Pfandbriefbank (Oesterreich) AG

Transcription

1 CREDIT OPINION Pfandbriefbank (Oesterreich) AG Update Following Upgrade to Baa3 stable Update Summary Rating Rationale On 12 October 2016, we upgraded the backed senior unsecured debt ratings of Pfandbriefbank (Oesterreich) AG (Pfandbriefbank) to Baa3 stable from Ba1 review for upgrade previously, following an announcement that a renewed and improved buyback offer by the Austrian government for debt issued by Heta Resolution AG (Heta, Ca stable1) was accepted by almost all creditors as of 10 October RATINGS Pfandbriefbank (Oesterreich) AG Domicile Austria Long Term Debt Baa3 Type Senior Unsecured - Fgn Curr Outlook Stable Long Term Deposit Not Assigned Type Not Assigned Outlook Not Assigned Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Contacts Goetz Thurm VP-Senior Analyst goetz.thurm@moodys.com Alexander Hendricks, CFA Associate Managing Director - Banking alexander.hendricks@moodys.com Carola Schuler Managing Director Banking carola.schuler@moodys.com The Baa3 rating assigned to Pfandbriefbank reflects our assessment of the creditworthiness of the Austrian Landes-Hypothekenbanken and their ability to service their senior longterm obligations. Pfandbriefbank's ratings are purely based on the member banks' improved creditworthiness and include no uplift from public-sector entities or government support. Our view is based on the lack of explicit commitment shown in the past by several federal states to honour their own obligations under the existing joint and several liability framework. The Baa3 rating remains underpinned by the 1.2 billion support measure that fully covers Pfandbriefbank's Heta exposure, thereby eliminating immediate liquidity and solvency concerns for the entity. It also incorporates the acceptance of the exchange offer, that provides for a longer-term solution. Pfandbriefbank's liabilities benefit from the multi-recourse statutory liability scheme of its member banks: the joint and several liability obligation of the Austrian regional mortgage banks (Landes-Hypothekenbanken) and of the Austrian federal states.

