GRE Criteria Review of Six German and Austrian Banks' Grandfathered Debt Results in Four Downgrades and Two Affirmations

Research Update: GRE Criteria Review Of Six German And Austrian Banks' Grandfathered Debt Results In Four Downgrades And Two Affirmations

Primary Credit Analyst: Dirk Heise, Frankfurt (49) 69-33-999-163; [email protected]

Secondary Contacts: Stefan Best, Frankfurt (49) 69-33-999-154; [email protected] Markus W Schmaus, Frankfurt (49) 69-33-999-155; [email protected] Michelle Brennan, London (44) 20-7176-7205; [email protected]

Table Of Contents

Overview

Rating Action

Rationale

Background On Grandfathered Debt Obligations:

Related Criteria And Research

Ratings List

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1014327 | 300025082 Research Update: GRE Criteria Review Of Six German And Austrian Banks' Grandfathered Debt Results In Four Downgrades And Two Affirmations

Overview

• Following a review of our ratings on the grandfathered debt obligations of Germany-based Landesbank Hessen (Helaba), DekaBank Deutsche Girozentrale, and Westdeutsche Immobilienbank (WIB), and Austria-based Hypo NOE Gruppe, Oberoesterreichische Landesbank, and Unicredit Bank Austria, we are now applying our criteria on rating government-related entities (GREs) to these obligations. • We believe that these obligations benefit from an extremely high likelihood of extraordinary government support as our criteria define it. • We are therefore lowering our debt ratings by one notch on grandfathered obligations issued by Helaba, Hypo NOE, Oberoesterreichische Landesbank, and Unicredit Bank Austria, and affirming the ratings on the grandfathered obligations issued by DekaBank and WIB. • At the same time, we are removing the outlooks from our issue ratings on these debt obligations. • Our counterparty credit and other debt ratings on these six banks are not affected by these rating actions.

Rating Action

On Sept. 20, 2012, Standard & Poor's Ratings Services lowered by one notch its issue ratings on grandfathered debt issued by Germany-based Landesbank Hessen-Thueringen Girozentrale (Helaba), Austria-based HYPO NOE Gruppe Bank AG, Austria-based Oberoesterreichische Landesbank AG; and UniCredit Bank Austria AG. At the same time, the respective issue ratings on grandfathered debt issued by DekaBank Deutsche Girozentrale and Westdeutsche ImmobilienBank (WIB) were affirmed.

At the same time, we removed the stable outlook on all grandfathered debt of DekaBank, and removed the negative outlooks on all other banks' grandfathered debt, which we initially assigned to indicate uncertainties about the future ownership and the guarantors' ongoing commitment to honor the guarantees in a timely fashion.

Rationale

The rating actions reflect our review of the grandfathered debt obligations, applying our current criteria for government-related entities (GREs). We

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1014327 | 300025082 Research Update: GRE Criteria Review Of Six German And Austrian Banks' Grandfathered Debt Results In Four Downgrades And Two Affirmations consider that, by applying our GRE criteria on these debt obligations, we better reflect our current view of and future developments that could affect our view of the likelihood of extraordinary government support on these debt obligations. By applying our GRE criteria only to the banks' grandfathered debt, we distinguish our ratings on grandfathering-guaranteed debt from our ratings on the banks' other debt obligations, which do not benefit from a grandfathering guarantee.

In our view, the grandfathered debt will benefit from an "extremely high" likelihood of extraordinary government support as we define it, based on our assessment of its "critical" role for and "very strong" link to the banks' respective governments.

We currently believe that a default of any of the six banks on their grandfathered debt would have a "critical" impact for its government for the following reasons: • All grandfathered debt obligations benefit from guarantees issued by public authorities as specified in the respective legislation governing these entities. • The respective authorities maintained existing guarantees and provided new debt guarantees during the transition process that followed the decision to abolish state guarantees as requested by the European Commission (EC). In our view, these guarantees served a central purpose of maintaining trust and financial market stability, and avoiding reputational risks. • At least as long as the states have material ties to and influence over the respective banks, exploiting the wording of the respective laws and not honoring the guarantees in a timely fashion would create significant reputational risk for the states and their own standing in the markets.

