Moody’s Investors Service has downgraded the following non-cumulative preference shares issued by Royal Bank of Scotland Group (“RBSG”):
– Royal Bank of Scotland Group plc non-cumulative preference shares from A3 to Ba2- RBS Capital Trust non-cumulative trust preferred securities from A3 to Ba2- National Westminster Bank plc 9% non-cumulative preference shares from A2 to Ba1
The outlook for all the instruments remains negative, in line with the negative outlook on the A1 and Aa3 senior debt rating of RBSG and National Westminster Bank plc.
This rating action completes the review of the bank’s non-cumulative preference shares initiated on January 20, 2009, where we indicated that instruments which gain voting rights in certain circumstances would be likely to drop to non-investment grade. The downgrades reflect the fact that whereas the nationalisation of these instruments is not our central scenario, the potential loss to investors in such a situation would be very high. Furthermore, we also are concerned that the possibility of a distressed exchange – whereby the bank would stop making coupon payments and offer to exchange these instruments into equity so that hybrid investors would share the risk of recapitalizing the bank with taxpayers – is an additional risk factor, especially for non-cumulative instruments.
Moody’s considers that the announcement by RBS of its participation in the UK Government’s Asset Protection Scheme on 26th February and the issuance of B-shares to the government, confirms our core assumption that the UK government aims to avoid full nationalisation of RBS. In addition, we consider that the larger than expected scope of the APS will provide protection for holders of debt and hybrid instruments.
Nevertheless, having raised its potential economic interest in RBS to 95%, we believe that the UK government will not be able to avoid full nationalisation in the case that assistance beyond the current measures is required in the future. The Treasury has not provided guidance on its approach to potential losses for hybrid debt holders in case of 100% government ownership, but ultimately we would expect to see a very high level of loss for holders of non-cumulative preference shares as in the case of the nationalisation of Northern Rock.
Given the potentially higher transition risk and expected loss for these capital instruments, we have downgraded all non-cumulative preference shares to non-investment grade. This rating action includes those that have explicit voting rights in certain circumstances and those that can get voting rights through a substitution for non-cumulative preference shares. The RBSG instruments are notched down from the A1 senior unsecured rating of RBSG, and the National Westminster Bank instrument is notched down from the Aa3 senior unsecured rating of National Westminster Bank, however due to the risks highlighted above, the notching goes beyond what is captured in our current guidelines for hybrid instruments.
RBS plc’s C- BFSR remains under review for further possible downgrade, and the review will be completed in the coming weeks following a full review of RBS’ participation in the UK government’s Asset Protection Scheme, which was announced on 26th February.
The junior subordinated debt (rated at A1 for RBS plc, and A2 for RBSG), and hybrid issuance other than non-cumulative preference shares (A3 for RBSG) also remains on review for further downgrade pending the completion of the review of the BFSR, due to the likely widening of notching should the BFSR go down further.
The last rating action on RBS was on January 20, 2009 when the senior debt ratings were downgraded from Aa1 to Aa3 (negative outlook).
The principal methodologies used in rating this issuer were “Bank Financial Strength Ratings: Global Methodology” (February 2007), “Incorporation of Joint-Default Analysis into Moody’s Bank Ratings: A Refined Methodology” (March 2007) as well as “Guidelines for Rating Bank Junior Securities” (April 2007) which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.
Based in Edinburgh, RBS reported total proforma assets of GBP 2,219 billion as of 31 December 2008.
D.C.