2 Credit Strengths The accepted buyback offer for the liabilities of Heta implies declining credit pressures on the Austrian Landes-Hypothekenbanken and provides more clarity on the remaining Heta resolution process. Pfandbriefbank's liabilities benefit from a multi-recourse statutory liability guarantee from its member banks and their statutory guarantors. A track record of liquidity support provided by the member banks has been built up. Honouring guarantee obligations for Pfandbriefbank would have limited impact on the federal states' risk-bearing capacity. Credit Challenges The application of resolution tools to Heta negatively affects Pfandbriefbank's asset profile. Several Austrian states have undermined the reliability of the support scheme in the past. Pfandbriefbank's strategic fit in its member banks' funding strategies is diminished, while the bank's future as a LandesHypothekenbanken funding vehicle is uncertain. Rating Outlook Pfandbriefbank's ratings carry a stable outlook, reflecting a stabilisation of the credit profiles of key supporting member banks. Factors that Could Lead to an Upgrade An upgrade could result from (1) a strengthening of the member banks' credit profiles; (2) a clarification of the legal obligations of the Austrian federal member-states under the guarantee framework, to the extent that this removes any doubts over the full and unconditional liability of all parties to support Pfandbriefbank in a timely fashion. Factors that Could Lead to a Downgrade Negative rating pressure could arise if (1) any of the member banks were to opt out of the agreed support measures for Pfandbriefbank, in the absence of which the bank could be at risk of insolvency; and (2) the member banks' credit profiles were to weaken. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Detailed Rating Considerations THE RECENTLY ACCEPTED BUYBACK OFFER INCORPORATES DECLINING CREDIT RISKS FOR PFANDBRIEFBANK MEMBER BANKS On 10 October 2016, the Kaerntner Ausgleichszahlungs-Fonds (KAF, Aa1 stable2) announced the acceptance of Heta's creditors of a buyback offer for Heta's liabilities, thereby providing further clarity on the potential impact on the involved Austrian LandesHypothekenbanken. The buyback offer indicates a recovery rate of around 90% of the face value of Heta s senior unsecured liabilities, significantly above provisioning levels at Pfandbriefbank member banks. The buyback will lead to the release of loan-loss provisions, positively impacting profitability and capital generation capacity of member banks. However, legal uncertainties around the resolution of Heta remain a risk factor. Pfandbriefbank's upgrade is based on the proved liquidity support by the Austrian Landes-Hypothekenbanken, their increased risk provisioning levels for Heta-related obligations, and the additional visibility provided by the October 2016 announcement of the accepted buyback offer for Heta's liabilities. The latter further reduces tail risks to Pfandbriefbank support. The Austrian Financial Market Authority previously imposed resolution measures on Heta in March 2015 and April 2016, leading to a payment moratorium on Heta's liabilities, affecting Heta's 1.2 billion liability as of March 2015 towards Pfandbriefbank, which is backed by deficiency guarantees from the State of Carinthia (Carinthia, A3 positive3). PFANDBRIEFBANK'S LIABILITIES BENEFIT FROM A GUARANTEE FROM ITS MEMBER BANKS AND THEIR GUARANTORS, BUT SEVERAL AUSTRIAN STATES HAVE UNDERMINED THE RELIABILITY OF THE SUPPORT SCHEME Pfandbriefbank's liabilities benefit from a multi-recourse statutory liability scheme by its member banks, a joint and several liability obligation of the Austrian regional mortgage banks (Landes-Hypothekenbanken) and of the Austrian federal states. Given its business profile as a poorly capitalised issuing vehicle for its member banks (the Austrian Landes-Hypothekenbanken or their legal successors), Pfandbriefbank relies fully on the performance of its concentrated assets to service its liabilities. The Heta moratorium in March 2015 therefore impaired its liquidity and solvency. Since April 2015, the member banks and the majority, but not all, of the Austrian Federal states have reliable support measures in place, which fully cover Pfandbriefbank's Heta exposure, thereby eliminating the entity's immediate liquidity and solvency concerns. In the meantime, the supporting entities provided approximately 0.8 billion in liquidity support, thereby building a track record of timely and credible support and reducing tail-risks related to the future support needs of 0.4 billion. Given the acceptance of the Heta exchange offer and taking into account expected recovery rates of 90% for senior unsecured obligations, the support needs will shrink significantly until year-end 2016 to slightly below 50 million, a positive to the member banks' credit profiles. However, the Austrian states' individual contributions were not uniformly provided, although Pfandbriefbank's liabilities are grandfathered under a statutory joint and several guarantee from member banks and their former guarantors (the relevant Austrian federal states), according to Austrian federal law. Consequently, Pfandbriefbank's Baa3 backed senior unsecured rating is derived from our assessment of the creditworthiness of the Austrian Landes-Hypothekenbanken, as indicated by our assessment of their ability to service senior long-term obligations. Pfandbriefbank's ratings do not incorporate any likelihood of public-sector support. PFANDBRIEFBANK'S STRATEGIC FIT IN ITS MEMBER BANKS' FUNDING STRATEGIES HAS DIMINISHED, WHILE THE BANK'S FUTURE AS A LANDES-HYPOTHEKENBANKEN FUNDING VEHICLE IS UNCERTAIN Pfandbriefbank is an issuing vehicle for member banks, including Heta, and subject to provisions of the Austrian Banking act. As of 2015, Pfandbriefbank has legally assumed all of Pfandbriefstelle der osterreichischen Landes-Hypothekenbanken's (Pfandbriefstelle; unrated) business operations and liabilities. Pfandbriefstelle completely transferred its banking business to Pfandbriefbank while remaining its sole owner. The transfer was based on the Austrian Banking Act by way of universal succession, ensuring that the legal framework for Pfandbriefstelle, including the guarantee structure, continues to be available for the new entity. Originally established in 1939 as a public-law entity, the group's purpose is to support the funding activities of the LandesHypothekenbanken through the issuance of mortgage-/public sector-secured bonds. The Landes-Hypothekenbanken were also allowed 3

