on review for downgrade by all three rating agencies after the group found it was no longer able to fund itself in the short term money markets and a €15 billion short term funding facility was subsequently provided by a consortium of German banks and guaranteed by the German government. The facility will be available for one month, in which time the group is expected to have made arrangements for more permanent funding.
The Group member of concern to this market is Hypo Real Estate Bank International (HREBI), which has issued senior unsecured debt and public sector and mortgage pfandbriefe. S&P and Fitch lowered their ratings on HREBI to ‘BBB+/A-’ from ‘A-/A’ with outlooks of negative and stable, respectively. Moody’s placed its ‘A1’ rating on review for possible downgrade.
S&P and Moody’s placed their ‘AAA/Aa2’ pfandbriefe ratings on review for possible downgrade while Fitch placed its ‘AAA’ public sector pfandbriefe ratings and ‘AA+’ mortgage pfandbriefe ratings on Rating Watch Negative.
Glitnir Bank (or Glitnir banki hf, formerly Islandsbanki) has also encountered funding difficulties in recent times in wholesale funding markets but this was not the catalyst for the Icelandic government taking a 75 per cent equity interest in the bank in return for a €600 million capital injection. The catalyst was Glitnir’s major shareholder, Stodir hf, to whom it has a significant exposure, being placed in administration the day before.
All rating agencies lowered their long-term unsecured ratings to ‘BBB/Baa2/BBB-’ from ‘BBB+/A2/A-’ respectively. S&P has a negative rating outlook and Moody’s is developing while Fitch has its ‘BBB-’ rating on Rating Watch Negative. The Icelandic government has said it does not intend to be a long-term shareholder but there are systemic issues for Iceland’s banks, which, as a group, have a high reliance on wholesale funding and at the same time have expanded aggressively outside of Iceland. Moreover, Iceland’s economic performance is deteriorating and Iceland faces the prospect of a hard landing in 2009.
These factors also led to rating action being taken on Iceland’s other banks including Kaupthing Bank. Moody’s placed its ‘A1’ long term credit rating assigned to Kaupthing on review for possible downgrade while Fitch lowered its issuer default rating to ‘BBB’ from ‘A-’ and left the rating on Rating Watch Negative.
The Dexia SA banking group has also experienced reduced access to funding in recent times as it has incurred significant losses on its holdings of structured securities and through its exposure to the US housing market via its monoline insurance subsidiary, Financial Security Assurance Inc. (FSA). Among other things, FSA has insured US$18 billion of mortgage linked securities.
The French, Belgian and Luxembourg governments combined during the week to inject €6.4 billion of equity into the group to address its funding difficulties and return some stability to the group. This equity injection takes public sector ownership of the group to more than 50 per cent.
Nevertheless, S&P lowered its long term credit rating on the group to ‘AA-’ from ‘AA’ on concerns of continuing losses being incurred on its structured security holdings, thereby impairing earnings and capital generation. After setting the rating outlook at negative, the fresh equity injection prompted an outlook revision to stable. Moody’s lowered the group’s rating to ‘Aa3’ from ‘Aa1’ and left the rating on review for possible downgrade and Fitch lowered the group’s ratings to ‘AA-’ from ‘AA+’ and placed a stable outlook on the new rating.
Dexia SA has two subsidiaries that have been active in the domestic debt capital market. FSA, mentioned above, has credit wrapped a number of bond issues. As a ring fenced monoline insurer it remains one of only two such insurers to retain ‘AAA’ ratings. S&P’s rating has a negative outlook assigned, Fitch a stable outlook while Moody’s rating is on review for possible downgrade.
The other subsidiary of interest is Dexia Municipal Agency (DMA) which still has on issue A$1.85 billion of covered bonds or pfandbriefe. DMA was established in 1999 as a société de credit foncier to finance public sector assets through the debt capital markets. Under French law it is an insolvency remote vehicle and the credit ratings assigned to its debt issues remain unchanged.
Structured credit ratings remain under pressure.
Turning to local rating actions, Mobius NCM-03 Trust was the subject of further rating action, for the same reasons as previously outlined, with Fitch this time lowering the ratings on the Class D & E tranches to ‘B+’ from ‘BB’ and ‘C’ from ‘CCC’, respectively. The ratings on all tranches of securities remain on Rating Watch Negative.
Following a downgrade of the MTN’s issued by Allco Max Securities and Mortgage Trust (2005-1T and 2006-1T issues) to ‘A-’ from ‘AA-’ the week before last, S&P downgraded the notes again on Friday to ‘BBB-’. S&P’s concerns remain unchanged, just exacerbated. No information was provided on the fate of the warehouse notes that were to be redeemed or re-marketed by September 30.
Moody’s moved on Centro, Centro CMBS and Qantas. The senior unsecured debt ratings assigned to Centro NP LLC were moved to ‘Caa1’ from ‘B3’. Moody’s made the downgrade even though Centro’s lenders extended the September 30, 2008 refinancing deadline for US debt to that of the Australian debt deadline of December 15. Moody’s is concerned about Centro’s inability to complete portfolio asset sales and the continuing pressure on the credit rating from the material decline in capital market liquidity. The rating remains on review for possible downgrade as do the ratings assigned to securities issued by Centro CMBS 2006-1 Trust.
Moody’s affirmed the ‘Baa1/P-2’ ratings that it assigns to Qantas after commencing a review in June over concerns about the cost pressures the airline was facing, including fuel costs. Moody’s concluded that Qantas had implemented sufficient initiatives to counter rising cost pressures.
S&P lowered the credit ratings assigned to Genworth Financial Inc’s (GFI) US lenders’ mortgage insurance subsidiaries to ‘AA-’ from ‘AA’ on GFI’s announcement that it is exploring strategic alternatives for this business, including a possible spin-off. Genworth Financial Mortgage Insurance Pty Ltd., a major provider of lenders’ mortgage insurance in Australia, is not included in this review and its credit ratings were not affected.
The ‘BBB-/A-3’ credit ratings assigned to Lend Lease by S&P were affirmed with a stable outlook and removed from CreditWatch. The rating action follows LLC's agreement to buy a 41 per cent stake in retirement village developer Babcock & Brown Communities Group (BBC), and to become manager of BBC. LLC also announced that given the uncertain global economic outlook it would not pursue further large-scale acquisitions in the near term.
- Bank rescues trigger many rating actions
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06 October 2008 6:56am
