Various Commerzbank, Dresdner, And Eurohypo Hybrid Capital Instruments Cut To 'CCC' And Kept On Watch Negative
FRANKFURT (Standard & Poor's) May 11, 2009--Standard & Poor's Ratings Services said today it lowered its issue ratings on various Tier 1 hybrid capital instruments issued by Germany-based Commerzbank AG (A/Stable/A-1) and related entities to 'CCC' from 'BB'. The instruments affected were issued by Commerzbank Capital Funding Trust I, II, and III (Commerzbank FTs), Dresdner Capital Funding Trust I, II, III, and IV (Dresdner FTs), and by Eurohypo Capital Funding Trust I and II (Eurohypo FTs). All of these issue ratings remain on CreditWatch, where they were placed with negative implications on Jan. 12, 2009. The 'C' ratings on Dresdner Bank's hybrid capital instruments, issued by HT1 Funding GmbH and UT2 Funding PLC, are unchanged.
These rating actions follow the May 7 announcements by Commerzbank and the European Commission (EC) that the EC has approved a planned €10 billion capital injection by the Federal Republic of Germany (AAA/Stable/A-1+) into Commerzbank. In its announcement, the EC stated that its approval was based on Commerzbank's restructuring plan, which includes the suspension of dividend and interest payments to holders of hybrid capital, aimed at keeping state aid to a minimum. Despite the EC ruling, Commerzbank may continue to make payments on certain hybrids if specific terms contractually oblige it to do so for the
financial years 2009 and 2010.
"The lowering of the issue ratings reflects our view that the likelihood of payment suspension on these instruments, starting with payments for financial year ending Dec. 31, 2009, is high," said Standard & Poor's credit analyst Stefan Best. "We base this opinion on our assessment that Commerzbank, which is in the process of integrating Dresdner Bank AG (A/Stable/A-1), and Eurohypo AG (A/Negative/A-1) will likely post losses in 2009. The downgrade also reflects our belief that the EC's expectation of nonpayment on the banks' hybrid capital instruments and pressure on the banks' financial profiles over the next two to three years could increase the likelihood of payment deferrals on these instruments because of the banks' need to preserve capital.
We are also of the view that the EC ruling indicates that it considers Commerzbank to be in distress."
However, the 'CCC' ratings also reflect our assessment that payments might be possible in 2009, although some details of the bank's implementation of the EC ruling and that of the German authorities are still unclear.
This is because, in its announcement, Commerzbank did not explicitly refer to distributions for 2008. Commerzbank's financial statements for 2008, including dividend accruals for these instruments, have already been finalized.
The terms of Dresdner FTs' hybrids stipulate that coupon deferral has to be linked to a declaration by Dresdner Bank's management board of a "shift" event (that is, that its regulatory Tier 1 or total capital ratio has fallen below the minimum requirement or that noncompliance with the minimum is imminent). This, in our view, may allow payment, given that Commerzbank's capital ratios will be strengthened by the government's planned capital injection.
Because Commerzbank FTs' hybrid instruments could potentially rank equally with those of the Dresdner FTs following finalization of Commerzbank's merger with Dresdner Bank, under the terms of the Commerzbank FTs' hybrids, coupon payments become mandatory if the bank makes coupon payments on equally ranking (parity) securities.
Nevertheless, we note that German regulators may have the power to veto payments under the German Banking Act.
We understand that Eurohypo FTs' hybrids would not be considered parity securities to those of the Dresdner FTs, so payments on the Dresdner FT instruments would not trigger coupon payments on the Eurohypo FTs' instruments.
We also understand that Commerzbank is not obliged to cover coupon payments on Eurohypo FTs' instruments under its profit-and-loss transfer agreement with Eurohypo.
At this stage, it is unclear to us whether the existing and planned new hybrid capital instruments held by the German government would be treated the same as the Dresdner FTs' and Commerzbank FTs' instruments with respect to coupon payment.
We believe that a €1.5 billion annual coupon payment to the German government, combined with the bank's potential losses over the next two to three years, would erode Commerzbank's capitalization and distributable reserves substantially and further increase the likelihood of nonpayment on all instruments.
"All of these issue ratings remain on CreditWatch with negative implications, reflecting the uncertainties regarding Commerzbank's and the German authorities' implementation of the EC ruling, which could affect all three banks' ability and willingness to meet coupon payments on individual instruments," said Mr. Best. "We would lower the ratings on individual instruments to 'CC', if we believe that a coupon deferral is imminent, and to 'C' if a coupon payment on an instrument is suspended."
RATINGS LIST
Downgraded
To From
Commerzbank Capital Funding Trust I
Preferred Stock CCC/Watch Neg BB/Watch Neg
Commerzbank Capital Funding Trust II
Preferred Stock CCC/Watch Neg BB/Watch Neg
Commerzbank Capital Funding Trust III
Preference Stock CCC/Watch Neg BB/Watch Neg
Dresdner Funding Trust I
Junior Subordinated CCC/Watch Neg BB/Watch Neg
Dresdner Funding Trust II
Junior Subordinated CCC/Watch Neg BB/Watch Neg
Dresdner Funding Trust III
Junior Subordinated CCC/Watch Neg BB/Watch Neg
Dresdner Funding Trust IV
Junior Subordinated CCC/Watch Neg BB/Watch Neg
Eurohypo Capital Funding Trust I
Preferred Stock* CCC/Watch Neg BB/Watch Neg
Eurohypo Capital Funding Trust II
Preferred Stock* CCC/Watch Neg BB/Watch Neg
Ratings Affirmed
HT1 Funding GmbH
Junior Subordinated** C
UT2 Funding PLC
Junior Subordinated** C
*Guaranteed by Eurohypo AG.
**Supported by Allianz SE.
NB: This list does not include all the ratings affected.
