DBRS Assigns Additional Ratings to Lloyds, Senior Unaffected at A (high)

DBRS has today assigned various additional ratings to debt instruments of Lloyds Banking Group plc (Lloyds or the Group), and certain subsidiaries. Importantly, today’s rating actions do not reflect any issuer-specific credit events and does not impact the outstanding ratings for Lloyds, including the A (high) Issuer and Long-Term Debt rating, with Negative trend.

DBRS has today assigned a BB (high) rating to the Preference Shares of Lloyds Banking Group, which is five notches below Lloyd’s intrinsic rating of “A”. The rating reflects the application of DBRS’s standard policy of notching preference shares by four notches for banks with an intrinsic rating of “A”. Further, DBRS has applied an additional notch reflecting the added risk associated with the temporarily halted payment of dividends/coupons on the preference shares. In return for receiving State Aid, Lloyds has agreed with the European Commission not to make any discretionary dividend or coupon payments on hybrid securities, including preference shares from 31 January 2010 until 31 January 2012. Given the recent financial performance of Lloyds, DBRS expects that Lloyds will reinstate dividend payments as soon as it is permitted, as such is limiting the notching associated with the halting of payments to only one.

Furthermore, DBRS has assigned BB (high) ratings to the Enhanced Capital Notes (ECNs) issued by LBG Capital No.1 and LBG Capital No.2. The ratings of the ECNs reflect the contingent capital risks inherent in these instruments. While DBRS recognises the subordinate guarantees and the mandatory pay feature of the ECNs, DBRS views certain aspects of the notes, specifically, the Mandatory Conversion feature, as the most salient features of these instruments. Accordingly, the ratings are notched from the standard preferred rating. The ECNs mandatorily convert into ordinary shares, should Lloyds Banking Group report a consolidated core Tier 1 ratio below 5%. Consolidated core Tier 1 capital, pro-forma to the February issuance, was 8.4%, providing a sizable cushion between the current level of capital and the “trigger”. However, DBRS views the “trigger” as relatively easy to ‘trip’, as it is a capital-based ratio that is above current minimum regulatory requirements. Moreover, given the pre-determined conversion rate, DBRS sees the potential for significant loss of principal, at conversion, should the share price at conversion be lower than the conversion price.

In addition, DBRS has assigned a rating of BBB (high) to the Group’s Non-Cumulative Discretionary Pay Subordinated Debt instruments and a rating of A (low) to the Non-Cumulative Discretionary Pay Subordinated Debt instruments of Lloyds TSB Bank plc (Lloyds TSB), HBOS plc (HBOS) and Bank of Scotland plc (Bank of Scotland). The ratings of these instruments are three notches below the senior debt rating of the respective issuing entity. The notching reflects the junior status of these instruments, the deferrable/non-cumulative nature of the coupon payments, and one notch for the deferral of coupon payments. This notching is consistent with standard DBRS rating methodology. Furthermore, DBRS has assigned an A (low) rating to the Cumulative Discretionary Pay Subordinated Debt instruments of the Group and an ‘A’ rating for these instruments of Lloyds TSB, HBOS and Bank of Scotland. The notching reflects the junior status of these instruments, with an added notch for the deferral of coupon payments.

Additionally, DBRS has assigned an ‘A’ rating to the Group’s Mandatory Pay Subordinated Debt instruments and an A (high) rating to the Mandatory Pay Subordinated Notes of Bank of Scotland. These ratings consider DBRS’s methodology under which subordinated debt with mandatory coupons are rated one notch lower than the senior debt rating. The trend on the aforementioned subordinated debt ratings is Negative, reflecting the trend on the Bank’s senior rating.

Finally, DBRS has changed the debt name for Mandatory Pay Subordinated Debt instruments, (previously Subordinated Debt) issued by both HBOS and Lloyds TSB. The new debt name more accurately describes the subordinated instruments of the issuers. The A (high) rating, with a Negative trend, for both HBOS and Lloyds TSB’s Mandatory Pay Subordinated Notes remains unchanged and consistent with DBRS methodology under which subordinated debt with mandatory coupons are rated one notch lower than the senior debt rating.

Note:
All figures are in GBP unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations, Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, Rating Bank Subordinated Debt and Hybrid Capital Instruments with Discretionary Payments, Rating Bank Subordinated Debt and Hybrid Capital Instruments with Contingent Risks, and Rating Bank Preferred Shares and Equivalent Hybrids, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.