Commerzbank and subsidiaries hit with downgrades

Commerzbank and its subsidiaries have suffered downgrades to senior debt and deposit ratings, following a review by Moody’s into the financial strength of banks that have previously benefited from government support.

Commerzbank AG and Commerzbank Europe (Ireland) saw their senior debt and deposit ratings downgraded two notches from Aa3 to A2, subsidiary Eurohypo AG dropped two notches from A3 to A1, and Deutsche Schiffsbank fell further from A2 to A3, after a Moody’s review.

Based on those ratings, it gave Commerzbank AG, Commerzbank Europe (Ireland) and Eurohypo AG a stable outlook, but negative for Deutsche Schiffsbank.

Deutsche Schiffsbank’s rating for its ability to repay short-term debt obligations also dropped from superior, or Prime-1, to strong, or Prime-2.

Ratings for Commerzbank AG’s senior subordinated debt and Tier III instruments fell one notch from Baa2 to Baa3. For the same instruments, Moody’s confirmed Eurohypo AG’s Ba1 ratings. Eurohypo’s senior subordinated debt–including Tier III instruments–maintained a negative outlook.

Eurohypo, a fully-owned subsidiary of Commerzbank, dragged down the latest ratings changes for the four institutions, said Moody’s.

Commerzbank needs to divest the business by the end of 2014, as per an agreement with the European Commission.

Moody’s said it expected Commerzbank as the parent company to hold on to Eurohypo, given the challenges of a difficult M&A environment.

For the first six months of 2010, Eurohypo recorded a pre-tax loss of Eur215m.

“The low quality of group earnings with a large portion of the 2010 profit contributed by non-core investments that are subject to unwinding” was meanwhile blamed for Commerzbank’s senior debt downgrades.

The agency also cited “a weakening environment for future government support that prompted Moody’s decision to reverse some of the extraordinary systemic support factored into the long-term ratings”.

The latest ratings changes come after German Commerzbank had its subordinated debt downgraded Thursday, 17 February.

Recently, Moody’s announced a review into the financial strength of banks as stand-alone institutions without government support, on the back of expectations that future losses will be imposed onto creditors instead of taxpayers.

Germany’s banks have been first in the firing line for downgrades, following the introduction of the German Bank Restructuring Act.

Under the new regulation, approved by Germany’s Parliament 2 November 2010, bank losses can be imposed on debtholders without it being put into liquidation.

Plans by other European regulators to impose similarly tough measures are likely to affect the ratings of banks across the region as Moody’s proceeds with its latest review.

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