DBRS Downgrades Hypo Real Estate Hybrid; Comments on 2008 Results and Soffin Support

DBRS has commented today that its ratings for senior and subordinated debt classes of Hypo Real Estate Holding AG and related entities (together, HRE or the Group) remain Under Review with Positive Implications, following the announcement of HRE’s full-year 2008 results and of a declaration of intent from Soffin to recapitalise HRE. At the same time, DBRS has today downgraded its rating for Trust-Preferred Securities issued by Hypo Real Estate International Trust I to D, removing the rating from Under Review with Negative Implications.

HRE announced a EUR 5.5 billion net loss for 2008. The loss was primarily driven by the EUR 2.5 billion impairment charge against goodwill from the acquisition of DEPFA Bank plc in 2007, EUR 2.3 billion in write-downs and valuation losses on securities and sharply increased EUR 1.7 billion in loan loss provisions. In DBRS’s view, these items with a combined negative pretax effect of EUR 6.5 billion demonstrate HRE’s exposure to the downturn in commercial real estate markets and the ongoing financial markets crisis.

The downgrade of the Trust-Preferred Securities issued by Hypo Real Estate International Trust I follows HRE’s announcement that it will not make Capital Payments on these instruments in 2009, consistent with their terms and conditions. The downgrade is in line with DBRS’s policy regarding non-payment of Capital Payments on perpetual, non-cumulative preferred securities. DBRS notes that HRE does not expect to resume Capital Payments on these securities in 2010 and 2011.

The continuing Under Review with Positive Implications status for HRE’s senior and subordinated debt classes is based on DBRS’s expectation that the Group will receive the extensive support it requires to stabilize its franchise, reduce ongoing funding pressures and ultimately execute its restructuring plan. Consistent with this expectation, HRE announced on 28 March 2009 that the German Financial Markets Stabilisation Fund (Soffin) signed a declaration of intent to recapitalise HRE and continue providing liquidity guarantees to stabilise the Group. Soffin has also committed to acquire 20 million common shares of Hypo Real Estate Holding AG for EURE 60 million, which will give Soffin an 8.7% stake in HRE. DBRS sees this action as a first step towards the necessary comprehensive recapitalisation of the Group.

DBRS views positively Soffin’s commitment to stabilise the Group and the recent renewal of liquidity guarantees for HRE. DBRS notes, however, that some uncertainty persists about the extent, form and timing of the recapitalisation and further liquidity support. HRE has stated that Soffin intends to gain full control over the Group as a prerequisite for the planned recapitalisation. A new law that provides options for an expedited full nationalisation of HRE is currently being discussed in the legislative process in Germany.

DBRS continues to closely monitor HRE’s progress towards addressing its significant capital needs. The urgent need for capital is highlighted by the Group’s weakening core (tier 1) capital ratio, which was 6.2% at year-end 2008, excluding the full-year loss consistent with German regulation. On a pro-forma basis, including the full-year loss, the core capital ratio stood at only 3.4%, which is below the required regulatory minimum of 4%.

The ratings review will take into consideration the amount of capital and liquidity support HRE ultimately receives, the impact of the Group’s ongoing challenges on its franchise and HRE’s ability to execute its restructuring plan and re-emerge as a viable institution.

Notes:
This rating is based on public information.
All figures are in Euros unless otherwise noted.

The applicable methodologies are, Analytical Background and Methodology for European Bank Ratings, Second Edition and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.