Moody's decision was driven by the recent downgrade of France to Aa1 from Aaa and the high correlation in credit risk which Moody's believes is present among the ESFS' and ESM's entities' largest financial supporters.
Moody's downgrade of France reflects the rating agency's view that there has been a marginal diminution in the certainty that the sovereign will fulfil its financial obligations. France is the second largest contributor to the two entities' financial resources, as a provider of callable capital in the case of the ESM and as a guarantor country in the case of the EFSF.
Moody's view that there is a high correlation in credit risk among the entities' supporters is consistent with the evolution to date of the euro area debt crisis and the close institutional, economic and financial linkages among the major euro area sovereigns. As a result, the credit risks and ratings of the ESM and the EFSF are closely aligned to those of its strongest supporters.
At the same time, Moody's explains that both entities remain extremely highly rated at Aa1 because the ESM and the EFSF benefit from the following common credit strengths:
(i) Low leverage: the ESM has a maximum lending capacity of EUR500 billion, which is backed by subscribed capital of EUR700 billion; while the EFSF has a guarantee mechanism which results in an overcollateralisation of up to 165%; and
(ii) The creditworthiness of the members: both entities have a weighted median shareholder rating of Aa1 (changed from Aaa further to the downgrade of France's government bond rating to Aa1); both the ESM's and the EFSF's purpose is to provide an inter-governmental support mechanism which extends financial assistance to members that are either unable to access the capital markets, or able to do so only at very high interest rates.
Moody's acknowledges that the ESM benefits from credit features that differentiate it from the EFSF, including the preferred creditor status and the paid-in capital of EUR80 billion. However, in Moody's view, these credit features do not enhance the ESM's credit profile to the extent that it would warrant a rating differentiation between the two entities.
In a related rating action, Moody's has additionally downgraded the ratings on all the debt securities that have been drawn down to date from the EFSF to Aa1 from Aaa.
A provisional rating for a debt facility is an indication of the rating that Moody's would likely assign to future draw-downs from the facility, pending the receipt of documentation detailing the terms of the debt issuance.
RATINGS RATIONALE RATIONALE FOR DOWNGRADE -- ESM The one-notch downgrade of the ESM's rating to Aa1 from Aaa follows the downgrade of France's government bond rating to Aa1 from Aaa on 19 November 2012. France's share in the ESM capital key is 20.4%, second after that of Germany (27.1%), and corresponds to a callable capital commitment of EUR126 billion (out of the ESM's total callable capital of EUR620 billion).
In common with many multilateral development banks (MDBs), the credit strength of the ESM rests in part on its certainty of being able to call on its members to fulfil their callable capital commitments. Among MDBs, the rating of the ESM is unusually reliant on the strength of its strongest financial supporters given (i) its highly concentrated potential exposure to weaker euro area member states, and (ii) the high credit risk correlation which Moody's believes exists among its shareholders.
In the very unlikely event of France being unable to fulfil its obligations to the ESM, there is a reasonable probability that other non-Aaa supporters would not be able to do so either. Accordingly, the deterioration in the creditworthiness of France as the second-largest euro area member state (as reflected by the recent downgrade), which implies a marginally diminished certainty it would be able to provide support to the ESM, has a negative effect on the ESM's creditworthiness.
Based on a scenario in which the ESM operates at full lending capacity (EUR500 billion), the ESM's rating could only exceed France's rating if it was assumed that either: (i) France would prioritise its callable capital commitments to the ESM over the payment of its own debt obligations should there be a need for such a prioritisation; or (ii) member states that have a lower rating than France are able to comply with their commitments to the extent that the ESM's outstanding issuance is fully covered, even in the unlikely event that France defaults. Moody's does not consider either to be likely.
Hence, the combination of France's large ESM capital share and the elevated default correlation of euro area member states leads to the conclusion that, in such a scenario, the effectively accessible capital -- subscribed capital of EUR700 billion minus the callable capital of defaulting countries -- will likely fall short of covering the outstanding issuance. Accordingly, in light of its anticipated highly concentrated credit portfolio and the high correlation of euro area member states' creditworthiness, Moody's considers the ESM's rating to be currently constrained by France's government bond rating.
Similarly to the ESM, the one-notch downgrade of the EFSF's rating to Aa1 from Aaa follows the recent downgrade of France's government bond rating to Aa1 from Aaa. France's share in the EFSF contribution key is 21.8%, second after Germany's 29.1% share. France's share corresponds to a guarantee commitment of EUR158 billion (out of EFSF's total guarantee commitment of EUR726 billion). Further to France's loss of its Aaa rating, only 67% instead of the previous 100% of the EFSF issuances are now backed by guarantees issued by Aaa-rated sovereigns. The full coverage of EFSF issuances by guarantees issued by Aaa-rated sovereigns had been a key factor for the EFSF's Aaa.
