German Bank Subordinated Debt Downgraded by Moody's on Regulation Concern

German banks’ subordinated debt securities valued at 24 billion euros ($33 billion) were downgraded by Moody’s Investors Service on the prospect that new legislation will increase the risk of losses among debt holders.

Moody’s cut the ratings of lower Tier 2 notes, a layer of debt that’s subordinated by coming behind senior bonds in the queue for repayment after a bank collapses. Like other governments seeking to ensure creditors pay up before taxpayers have to contribute, German law now removes the protection Tier 2 bonds enjoyed from the authorities’ preference for saving lenders before they fail.

“The new legislation materially reduces the likelihood of government support for LT2 securities and therefore took out the state support uplift,” BNP Paribas SA analysts Olivia Frieser and Ivan Zubo wrote in a note to clients today. “The downgrades are as harsh as we had expected, which may weigh on sentiment.”

The cost of insuring German bank debt rose, according to CMA prices for credit-default swaps. Contracts on the subordinated debt of Deutsche Bank AG jumped 12 basis points to 160, the highest in five weeks. Swaps linked to Commerzbank AG’s junior debt climbed 25 basis points to 450 and senior contracts rose 10 to 190.

Toughening Rules

Lawmakers throughout Europe are toughening rules governing bank failures. Danish regulators wiped out the stock and subordinated bonds of Amagerbanken A/S when it failed this month, and are going further than that by inflicting losses -- expected to be about 41 percent -- on senior bondholders and depositors with more than the insured maximum in their accounts.

“Bondholders have to be prepared for losses,” Bjoern Skogstad Aamo, head of Norway’s Financial Supervisory Authority in Oslo, said Feb. 10.

In Ireland, where the state has put 46.3 billion euros into its debt-laden banks after property prices collapsed, the Credit Institutions (Stabilization) Bill gives the government the power to force subordinated bondholders to take losses. Junior creditors of Anglo Irish Bank Corp. were obliged to sell back their notes at an 80 percent discount.

Germany’s Bank Restructuring Act was approved by Parliament on Nov. 2 and allows regulators to transfer the assets and liabilities of a failing bank while permitting the government to write down debt.

Impose Losses

“The new regulatory tools allow authorities to impose losses on debt holders without necessarily placing the entire bank into liquidation,” the ratings firm said yesterday in a statement. “Moody’s considers subordinated debt to be most at risk under the new law.”

The ratings downgrades apply to 248 subordinated securities together with portions of debt programs issued or backed by 24 banks. The average reduction was 2 1/2 levels, Moody’s said.

Deutsche Bank AG, Commerzbank AG, Munich-based Bayerische Landesbank and DekaBank Deutsche Girozentrale, the fund manager for Germany’s state-owned savings banks, were among lenders whose securities were downgraded.

Libby Young, a Deutsche Bank spokeswoman, Reiner Rossmann, a Commerzbank spokesman, and BayernLB’s Florian Ernst all declined to comment. DekaBank spokesman Markus Weber didn’t return a voice mail.

“The regulatory tools provided by the Bank Restructuring Act are broad enough to allow the imposition of losses on senior unsecured and subordinated bondholders,” Moody’s said.

The following banks’ subordinated debt ratings were downgraded:

Bayerische Landesbank
Bremer Landesbank
Commerzbank AG
DekaBank
Deutsche Girozentrale
Depfa Bank Plc
Deutsche Apotheker- und Aerztebank eG
Deutsche Bank AG
Deutsche Hypothekenbank AG
Deutsche Pfandbriefbank AG
Deutsche Postbank AG
DVB Bank SE
DZ Bank AG
Eurohypo AG
HSH Nordbank AG
IKB Deutsche Industriebank AG
Landesbank Baden-Wuerttemberg
Landesbank Berlin AG
Landesbank Hessen-Thueringen Girozentrale
Muenchener Hypothekenbank eG
Norddeutsche Landesbank Girozentrale
Sparkasse KoelnBonn
UniCredit Bank AG
Volkswagen Bank GmbH
WestLB AG (part of an EMTN program)

To contact the reporters on this story: Laura Marcinek in New York at lmarcinek3@bloomberg.net; John Glover in London at johnglover@bloomberg.net

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net; Paul Armstrong at Parmstrong10@bloomberg.net

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