FMS Wertmanagement Aaa Stable

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1 CREDIT OPINION Update Contacts Simon Griffin VP-Senior Analyst Kathrin Muehlbronner Senior Vice President Michail Michailopoulos Associate Analyst FMS Wertmanagement Aaa Stable Annual Update Summary Rating Rationale The credit strengths underpinning the rating of FMS Wertmanagement include: (1) its loss compensation mechanism whereby the German government is the ultimate obligor; and (2) an explicit guarantee from the German Financial Market Stabilisation Fund (SoFFin). The main credit challenges facing FMS Wertmanagement are: (1) very weak asset quality as a result of portfolio concentrations of long-maturity, complex and illiquid assets; (2) the large maturity mismatch between assets and liabilities; (3) a reliance upon wholesale funding; and (4) low margins. Exhibit 1 Exhibit 2 The size of FMS-WM's wind-up portfolio is on a declining trajectory The maturity profile of FMS-WM's wind-up portfolio EUR billion EUR billion *Refers to the transfer date (1 October 2010) Source: Annual Report 2015, Moody's Investors Service Source: FMS Wertmanagement, Moody's Investors Service Dietmar Hornung Associate Managing Director dietmar.hornung@moodys.com Yves Lemay MD-EMEA Sovereign yves.lemay@moodys.com This Credit Opinion provides a discussion of the credit rating(s) for FMS Wertmanagement and should be read in conjunction with Moody's most recent Credit Analysis on the Government of Germany and rating information available on Moody's website.