Regarding the grandfathered debt, our current view of the "very strong" link to the government is based on the following considerations: • All grandfathered debt benefits by definition from a form of legally enforceable public guarantee until maturity, which provides a durable link to and an incentive for the government to support the banks if needed to make payments on these obligations. • Nonpayment on grandfathered debt could significantly affect the respective public authorities' reputation because they are publicly associated with these debt instruments due to remaining ties to the respective issuers. • The public authorities in Germany and Austria have demonstrated a track record of supporting banking institutions that are systemically important or to which they are closely tied, for example, through full or partial ownership.

To derive the ratings on grandfathered debt, we apply table 4 of our GRE criteria. We do not equalize our ratings on grandfathered debt with those on the guarantors in the case of Landesbanks because the wording of the grandfathering guarantee does not sufficiently specify that the guarantor is obliged to service the guaranteed obligations on the dates on which payments

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1014327 | 300025082 Research Update: GRE Criteria Review Of Six German And Austrian Banks' Grandfathered Debt Results In Four Downgrades And Two Affirmations are due. We do not equalize our ratings on grandfathered debt with those on the guarantors in the case of Austrian banks because the guarantee is one of collection.

The application of GRE criteria had no impact on our ratings on grandfathered debt issued by DekaBank and WIB because we already lowered the ratings based on a change in ownership in April 2011 in the case of Dekabank, and because of the previous ownership of WestLB AG until July 2012 in the case of WIB.

The rating on Unicredit Bank Austria's grandfathered debt is one additional notch lower than indicated by table 4 of our GRE criteria. This is due to the indirect link to the City of Vienna (unsolicited AA+/Negative/A-1+), which allows for a gradual transition in the role and link, potentially leading to a weakening of the likelihood of extraordinary government support over time, in our view.

Any positive or negative rating action on the grandfathered debt would most likely be based on the following factors: • Developments that could lead us to change our assessment of the role or link to the respective states with regard to grandfathered debt; • Positive or negative rating actions on the guarantors; or • A lowering of the stand-alone credit profiles of the respective banks.

Background On Grandfathered Debt Obligations:

Grandfathered debt obligations of German Landesbanks and DekaBank are those incurred between July 19, 2001, and July 18, 2005, and maturing between July 19, 2005, and Dec. 31, 2015, as well as any obligations issued until July 18, 2001, irrespective of their maturity.

Grandfathered debt obligations of Austrian Landesbanks are those incurred up to April 2, 2003, irrespective of their maturity, and obligations incurred between April 3, 2003, and April 1, 2007, that mature by Sept. 30, 2017.

The grandfathering followed the abolition of state guarantees, which was enforced by the EC in 2001 on German Landesbanks and in 2003 on Austrian Landeshypothekenbanks. The EC granted Landesbanks a "transition period" between July 2001 and July 2005 and the Austrian Landesbanks between April 2003 and April 2007 that allowed banks to continue issuing guaranteed debt to prepare for the new environment without state guarantees.

Grandfathered debt obligations of UniCredit Bank Austria incurred until year-end 2001 benefit from a deficiency guarantee from the city of Vienna through the city's shell holding company Anteilsverwaltung Zentralsparkasse (AVZ; not rated).

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1014327 | 300025082 Research Update: GRE Criteria Review Of Six German And Austrian Banks' Grandfathered Debt Results In Four Downgrades And Two Affirmations

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated. • Banks: Rating Methodology and Assumptions, Nov. 9, 2011 • Group Rating Methodology And Assumptions, Nov. 9, 2011 • General Criteria: Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010

Ratings List

Downgraded; CreditWatch/Outlook Action To From

Landesbank Hessen-Thueringen Girozentrale (Helaba) Grandfathered debt ratings AA- AA/Negative

HYPO NOE Gruppe Bank AG Grandfathered debt ratings AA AA+/Negative

Oberoesterreichische Landesbank AG Grandfathered debt ratings AA AA+/Negative

UniCredit Bank Austria AG Grandfathered debt ratings AA- AA/Negative

Ratings Affirmed; CreditWatch/Outlook Action DekaBank Deutsche Girozentrale Grandfathered debt ratings AA- AA-/Stable

Westdeutsche ImmobilienBank Grandfathered debt ratings A+ A+/Negative

Additional Contact: Financial Institutions Ratings Europe; [email protected]

Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.

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