Dexia Tumbles After Moody's Puts It On Downgrade Review Citing "Deteriorating Liquidity And Worsening Funding Conditions"

Tyler Durden's picture

If there is one thing Zero Hedge readers should be well aware of, it is that the biggest Belgian bank (whose assets are 180% of Belgian GDP) Dexia is in trouble. Potentially very big trouble. Sure enough, even those embarrassingly late to the party "analysts" at Moody's have just figured it out: "Moody's Investors Service has today placed on review for downgrade the standalone bank financial strength ratings (BFSRs), the long-term deposit and senior debt ratings and the short-term ratings of Dexia Group's three main operating entities -- Dexia Bank Belgium (DBB), Dexia Credit Local (DCL) and Dexia Banque Internationale à Luxembourg (DBIL). The review for downgrade of Dexia's three main operating entities' BFSRs is driven by Moody's concerns about further deterioration in the liquidity position of the group in light of the worsening funding conditions in the wider market." Immediate result: stock plunges up to 15% overnight. We are still confident the outcome will be a full or partial nationalization, with all the ensuing bells and whistles for the various trading securities.

From Moody's

Paris, October 03, 2011 -- Moody's Investors Service has today placed on review for downgrade the standalone bank financial strength ratings (BFSRs), the long-term deposit and senior debt ratings and the short-term ratings of Dexia Group's three main operating entities -- Dexia Bank Belgium (DBB), Dexia Credit Local (DCL) and Dexia Banque Internationale à Luxembourg (DBIL). The review for downgrade of Dexia's three main operating entities' BFSRs is driven by Moody's concerns about further deterioration in the liquidity position of the group in light of the worsening funding conditions in the wider market. The review of the long and short-term debt ratings is prompted by the downward pressure on the BFSRs.

The BFSRs of DBB, DCL and DBIL are currently aligned at D, mapping to Ba2 on Moody's long-term scale. The long-term debt and deposit ratings and the short-term debt ratings of these subsidiaries are also aligned at A3 and Prime-1, respectively. Subordinated and hybrid securities issued by these entities or their respective issuing vehicles were also placed on review for downgrade.

RATINGS RATIONALE

- REVIEW OF THE BFSRs

Moody's decision to place the BFSRs of Dexia's three main operating entities on review for downgrade was driven by concerns about a further weakening in the group's liquidity position since Moody's last rating action on Dexia in light of the worsening funding conditions in the market.

In its press release of 7 July 2011, Moody's said that it continued to have concerns about the group's sizeable reliance on short-term funding and the consequent liquidity gaps that render it vulnerable to adverse market conditions and to a deterioration in the market perception of the creditworthiness of Dexia, and consequently increasingly reliant on the support which the group's shareholders have so far made available. In Moody's view, Dexia has experienced further tightening in its access to market funding -- even to short-term unsecured funding -- since the most recent rating action on 7 July. Moody's believes that in addition to these funding pressures, Dexia's collateral postings on hedging derivatives have increased due to substantial market volatility. These pressures are likely to have led to a substantial increase in its usage of short-term secured funding, potentially resulting in a further squeeze in its available liquidity reserves. The rating agency considers the current BFSRs of D may no longer adequately reflect the risks the group is currently faced with, given its weakened financial structure.

In addition to this liquidity issue, the review will continue to assess the impact on the BFSRs of (i) the substantial negative available-for-sale reserves, representing potential losses that could be realised if Dexia needs to continue selling illiquid assets ahead of their contractual maturity; and (ii) the likely evolution of Dexia's hitherto strong public-finance franchise in the context of the group's reduced production strategy. Moody's notes that some of the provisions taken in the second quarter in respect of the accelerated asset disposal programme remain unused at present.

- REVIEW OF THE LONG AND SHORT-TERM RATINGS

The review of Dexia's long and short-term debt ratings was primarily driven by the downward pressure on the BFSRs. Dexia Group's three main operating entities' long-term debt and deposit ratings of A3 currently include a five-notch rating uplift based on Moody's expectation that the group will benefit from very high systemic support from France, Belgium and Luxembourg. During the review, Moody's will assess the potential for the debt rating to be sustained at its current level through further support offsetting any reduction in intrinsic strength.

Moody's also notes the comments by Dexia's Chairman of the Board of Directors on 27 September 2011, stating that the Group will examine various strategic hypotheses. Moody's will use the review to assess the effect of any change in the Group's strategy on (i) Dexia's business and risk profile; and (ii) the systemic support available to the various group entities over the longer term.