DBRS Downgrades Dexia Entities Jr. Sub Debt; Senior at A (high) Unchanged

DBRS has today downgraded the ratings for the junior subordinated debt of Dexia Group’s (Dexia or the Group) three main operating entities (Dexia Bank Belgium (DBB), Dexia Crédit Local (DCL) and Dexia Banque Internationale à Luxembourg (Dexia BIL)). The junior subordinated debt of DCL has been downgraded two notches to BBB (high) from “A” to reflect its noncumulative payment feature and the nonpayment of its discretionary coupons. The junior subordinated debt of DBB is downgraded one notch to A (low) from “A” to reflect the nonpayment of its discretionary coupons, which are cumulative. The junior subordinated debt of Dexia BIL has been downgraded one notch to A (low) from “A”, to reflect the noncumulative nature of this debt, as well as the likelihood that the upcoming discretionary payments will be paid. The trend on these ratings remains Negative. In taking these actions, DBRS concludes the review largely as anticipated when these particular debts were placed under review negative on 9 December 2009. All other ratings for these entities are unchanged. The Senior Long-term Debt & Deposits ratings for these entities remain at A (high) and the Short-term Debt and Deposits ratings remain at R-1 (middle). The trend on the Senior Long-term and Short-term Debt and Deposits ratings remains Negative.

On 6 February 2010, Dexia announced that it had reached an agreement with the European Commission (EC) on its restructuring plan. As a part of this plan, the EC has restricted Dexia from making any coupon payments on subordinated debt instruments, unless deemed mandatory, until the end of 2011. Under DBRS’s methodology, Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments, an additional notch is added when instruments with discretionary payments defer or skip. To date, Dexia has not made the discretionary coupon payments on the junior subordinated debt issued out of DBB and DCL that were due on 18 November 2009.

The downgrade of the junior subordinated debt instruments of DBB places these ratings two notches below the senior debt rating of these entities. One notch reflects the characteristics of these subordinated debt instruments. The second notch reflects the nonpayment of the discretionary coupon payment on these debt instruments, on which missed payments are cumulative.

The downgrade of the junior subordinated debt instruments of DCL places these ratings three notches below the senior debt rating of these entities. One notch reflects the characteristics of these subordinated debt instruments. The second notch reflects the non-cumulative nature of the discretionary payments. The third notch reflects the nonpayment of the discretionary coupon payment on these debt instruments.

In its rating of the DCL junior subordinated debt, DBRS takes into account certain reversible contingent writedown risks in the features of this debt. In its just released methodology to rating such debt, Rating Bank Subordinated Debt and Hybrid Capital Instruments with Contingent Risks, DBRS draws an important distinction in its ratings between those instruments where these adverse events are reversible, and those instruments where these adverse events, once triggered, are irreversible. Instruments with reversible contingent events are generally rated similarly to debt instruments that otherwise have comparable characteristics. Conversely, instruments with contingent events that are not reversible are viewed as more risky and more equity-like and, as such, are generally rated lower with notching driven by DBRS’s preferred rating scale for banks.

The junior subordinated debt of Dexia BIL, which also has certain reversible contingent risks, is downgraded by one notch, placing this rating two notches below Dexia BIL’s senior debt rating. One notch reflects the characteristics of this subordinated debt instrument and the second notch reflects the non-cumulative nature of the discretionary payments. While Dexia BIL has an upcoming discretionary payment on this debt to be made on 6 July 2010, DBRS anticipates that the Group will be obliged to make this coupon payment, given that this entity had positive net income in 2009 and met its capital solvency ratios requirements at the end of 2009 as required by the terms of the note.

DBRS has withdrawn the preferred share ratings for the Dexia entities as there are no outstanding preferred shares. This resolves the Under Review Negative status of these ratings, which was initiated to address the implications of missed discretionary payments for Dexia instruments with such characteristics.

Note:
All figures are in euros unless otherwise noted.

The applicable methodologies are
Global Methodology for Rating Banks and Banking Organisations,
Rating Bank Subordinated Debt and Hybrid Capital Instruments with Contingent Risks,
Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments,
Rating Bank Preferred Shares and Equivalent Hybrids,
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.