2 Key Indicators Summary Rating Rationale (continued) FMS-WM is a German wind-up institution established in late 2010 in order to wind up a EUR billion1 portfolio of risk exposures and non-strategic assets from the Hypo Real Estate Group (HRE). Whilst FMS-WM may engage in those banking and financial service transactions that serve its purposes, FMS-WM does not hold a banking license and therefore has no access to ECB funding. At the same time, FMS-WM is not subject to banking regulation and is free from regulatory requirements relating to capital and liquidity. FMS-WM is supervised by the FMSA. FMS Wertmanagement (FMS-WM) is rated on a par with the German sovereign (Aaa stable). This derives from a loss compensation obligation through the Financial Market Stabilisation Fund (SoFFin) whereby FMS-WM ultimately becomes an obligation of the German sovereign. A loss compensation clause obliges SoFFin to pay promptly, and no later than on the third business day following a request, any amount which the Executive Board of FMS-WM deems necessary to meet FMS-WM's liabilities in full and in a timely manner. Since January 2014, SoFFin has provided an explicit guarantee for liabilities of FMS-WM (with a grandfathering of the outstanding debt of FMS-WM). This implies that SoFFin will be directly liable to third parties rather than indirectly liable via the loss compensation mechanism. It allows debt holders of FMS-WM to apply a 0% risk weight under Basel III rules for FMS-WM debt issues. Although the explicit guarantee is stronger than the previous implicit guarantee, it does not alter our assessment, given that we already view the loss compensation mechanism as sufficiently strong to link FMS-WM's rating directly to that of the German sovereign. The methodological approach for rating FMS-WM on a par with the German sovereign is found in Moody's credit substitution procedure for government-related issuers, whereby FMS-WM's credit rating is fully substituted by that of the German sovereign. As a consequence, FMS-WM's credit metrics such as asset quality and capital adequacy do not have an impact on the credit rating of FMSWM. Under the credit substitution approach, the credit rating of FMS-WM is driven solely by the German sovereign credit rating. FMS-WM was established as a public law entity pursuant to Section 8a of the Financial Market Stabilisation Fund Act (FMStFG). The legal basis for the application of credit substitution to FMS-WM's rating is its charter and the FMStFG. SoFFin's loss compensation obligation is established by 7 of the FMS Charter, and the general liability for SoFFin's obligations by the German sovereign is set out in Section 5 of the FMStFG. In May 2014, FMS-WM was mandated to wind-up DEPFA Bank plc (DEPFA), with total assets of EUR 48.5 billion2 as of December DEPFA was a subsidiary of HRE Group, which transferred certain non-strategic assets to FMS-WM in Following a decision by the European Commission in July 2011, DEPFA was not allowed to generate new business, subject to certain exceptions, unless the company was privatised. Since this privatisation did not occur in 2014, the inter-ministerial steering committee of FMSA decided to transfer the ownership of DEPFA from HRE Group to FMS-WM. The transfer of ownership from HRE Group to FMS-WM was completed in December 2014, when FMS-WM acquired all DEPFA equity at a purchase price of EUR 320 million. DEPFA is now a 100% subsidiary of FMS-WM, managed as an independent financial investment. DEPFA remains a regulated bank under Irish law and is, unlike FMS-WM, subject to the EU Bank Resolution and Recovery 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 Directive (BRRD). FMS-WM is not obliged to publish consolidated IFRS accounts for DEPFA. Instead, FMS-WM reports according to German GAAP rules, whilst DEPFA reports its results according to IFRS rules. We expect that FMS-WM will optimise DEPFA's liability management and funding costs with positive consequences for its financial results. FMS-WM has no formal obligation to inject capital into DEPFA in cases of financial distress and it is as yet unclear how far FMSWM might compensate any losses or funding shortfalls. Rating Outlook The rating outlook for FMS-WM was moved to stable from negative on 28 February 2014, reflecting the changed rating outlook for the German sovereign. Factors that Could Lead to a Downgrade Any change to the rating of the German sovereign would have an impact upon the rating of FMS-WM. Any changes to the current legal and contractual framework that would have a negative effect upon the strong link with the German sovereign might also lead to a downgrade of the rating of FMS-WM. Recent Developments In H1 2016, FMS-WM's wind-up portfolio was reduced to EUR 87 billion from EUR 94.7 billion at year-end 2015, representing a decline of around 8% since the beginning of The portfolio has now been reduced by EUR 88.7 billion (including currency effects), or 50.5%, since FMS-WM began its activities in October 2010, when the nominal value of the transferred portfolio stood at EUR billion. The wind-up has proceeded at a faster pace than was originally planned. The accelerated wind-up of some parts of the portfolio has been supported by favourable developments in the public sector, in asset-backed securities and in the North American real estate market. To fund its operations, FMS-WM issued EUR 10.5 billion in capital market instruments in H The funding programme for the year as a whole plans to raise EUR 14.4 billion. This compares with EUR 8.3 billion raised in H1 2015, EUR 12.3 billion raised in 2015 and EUR 11.6 billion raised in FMS-WM has turned a profit from its ordinary activities since 2012 and posted profits of EUR 200 million in H1 2016, following profits of EUR 413 million in 2015, EUR 373 million in 2014, EUR 146 million in 2013, and EUR 37 million in In 2011, FMS-WM reported a significant loss of around EUR 10 billion, mainly due to write-downs of EUR 8.9 billion on Greek sovereign debt holdings. FMS-WM expects interest margins to decline in coming years given that assets with higher margins, such as commercial real estate, will mature sooner than lower margin parts of the portfolio. At year-end 2015, FMS-WM's wind-up portfolio contained 2,648 exposures (against 3,226 exposures in 2014) with 1,329 counterparties (1,598 in 2014). The wind-up portfolio contained assets in Commercial Real Estate (5%), Infrastructure (15%), the Public Sector (50%) and Structured Products (30%). With regard to the geographic distribution: the largest country exposures recorded were in Italy (25%), the UK (22%), the US (20%), Spain (5%) and Germany (5%). The portfolio was dominated by euro-denominated assets (43%), followed by USD-denominated assets (27%) and GBP-denominated assets (18%). In the EUR 94.7 billion portfolio (as of yearend 2015), around 80% had a legal maturity extending beyond FMS-WM has established itself in international capital markets with a euro-denominated benchmark curve and by issuing US dollardenominated global bonds. By means of its own issuances, FMS-WM was able to replace all ECB funding on its liability side, inherited from HRE, by March By 30 June 2014, FMS-WM had achieved its targeted Term Funding Ratio of 50%/50% between Money and Capital Markets. FMS-WM's debt market issuances also contributed to an improvement in the maturity mismatch between its asset and liability sides as compared to the start of its operations. According to FMS-WM, its liabilities currently have an average maturity of around 20 months as compared to what was previously almost entirely central bank refinancing. DEPFA reported total assets (mostly public sector assets) of EUR 39.1 billion as of H (unaudited), from EUR 36.7 billion in 2015, 48.5 billion in 2014 and EUR 47.5 billion in Total liabilities amounted to EUR 37.3 billion as of H with EUR 1.8 billion in equity capital. At year-end 2015, DEPFA's portfolio was concentrated in the US (25.4% of total), Germany (23.4%), Spain (8.7%) and Belgium (8.7%). DEPFA posted a net loss of EUR 54 million in H1 2016, following a loss of EUR 60 million in H and EUR 155 million in 2014 as a whole, as compared to a profit of EUR 36 million in

4 Moody's Related Research Credit Opinion: Government of Germany Aaa Stable: Quarterly Update Credit Opinion, 14 October 2016 Rating Methodology: Sovereign Bond Ratings, 18 December 2015 To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. 4

5 Authors Simon Griffin Vice President Senior Analyst Michail Michailopoulos Associate Analyst Endnotes 1 According to German GAAP accounting standards 2 According to IFRS accounting standards 5

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