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FITCH: RESOLUTION OF WESTLB'S RWN REQUIRES GREATER CLARITY ON OWNERSHIP AND
BUSINESS MODEL
Fitch Ratings-Frankfurt/London-21 February 2011: Fitch Ratings says that the
Rating Watch Negative on WestLB AG's (WestLB) ratings could be resolved if the
current discussions between the European Commission (EC) and the German Federal
Government bring clarity to the bank's future ownership and business model.
WestLB's Issuer Default Ratings (IDRs) of 'A-' and 'F1', Support Rating of '1'
and Support Rating Floor (SRF) of 'A-' were placed on RWN on 14 September 2009
to reflect the impact of a targeted transfer of ownership and change in the
bank's business model on the likelihood of support from the state of North
Rhine-Westphalia (NRW, 'AAA', 17.8%). WestLB's ratings are based on support,
without which the IDRs would be several notches lower and well into
sub-investment grade. The EC's targeted sale of WestLB by end-2011 is being
reviewed under the new proposals. WestLB has undergone material restructuring
since 2009, but the EC is seeking more significant change to its business model
to satisfy state aid requirements.
Fitch expects the EC to reach a final decision on the state aid proposals
submitted on 15 February 2010 within the next few weeks. This decision shouldbring some clarity to WestLB's future ownership and business model. WestLB is
currently owned by NRW, NRW's two regional savings bank associations (not
rated,
25.0% each), NRW.BANK (the regional public development bank 98.6%-owned by NRW,
'AAA', 30.9%) and two regional public authorities (0.65% each).
Several factors underpin Fitch's view of state support for WestLB and tie it
into the savings bank network under its current ownership. NRW and the region's
savings banks guarantee WestLB's grandfathered debt (rated 'AAA'), which will
remain material until 2015, especially subordinated debt. Moreover, WestLB has
strong economic links with NRW's savings banks, the regional market leaders in
retail banking. Fitch also considers that WestLB's funding profile benefited
from its privileged access to the region's savings banks during the financial
crisis. In addition, on 16 February 2011, federal government representatives
strongly expressed their view verbally that WestLB can rely on its owners'
responsibilities and support from the German authorities.
In November 2010, the EC extended its ongoing investigation into WestLB's state
aid. This move was motivated by the EC's view that in addition to previous
state
aid, the bank received an estimated EUR3.4bn in state subsidies when it Consequently, the EC subjected its approval of the entire state aid received by
WestLB to additional restructuring measures, which had to be submitted by 15
February 2011. On that date, the federal government proposed two alternative
restructuring plans.
Under the first proposal - devised by WestLB and its favoured option - the bank
would further reduce its total assets and risk-weighted assets by about
one-third by 2015. To improve the chance of a sale to third parties, WestLB is
proposing restructuring into four legally dependent but autonomously operating
units. Additionally, a progress report on WestLB's ongoing sale process was
submitted to the EC, as a sale of a majority stake remains a condition for the
EC's approval of the state aid received in 2009.
At the same time, the federal government submitted a second proposal as an
alternative in anticipation of the potential refusal of the first proposal.
Under this alternative, WestLB would spin-off a medium-sized central bank
(Verbundbank) for NRW's savings banks and considerably shrink to a size that
still enabled it to be a servicer to EAA, fully owned by NRW. The Verbundbank
would be complemented by some regional ancillary businesses, and the broader
German savings bank sector (Sparkassen-Finanzgruppe, A+/Stable) would
collectively become the sole owner of the Verbundbank. Fitch also understands that further large asset sales and transfers to the EAA could support WestLB's
transformation from a large and complex organisation with total assets of over
EUR200bn and an international branch network into a supporting entity for EAA
and Verbundbank.
It is still unclear which alternative will receive the EC's approval. Fitch
considers it unlikely that WestLB's favoured option - if approved by the EC -
would alter NRW's propensity to support the bank, as long as the bank's
ownership structure remains unchanged. In Fitch's view, the outcome of this
process would remain highly uncertain. Other Landesbanken have thus far shown
very little interest in a combination with WestLB. Financial investors outside
the Landesbanken sector remain involved in the bidding process, but do not
offer
the prospects that a sale within the Landesbanken sector could bring of
materialising strategic and financial synergies.
Fitch considers that a WestLB AG fully owned by NRW and a smaller and focussed
Verbundbank owned by the German savings bank sector which benefits from its
integration and strategic partnership with NRW's savings banks could both
result
in strong and sustainable institutional support.
timeframe beyond 2011. Their success also depends on the continued strain on
WestLB's infrastructure, personnel and franchise, which might significantly
increase the cost of implementation.
By Cornelius Rahn
Feb. 22 (Bloomberg) -- WestLB AG had some of its credit
rating outlooks changed by Moody’s Investors Service, which
cited the lender’s “more far-reaching downsizing and
restructuring targets.”
The outlook on the bank’s E+ standalone bank financial
strength rating was changed to “developing” from “stable,”
while the outlook on its A3 senior debt and deposit rating was
changed to “developing” from “negative,” Moody’s said in a
statement today.
