Moody’s has placed the ratings of Fortis Insurance Belgium and Fortis Group under review for possible downgrade. A list of all the ratings is available at the end of the press release.
The rating actions follow Fortis’ shareholders vote to disapprove the sale of Fortis Bank SA/NV to the Belgian State and the subsequent refusal of the revised agreement signed between BNP Paribas, Fortis and the Belgian government.
The review for possible downgrade reflects the new uncertainties on the future of the Fortis Group resulting from this vote, considerable uncertainties in respect of the extent of any support from BNP Paribas to Fortis, and the increased risk profile of the Group.
On the 11 February, Fortis shareholders voted to reject the sale of 50% plus one share of Fortis Bank SA/NV to the Belgian State, and also to reject the subsequent sale of 75% of Fortis Bank SA/NV and 10% of Fortis Insurance Belgium to BNP Paribas. As a result, the originally agreed “protocole d’accord” remains valid, whereby BNP Paribas would acquire 75% of Fortis Bank SA/NV and 100% of Fortis Insurance Belgium.
Moody’s notes that the outcome of this vote has contributed to a high level of legal complexity around the dismantling of the Fortis Group. First, although Moody’s notes that the sale of Fortis Bank SA/NV to the Belgian State has already been completed, the negative vote of the shareholders might lead to legal disputes between Fortis’ shareholders and the Belgian government. At the same time, in spite of the negative vote of the shareholders, the original “protocole d’accord” signed in October 2008 between Fortis, BNP Paribas and the Belgian state remains a binding contract for the three parties. However, Moody’s notes that there is some likelihood that the original agreement may not complete as originally planned, as a result of the shareholder vote and potential legal interventions. As a consequence, upwards rating pressure at Fortis Insurance Belgium is reduced. Furthermore, in a scenario where BNP Paribas still proceeds with the transactions, Moody’s considers that any associated legal uncertainties, including potential counter-claims from Fortis shareholder groups, could be complex and take time to resolve, thus creating potential damages to the insurance company franchise and to Fortis Group in the short-term. Finally, Moody’s added that the risk profile of Fortis Holding has the potential to increase, as a consequence of its potential obligation to finance Royal Park Investments (the SPV set up to manage some structured investments initially held by Fortis Bank SA/NV) up to EUR6.9 billion.
Moody’s review for possible downgrade will therefore focus on the extent to which a) the original agreement is completed as originally outlined b) the uncertainties of the last months have damaged the franchise of Fortis Insurance Belgium and the financial situation of the company. In the event of the “protocole d’accord” not being completed, Moody’s added that, in terms of ratings for Fortis Holding companies, Moody’s ratings reflect the financial strength of the Group’s operating insurance companies as well as the subordination of the holding company creditors (traditionally captured through a three notch difference between the insurance financial strength rating of an operating company and the issuer rating of a holding company). Nonetheless, Moody’s review will also focus on the new strategy of the Group and the specific resources and obligations of the holding companies (including the off-balance sheet items) and will consider whether additional notching is required to reflect the holding companies’ financial position.
The review for possible downgrade for the P-2 short-term rating of the Group will focus on the liquidity position of the Group in light of the recent initiatives launched by the Group to repay its senior obligations and the potential increased investment in the structured assets SPV.
Commenting more specifically on the hybrid debts (FRESH and debts issued by Fortis Hybrid Financing), the rating agency mentioned that the respective mandatory convertible and junior / preferred status of these securities could imply higher levels of loss as the Fortis Group profile deteriorates, and Moody’s review will also consider the likelihood of breach of the mandatory deferral triggers and whether any additional notching is necessary for these junior instruments. This also applies for the CASHES issued by Fortis Bank SA/NV but including mandatory deferral based on Fortis Group’s financial situation.
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D.C.