DBRS Confirms European Financial Stability Facility at AAA Stable Trend

DBRS Ratings Limited (DBRS) has confirmed the European Financial Stability Facility’s long-term issuer rating at AAA and short-term issuer rating at R-1 (high). The trend on both ratings is Stable.

The ratings reflect the “irrevocable and unconditional guarantees” provided by Euro area member states as stipulated by the EFSF Framework Agreement, the creditworthiness of EFSF guarantors, and the strong commitment of member states to provide support if necessary.

The ratings depend entirely on the Support Assessment, in which the credit ratings of the EFSF’s core guarantors are the principal factor. The Support Assessment is viewed at a level equivalent to AAA. DBRS does not consider it necessary to provide a full Intrinsic Assessment given the nature of the EFSF’s capital structure. DBRS defines the core guarantor group as the Federal Republic of Germany (AAA, Stable), the Republic of France (AAA, Stable), the Republic of Italy (A low, Under Review with Negative Implications) and the Kingdom of Spain (A low, Stable). These four guarantors are the largest by guarantee size and cumulatively account for 83% of the overall guarantor pool.

The EFSF’s loan portfolio is characterised by a high degree of concentration and relatively weak asset quality. Loans totalling €174.6 billion were provided to Greece, Portugal and Ireland to support their economic adjustment programmes. Of this amount, €130.9 billion was disbursed to Greece (CCC high, Stable). Nevertheless, elevated credit risk does not call into question the commitment of the Euro area member states to honour their EFSF guarantees. Moreover, debt relief measures provided to Greece in recent years, which have included extension of EFSF debt maturities and deferral of interest payments on EFSF loans, have not resulted in any financial losses to the EFSF. DBRS does not expect any additional debt relief measures, such as a further lengthening of maturities and reduction in interest rates on EFSF loans, to result in a net loss to the EFSF that would affect creditworthiness. This is because any loss would be absorbed by the Euro area member states’ guarantees. Therefore, as long as the member states are committed to EMU, DBRS would not view a net loss to the EFSF as a decline in creditworthiness.

With the EFSF no longer engaged in new lending programmes, loan commitments are effectively capped. The European Stability Mechanism (ESM), which started operations in October 2012 and which DBRS rates AAA / R-1 (high), has since become the sole institution to provide financial assistance to Euro area member states facing financing difficulties. Nevertheless, the EFSF will remain active in the markets until its loans are repaid.

The EFSF ratings rely principally on guarantees provided by Euro area member states, given the low amount of paid-in capital. Proceeds from loan repayments are used to meet EFSF debt obligations. In the event of default by a borrower, the shortfall would be covered by guarantees and credit enhancement measures. The over-guarantee structure backing EFSF obligations (with maximum over-guarantees by each guarantor of 165%) provides further support to the ratings. The guarantees and over-guarantees from Germany and France alone cover a substantial portion of all EFSF loan commitments.

DBRS believes the commitment of core guarantors to support the EFSF is strong. The EFSF was created to protect financial stability in the Euro area. It has been an integral part of a broader policy response to the Euro area sovereign debt crisis, and an illustration of the commitment of member states to preserve the monetary union. Because of the importance of the mandate of both the EFSF and ESM, DBRS believes core guarantors are highly likely to provide support in a stress scenario.

RATING DRIVERS
Given the strong political commitment of member states to the Economic and Monetary Union and the added benefits associated with diversification, the EFSF ratings are not sensitive to a one-notch downgrade of any single core guarantor. However, the ratings could be lowered if several core guarantors experience ratings downgrades, or if there is a marked deterioration in the creditworthiness of a single core guarantor. Specifically, a two-notch downgrade of France or Germany or a one-notch downgrade of both would likely result in a downgrade of the EFSF ratings to AA (high). Furthermore, multiple notch downgrades of Italy or Spain would likely put downward pressure on the EFSF ratings, particularly if the credit deterioration raises concerns about the cohesion of the Euro area, or weakens the political commitment of core guarantors to the Economic and Monetary Union (EMU). On 5th August, DBRS placed Italy’s A (low) long-term ratings Under Review with Negative Implications. If DBRS were to downgrade Italy by one-notch, it is unlikely that this would result in a downgrade of the EFSF ratings.

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

The principal applicable methodologies are Rating Supranational Institutions and Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales. These can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

The sources of information used for this rating include the European Financial Stability Facility and the International Monetary Fund. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

This rating did not include participation by the rated entity or any related third party and is based solely on publicly available information.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Adriana Alvarado, Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and Sovereign Ratings
Initial Rating Date: 27 July 2012
Last Rating Date: 12 February 2016

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.