OREANDA-NEWS. Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDRs) of Germany-based Erste Abwicklungsanstalt (EAA) and FMS Wertmanagement Anstalt des oeffentlichen Rechts (FMS WM) at 'AAA', and Portigon AG at 'A+', all with Stable Outlooks. Fitch has also affirmed the Long-term IDRs of Ireland-based Depfa Bank plc and its subsidiaries at 'BBB+' with a Negative Outlook. A full list of rating actions is at the end of this rating action commentary.

These rating actions are part of a review of EU wind-down banks, on which Fitch will issue a peer report shortly.

The issuer and senior debt ratings of FMS WM, EAA and Portigon reflect Fitch's view that there is an extremely high likelihood of support ultimately from Germany (AAA/Stable) through the Financial Market Stabilisation Fund (SoFFin) and, in the case of EAA and Portigon from the State of North-Rhine Westphalia (NRW; AAA/Stable).

Fitch's view of support for FMS WM is based on SoFFin's statutory loss-absorption obligation as stipulated in Germany's Financial Market Stabilisation Fund Act and FMS WM's statutes. Since 1 January 2014 SoFFin has also guaranteed all the liabilities of FMS WM. Germany is in turn directly liable for all of SoFFin's obligations; FMS WM's ratings are therefore aligned with those of Germany.

EAA's ratings are based on Fitch's view of an extremely high likelihood of support from the entity's owners, particularly NRW, due to their statutory loss-absorption obligation. These statutory loss-absorption obligations are stipulated by the Law on the Further Development of Financial Market Stability (Gesetz zur Fortentwicklung der Finanzmarktstabilisierung, FMStG) and in EAA's statutes.

EAA's largest single owner is NRW (48.2%), with the remaining owners being the two regional savings banks associations in NRW (25% each) and two local regional associations (0.9% each). All owners are liable to provide support to EAA to varying degrees but the ultimate liability lies with NRW, and through NRW, Germany. EAA's statutes include a deficiency guarantee from NRW should the other owners have insufficient resources to support EAA, as the other owners' potential liabilities under the scheme are capped according to the FMStG law and EAA's statutes. The Federal Agency for Financial Market Stabilisation (FMSA) and NRW share the burden of any losses above the cap, according to EAA's statutes. As a result, EAA's ratings are equalised with those of NRW.

Portigon's 'A+' Long-term IDR is driven by the support structure in place outlined in its binding framework agreement. The contractually binding framework agreement commits NRW, Portigon's sole ultimate owner, to be responsible for all of Portigon's losses exceeding the amount that is shared by the other stakeholders of the former WestLB AG (Portigon's previous name). The framework agreement was established in June 2011 between Portigon and its owners as well as the FMSA and EAA.

Portigon's 'A+' Long-term IDR is four notches below NRW's 'AAA' IDR. The notching is driven by Fitch's view that there remains some risk, albeit highly remote, of payment disruption on Portigon's remaining obligations as the entity's wind-down is completed. Portigon is not of strategic importance for NRW, and while its support structure is very strong, it is not tantamount to a guarantee. Fitch expects Portigon to continue to produce operating losses and consume its capital through its wind-down process. With a CET1 ratio of 91.9% at end-June 2014 and a shrinking balance sheet with only around EUR2bn in risk-weighted assets, the risk of a scenario in which Portigon would need further capital support from NRW is very small, but Portigon as a bank is at least theoretically subject to the implementation of the Bank Recovery and Resolution Directive in Germany (BRRD Umsetzungsgesetz).

In Fitch's view, the formalised support for FMS WM, EAA and Portigon is underpinned by the agency's assessment of political and economic motivation rather than precise wording in legislation or contractual agreements. Fitch expects that Germany will provide timely support for EAA and FMS WM and NRW to Portigon because of the potentially huge reputational and financial risks involved.

Fitch does not assign Viability Ratings to EAA or FMS WM or Portigon because they are wind-down institutions whose business models would not be viable without external support.

FMS WM, EAA, and Portigon's IDRs are primarily sensitive to Germany's ability and propensity to provide support. The Stable Outlooks on FMS WM and EAA reflect Fitch's expectation that the likelihood of state support for these institutions will not be affected by changes to resolution legislation. FMS WM and EAA are not banks and so are not subject to the implementation of the BRRD Umsetzungsgesetz.

The Stable Outlook for Portigon, which could at least theoretically be subject to resolution legislation, reflects its minimal remaining obligations, which are largely linked to its owners by derivative contracts. This makes it difficult to envisage a scenario where losses could be imposed on senior creditors.