Moody's changes outlook on WestLB's A3/E+ ratings to developing
Hybrid ratings' outlook changed to developing; Prime-1 rating affirmed
Frankfurt am Main, February 22, 2011 -- Moody's Investors Service has
today changed the outlook on WestLB AG's E+ standalone bank financial
strength rating (BFSR) to developing from stable and the outlook on the
A3 senior debt and deposit ratings to developing from negative.
Concurrently, Moody's has changed to developing from stable the outlook
on WestLB's B3-rated profit participation certificates and Caa1-rated
silent participations. WestLB's Prime-1 short-term rating has been
affirmed. Moody's ratings for WestLB's grandfathered debt of Aa1 are
unaffected.
The change of the outlook follows reports that a plan for a further
downsizing -- coupled with an internal separation of WestLB into four
organisationally independent business units -- has been submitted to the
European Commission (EC) for approval. In Moody's view, the
organisational restructuring has been proposed to pave the way for a
partial, orderly unwinding of WestLB, which (i) enhances predictability
surrounding the bank's future; and (ii) implies a level of protection for
bondholders in a wind-down scenario.
RATINGS RATIONALE
The revised restructuring plan submitted by WestLB on 15 February 2011 to
the EC not only includes more far-reaching downsizing and restructuring
targets, but also elements that appear to be proposed in preparation for
a fall-back plan to cover the eventuality that WestLB might be unable to
comply with the required change in (at least the majority of) the bank's
current ownership by the end of 2011.
Moody's understands that the restructuring plan still follows the bank's
preferred option of a further significant downsizing of WestLB that would
be pursued in addition to the previously agreed sale of the bank.
However, the reorganisation also entails a separation for different
businesses that, at a later stage, could serve the purpose of an orderly
breaking-up and partial unwinding of WestLB. This, in particular, would
benefit from the support of its current shareholders -- most prominently
the Federal State of North-Rhine Westphalia (NRW / Aa1 stable), as well
as the German savings banks' sector (S-Finanzgruppe / Aa2 stable) and the
Federal Government (Aaa stable).
"While the news lifts some of the earlier rating pressures, ratings could
still move in either direction," said Katharina Barten, a Moody's senior
credit officer and lead analyst for WestLB. "At this stage, we cannot be
certain that WestLB will find a new owner and, if not, what the exact
implications would be for bond investors and depositors," Ms Barten
added. According to the agency, an orderly unwinding of parts of WestLB
would follow, only if the sale of the whole bank fails and/or if the EC
does not approve the latest restructuring plan.
Although very few details about the new plan have been unveiled to date,
Moody's takes the view that the plan may assist in (i) closing the EC's
as yet unresolved state-aid ruling; (ii) avoiding a potentially
non-orderly resolution of WestLB; and (iii) paving the way for parts of
WestLB to be also legally separated at a later stage, and transferred to
a new entity that would likely be wholly-owned (and potentially supported
by) the S-Finanzgruppe.
A FULL SALE OF WESTLB POTENTIALLY BEARS THE HIGHEST RISK FOR INVESTORS
Reportedly, there are several bidders that have expressed interest in
fully acquiring WestLB. These bidders have not been officially disclosed
at this stage and therefore it is difficult to make assumptions regarding
WestLB's medium-term business and risk profile. If it were privatised and
held by less supportive or financially weaker owners, Moody's cautions
that WestLB's ratings could experience a multi-notch downgrade. The
rating agency takes the view that privatisation is less likely, given the
current adverse market conditions for the sale of sizeable banks.
RISK FOR HYBRID HOLDERS: LOW PREDICTABILITY, HIGH TRANSITION RISK
WestLB's hybrids experienced coupon losses or deferrals in 2009 and a
write-down of principal on these instruments, following a net loss for
the year (based on German GAAP accounts). Although these instruments are
principally loss-absorbing in a liquidation scenario with a relatively
high risk of a partial or even full loss, Moody's has reservations as to
whether a loss can be imposed in an orderly unwinding. In this context,
Moody's notes that neither the EC, nor the German government, has ever
intervened in a bank's contractual obligations towards investors in
hybrid capital instruments.
Nonetheless, the rating agency cautions that the uncertainty of the
current situation and the materially weakened support in Germany for all
subordinated classes of debt and capital instruments result in major
transition risk for the ratings of WestLB's hybrid instruments.
METHODOGIES
The principal methodologies used in rating WestLB AG were Bank Financial
Strength Ratings: Global Methodology published in February 2007, Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A
Refined Methodology published in March 2007, and Moody's Guidelines for
Rating Bank Hybrid Securities and Subordinated Debt published in November
2009.
PREVIOUS RATING ACTIONS
Moody's last rating action on WestLB was on 17 February 2011, when
Moody's downgraded WestLB's EMTN program rating for senior subordinated
debt to (P)B1 from (P)Baa1 and subsequently withdrew this rating.
Domiciled in Dusseldorf, Germany, WestLB reported total assets of EUR220
billion as of 30 September 2010 and a pretax loss for the first nine
months of EUR33 million.
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