In the very unlikely scenario of the French sovereign bond default, Moody's does not expect that France would be able to fund its commitments to the EFSF. Furthermore, given the credit risk correlation of the EFSF guarantor countries, Moody's considers it unlikely that lower-rated member states would be in a position to honour their own commitments to the EFSF and fully compensate for a potential shortfall arising from France. Hence, in light of the elevated credit risk correlation among the guarantor countries, the EFSF's rating is -- similar to that of the ESM -- currently constrained by France's government bond rating.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook on the ESM's long-term rating reflects the negative outlooks on the ESM member states with significant capital contribution keys and high ratings. Specifically, the Aaa ratings of Germany (which holds a 27.1% share in the subscribed capital) and the Netherlands (5.7%), as well as the Aa1 rating of France (20.4%) all have negative outlooks.
The negative outlook on the EFSF's (P)Aa1 rating reflects the negative outlooks on euro area sovereigns that are EFSF guarantors, including some countries with significant shares in the EFSF's guarantor pool. Specifically, the Aaa ratings of Germany (which holds a 29.1% share in the guarantor pool) and the Netherlands (6.1%), as well as the Aa1 rating of France (21.8%) all have negative outlooks.
WHAT COULD MOVE RATINGS UP/DOWN
Risks that would negatively affect the creditworthiness of the ESM -- leading to a potential further downgrade of the ESM's rating -- would include a deterioration in the creditworthiness of the participating euro area member states (as reflected by a change in Moody's ratings for these states). In this context, the ESM's rating is sensitive to changes in the ratings of Aaa- and Aa-rated countries with large ESM capital contribution keys, i.e., Germany, France and the Netherlands.
Furthermore, a weakening of the political commitment among euro area member states to the ESM could also have negative rating implications. Also, given that the ESM's Aa1 rating is based on the assumption of superior financial-management capabilities, transition/downgrade risks could also arise from a potential erosion of those capabilities. Such risks would arise in the event of an inappropriate skill transfer or skill acquisition that might adversely affect ESM's governance and risk management practice.
Given that the outlook on the ESM's Aa1 rating is currently negative, the rating is unlikely to experience upward pressure in the near term. However, Moody's could change the outlook for the ESM's ratings to stable if the outlooks on the ratings of the highly rated countries that are key capital contributors to the ESM returned to stable.
Risks that would negatively affect the creditworthiness of the EFSF programme -- leading to a potential downgrade of the EFSF's rating -- include a deterioration in the creditworthiness of the participating euro area member states (as reflected by a change in Moody's ratings for these states). In this context, the EFSF's rating is sensitive to changes in the ratings of Aaa and Aa countries with large EFSF contribution keys, i.e., Germany, France and the Netherlands. Moreover, as with the ESM, a weakening of the political commitment among euro area member states to the EFSF, as perceived by Moody's, could also have negative rating implications.
Given that the outlook on the EFSF's (P)Aa1 rating is currently negative, the rating is unlikely to experience upward pressure in the near term. However, the outlook on the EFSF's ratings could return to stable if Moody's decided to move to stable the outlooks on the ratings of highly rated countries with large EFSF contribution keys, i.e. Germany, France and the Netherlands.
The ESM's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the issuer's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's tolerance for risk. Moody's compared these attributes against other issuers both within and outside ESM's core industry and believes that the ESM's ratings are comparable to those of other issuers with similar credit risk.
The EFSF's ratings were assigned by evaluating factors relevant to the specific characteristics of the facility, reflecting its dual nature as a financing facility and vehicle of public policy. These attributes were compared against those of other issuers, and Moody's believes the EFSF's ratings to be similar to other issuers of similar credit risk.
Moody's assigns a provisional rating when it is highly likely that the rating will become definitive after all documents have been received. Moody's will monitor the transaction on an ongoing basis to ensure that it continues to perform in the manner expected. Any subsequent changes in the rating will be publicly announced.
For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following: parties involved in the ratings, parties not involved in the ratings, and public information.
Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.
Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
These rated entities have received a Rating Assessment Service within the last two years preceding the Credit Rating Action.
Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.
Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Dietmar Hornung VP - Senior Credit Officer Sovereign Risk Group Moody'sDeutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Bart Oosterveld MD - Sovereign Risk Sovereign Risk Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED,DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT.
All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error negligent or otherwise or other circumstance or contingency within or outside the control of MOODY'S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY'S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.
MIS, a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Shareholder Relations -- Corporate Governance -- Director and Shareholder Affiliation Policy."
Any publication into Australia of this document is by MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657, which holds Australian Financial Services License no. 336969. This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001.
Notwithstanding the foregoing, credit ratings assigned on and after October 1, 2010 by Moody's Japan K.K. ("MJKK") are MJKK's current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. In such a case, "MIS" in the foregoing statements shall be deemed to be replaced with "MJKK". MJKK is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO.
This credit rating is an opinion as to the creditworthiness or a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be dangerous for retail investors to make any investment decision based on this credit rating. If in doubt you should contact your financial or other professional adviser.
Heute im Fokus
Familienunternehmen: Rendite und Sicherheit!