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.
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.
“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)