DBRS Downgrades and Withdraws Dexia Crédit Local (“Dexia CL”) at A (low)

DBRS Inc. (DBRS) has concluded its review on Dexia SA’s (Dexia or the Group) main operating entity’s – Dexia Crédit Local (Dexia CL or DCL), and downgraded its Senior Long-Term Debt & Deposits rating to A (low) from A (high) Under Review Negative (URN) and Short-Term Debt & Deposits rating to R-1 (low) from R-1 (middle) URN. All ratings have a Negative trend. These ratings reflect DBRS’s view that ongoing government support for these classes of obligors remains extremely likely. DBRS also downgraded DCL’s subordinated debt to BB (high) from A and its junior subordinated debt to BB (high) from BBB (high) to reflect the evolving regulatory environment for burden sharing within the European Union, which makes it less likely that junior debt holders would benefit from government support if needed. At the same time, DBRS has withdrawn all ratings of DCL. The decision to withdraw the ratings was made at DBRS’s discretion.

The ratings for Dexia’s current and former principal subsidiaries reflected the combined strength of the Group, which operated these entities as integral components of its overall franchise. The review was triggered by changes to the structure of the Group and the impact that these changes could have on the creditworthiness of its subsidiaries (including Dexia CL, Dexia Bank Belgium (now Belfius) and Dexia Banque Internationale à Luxembourg (DBIL)), as well as the nature and extent of government support. Both DBB and DBIL were sold as part of the strategy adopted by Dexia to dispose of various entities. DBB was sold to the Belgian State in October 2011. DBIL was sold to Precision Capital, a Qatar fund, in April 2012. With EUR 356 billion in assets as of end-2012, DCL is now the main operating subsidiary of Dexia. The Group had EUR 357 billion in assets as of 2012.

These rating actions follow the EC approval of Dexia S.A.’s revised orderly resolution plan on 28 December 2012 and the entry into force of a substantial guarantee, the “2013 Guarantee” (the Guarantee), on 24 January 2013. In addition, in connection with the Group’s orderly resolution plan, Dexia S.A. received EUR 5.5 billion capital increase on 31 December 2012 by the Belgian and French States through the issuance of preferred shares to the States. This resulted in the Belgian and French States being the main shareholders, with 50.02% and 44.40% shares respectively. The scheme for a tripartite funding guarantee from the Belgian, French and Luxembourg States was approved in January 2013 and replaces the 2011 Temporary Guarantee. The “2013 Guarantee” is a several, but not joint guarantee that may not exceed EUR 85 billion of principal, and is based on the repayment of obligations as follows: 51.41% Belgian State, 45.59% French State, and 3.0% Luxembourg State. The Guarantee allows Dexia CL to borrow up to EUR 85 billion, including funding already covered by the provisional guarantee of 2011; outstanding debt obligations covered by the Guarantee totaled EUR 51.1 billion as of 23 July 2013. The Guarantee was granted to Dexia by the States without collateral and is valid until December 2021.

In lowering the Long-Term debt rating to A (low), DBRS takes into consideration the fact that Dexia SA is now 94.42% jointly owned by the Belgian and the French States (rated AA (high) with a Negative trend and AAA with a Stable trend by DBRS). However, the 2-notch downgrade also reflects the nature of the reorganization whereby Dexia disposed of most of its commercial operations and is now being managed in a run-off mode. At the same time, reflective of the governments’ willingness to preserve stability, new business with local authorities in France is originated by a new company, Société de Financement Local (SFIL), launched in February 2013. Following its sale to SFIL, Dexia Municipal Agency (DMA), the French entity that was refinancing loans to the public sector issuing "obligations foncières" or French covered bonds, was renamed Caisse Francaise de Financement Local (CAFFIL). The French State has direct ownership in SFIL, alongside Caisse des Dépôts et Consignations (CDC) and La Banque Postale, which are both publicly controlled institutions in France.

In downgrading the subordinated debt and junior subordinated debt, DBRS considers the evolving regulatory environment and the potential for the burden sharing for these instruments, if the Group were to need additional capital. While the Group has made progress with its restructuring plan, it nevertheless remains under significant pressure due to the low interest rate environment, funding stress and negative earnings with a weak economic outlook.

Note:
All figures are in Euros (EUR) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments and DBRS Criteria: Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments. These can be found at: http://www.dbrs.com/about/methodologies.

[Amended on January 12, 2015 to reflect actual methodologies used.]

The sources of information used for this rating include publicly available company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Roger Lister
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 10 January 2007
Most Recent Rating Update: 7 October 2011

For additional information on this rating, please refer to the linking document under Related Research.