4 to issue covered bonds on their own behalf. Furthermore, Pfandbriefbank is authorised to issue unsecured bonds, but its predecessor company Pfandbriefstelle stopped doing so in In the context of Pfandbriefbank's grandfathered debt obligations incurred before April 2007, their member banks (with the exception of Salzburger Landes-Hypothekenbank AG, Salzburger Hypo, unrated) benefit from a deficiency guarantee from their then-majority owners, the federal states. In 2003, the statutory support scheme for some Austrian public-sector banks was abolished following a respective decision by the European Commission. To facilitate the adaptation of funding strategies for the affected banks, a phase-out schedule for the state guarantees was agreed with the European Commission, whereby the grandfathering applies for securities as follows: 1) Until their respective maturity if issued before 1 April ) Until 30 September 2017 if issued between April 2003 and before 1 April ) All liabilities incurred after 1 April 2007 are not guaranteed, regardless of their maturity. Pfandbriefbank's securities are "grandfathered" by the following members banks: Hypo-Bank Burgenland AG, Eisenstadt (unrated) Austrian Anadi Bank AG (formerly Hypo Alpe-Adria-Bank AG), Klagenfurt (unrated) Heta Asset Resolution AG (formerly Hypo Alpe-Adria-Bank International AG), Klagenfurt, (Ca stable)4. HYPO NOE Landesbank AG, St. Pölten (unrated) HYPO NOE Gruppe Bank AG, St. Pölten (unrated) Oberoesterreichische Landesbank AG, Linz (unrated) Salzburger Landes-Hypothekenbank AG, Salzburg (unrated) Landes-Hypothekenbank Steiermark AG, Graz (unrated) Hypo Tirol Bank AG, Innsbruck (Baa3 stable/baa3 stable; ba2)5) Vorarlberger Landes- und Hypothekenbank AG, Bregenz (Baa1 stable/baa1 stable; baa3)6 Because the guarantee was no longer available after 2007, Pfandbriefbank has stopped issuing new debt and is practically in winddown. Its total assets decreased to 2.3 billion as of half-year 2016 (year-end 2015: 3.4 billion; year-end 2014: 5.6 billion; year-end 2013: 6.2 billion). In line with the downsizing of overall issued debt volumes, we note the diminishing importance of Pfandbriefbank for the funding strategy of its member banks. Given the above-mentioned halt in new issuance, Pfandbriefbank's future perspective is unclear. Planned changes in the legal framework will enable Pfandbriefbank to provide funding for Austria's Landes-Hypothekenbanken in the future. However, while these changes could result in a repositioning of Pfandbriefbank, we do not think that any change in strategy would be swift, because of the prolonged time of non-issuance activity that has passed since changes to the legal framework for deficiency guarantees. HONOURING OF THE GUARANTEE OBLIGATIONS FOR PFANDBRIEFBANK WOULD HAVE LIMITED IMPACT ON THE FEDERAL STATES' RISK-BEARING CAPACITY With total assets of 2.3 billion as of half-year 2016, the risks related to guarantees for Pfandbriefbank appear to be manageable for the Austrian federal states, which form part of the guarantee framework. The federal states' total budget size was 33 billion in 2014 for Pfandbriefbank related Austrian states. We currently rate those from Aa1, stable (Lower Austria) to A3, positive (Carinthia)7. 4

5 Ratings Exhibit 1 Category PFANDBRIEFBANK (OESTERREICH) AG Outlook Bkd Senior Unsecured Moody's Rating Stable Baa3 Source: Moody's Investors Service 5

6 Endnotes 1 The rating shown is Heta's Carinthian state guaranteed senior unsecured debt and outlook 2 The rating shown is KAF's Austrian government backed debt rating and outlook 3 The rating shown is Carinthia's senior unsecured rating and outlook 4 The rating shown is Heta's Carinthian state guaranteed senior unsecured debt and outlook 5 The ratings shown are Hypo Tirol's deposit rating and outlook, its senior unsecured debt rating and outlook, and its baseline credit assessment 6 The ratings shown are Vorarlberger Landes- und Hypothekenbank's deposit rating and outlook, its senior unsecured debt rating and outlook, and its baseline credit assessment 7 The ratings shown are the states' long-term issuer ratings and outlook 6

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