Moody's Downgrades Rating Of Dexia's Main Operating Units

Moody's Investors Service has downgraded the long term debt and deposit ratings of Dexia Group's main banking entities, Dexia Credit Local (DCL), Dexia Bank Belgium (DBB), Dexia Banque Internationale a Luxembourg (DBIL) to A1 from Aa3. In addition, the Bank

By None

Moody’s Investors Service has downgraded the long-term debt and deposit ratings of Dexia Group’s main banking entities, Dexia Credit Local (DCL), Dexia Bank Belgium (DBB), Dexia Banque Internationale a Luxembourg (DBIL) to A1 from Aa3.

In addition, the Bank Financial Strength Ratings (BFSRs) of DCL, DBB and DBIL have been downgraded to D+ (mapping to a Baseline Credit Assessment of Ba1) from C- (which mapped to a Baseline Credit Assessment of Baa2). Ratings of subordinated and junior subordinated debts issued by those entities and/or Dexia SA are also downgraded as described in more detail below. All long-term ratings and BFSRs have been assigned a negative outlook. The short-term debt and deposit ratings have been confirmed at Prime-1. This rating action concludes a review for possible downgrade that was initiated on 1 October 2008. Subsequently, the backed short-term rating of Prime-1 assigned on 13 January 2009 has been withdrawn following the confirmation of the Prime-1 short-term rating of the Group’s main entities. Indeed, Moody’s does not assign backed Prime-1 rating for issuers that already have a Prime-1 rating.

Moody’s acknowledges the support by the national governments of Belgium, France and Luxembourg, as well as by the Belgian local governments, evidenced by the capital increase and guarantee agreements that have been provided to Dexia Group and are described in more detail below. Public sector ownership within Dexia is now above 50% and support from those key shareholders will continue to be a major rating factor going forward. Moody’s anticipates that systemic support for the Dexia group will continue and has incorporated this support by providing a six-notch uplift to the BFSR. At the same time, Moody’s took into account the significant imbalances in Dexia’s balance sheet and the challenging funding profile of the group, which are expected to impact the group’s performance over the medium term.

The rating actions reflect the risks associated with significant imbalances in Dexia’s balance sheet, which have been exacerbated during periods of liquidity stress, as well as the increasing credit losses and provisioning required over the past quarters. Dexia’s over-reliance on short-term financing and its very limited access to both unsecured and secured funding in the interbank market since September 2008 have required strong State and central bank support in order to meet the group’s funding needs. In addition, increasing writedowns have negatively weighed on profitability levels while the group also recorded significant negative reserves in its Available for Sale (AFS) portfolio. These factors remain a matter of concern that has led to today’s rating action.

Looking ahead, Moody’s expects that potential losses in the EUR174 billion securities and banking portfolios — especially structured finance, exposures to monolines and debt issued by financial institutions — higher funding costs and the likely increase in provisioning, will continue to damage the group’s profitability in the coming quarters. In addition, the completion of the sale of FSA’s insurance activities and direct consolidation of FSA Financial Products are expected to erode Dexia’s regulatory capital metrics, although Moody’s anticipates these to remain at satisfactory levels given the headroom provided by the recent capital injection. Moody’s also comments that the Tier 1 ratio of 14.5% as reported at end of September 2008, does not fully reflect the potential forthcoming pressure on the group’s capital, as it does not incorporate the AFS reserve of minus EUR11 billion as of end-September 2008.

To see the ratings actions taken, please visit www.moodys.com.

D.C.

«