Negative rating action on FMS WM, EAA, and Portigon could be triggered by any changes in Germany's ratings, and for EAA and Portigon, NRW's ratings. The ratings are also sensitive to a change in the nature or structure of the support available to these institutions, which Fitch views as unlikely.

EAA's and Portigon's guaranteed obligations are rated 'AAA' driven by the grandfathered statutory guarantor liability (Gewaehrtraegerhaftung) from each of the former WestLB AG's (now Portigon) owners, especially from NRW.

Depfa's ratings are driven by the high likelihood that support would be forthcoming from Germany via FMS WM, if ever needed. Depfa's transfer from its former parent (HRE Holding AG) to FMS WM, effective in December 2014, follows the German government's decision in May 2014 to continue Depfa's orderly wind-down and abandon its reprivatisation plans.

Fitch's assessment of the high likelihood of state support for Depfa is driven by qualitative factors - primarily its ultimate ownership by Germany, as well as the state aid agreement with the European Commission (EC) that agreed on a sale or, failing that, a wind-down of Depfa. Depfa's ratings take into account Fitch's view that Germany's propensity to support it in all circumstances is marginally weakened by its location in Ireland rather than Germany.

The Negative Outlook reflects the uncertainty around the terms of the transfer of Depfa to FMS WM and the details of its wind-down plan, which have yet to be communicated, in the context of the implementation of bank resolution legislation in the European Union that will present obstacles to state recapitalisation of a bank.

Fitch's 'BBB+' Long-term IDR is driven by our expectation that there will be no major impact from the transfer on Depfa's operations, as the bank has been effectively in wind-down without any new business originated since 2008. However, the rating is sensitive to clarity around how Germany will ensure that capital and funding needs are met in the course of run down and we expect to downgrade by at least one notch by end-June 2015 to indicate the obstacles that the resolution legislation will impose on any state capital supplied that could be considered new state aid since January 2015. The downgrade could be limited to one notch if details of Depfa's run-down plan provide clarity around FMS WM's expectations for meeting regulatory capital requirements despite operating losses as the bank is run down.

The timing and details of Depfa's liquidation at the end of its wind-down process are also unclear. While we do not expect losses for senior unsecured creditors, we do not fully exclude the possibility that such liquidation could include the transfer of assets and liabilities to external third parties, most likely other banks.

Fitch understands that FMS WM does not intend to modify Depfa's group structure, ie that DEPFA ACS Bank (DEPFA ACS) and Hypo Public Finance Bank (HPFB) will remain fully owned by Depfa and continue to be wound down in a similar way to Depfa.

Consequently, the alignment of DEPFA ACS and HPFB's ratings with those of their parent reflects their integration into Depfa and our expectation that state support would flow through Depfa. It also reflects the reputational risk to the German government of allowing a DEPFA subsidiary to fail. DEPFA ACS benefits from a declaration of backing from its parent, expressing Depfa's commitment to fulfil DEPFA ACS's contractual obligations in case of need.

HPFB has not conducted any new business since 2008, most of its remaining assets have been transferred to FMS WM and it has no outstanding debt. Fitch believes that Depfa intends to voluntarily liquidate HPFB at some point. Fitch has therefore withdrawn its ratings because it no longer considers these to be meaningful to its coverage.

Depfa's ratings are sensitive to any change in Fitch's view of Germany's propensity to support banks and to the support dynamics between Germany, FMS WM and Depfa, in particular to significant changes in the relationship between Germany and FMS WM, although Fitch considers the latter scenario to be highly unlikely for the foreseeable future.

Depfa's ratings are also sensitive to Fitch's view of Germany's ability to support its banks, as signalled by Germany's sovereign rating. Given Depfa's domicile in Ireland, the bank's ratings also reflect the broad sovereign and associated banking sector risks in Ireland, not all of which are within the German owner's power to neutralise. Therefore Depfa's IDRs are also sensitive to the Irish sovereign rating.

DEPFA ACS's ratings are sensitive to changes to Depfa's IDRs or to any move that could affect the strength of its integration into Depfa.

Fitch does not assign Viability Ratings to Depfa or its subsidiaries because they are wind-down institutions whose business models would not be viable without external support.

The ratings of performing subordinated lower Tier 2 debt securities issued by Depfa reflect its still material credit risk if state support is excluded and lack of financial flexibility for subordinated instruments. The limited margin of safety for full performance of the debt is situated in the 'B' category on Fitch's rating scale.

The material credit risk is driven by potential bail-in of the bank's' subordinated debt holders that would be triggered by any additional state support to accompany its orderly wind-down, facilitated by the BRRD legislation. This risk is only partly compensated by the relatively short remaining period until maturity of Depfa's only dated subordinated debt instrument that is rated by Fitch (December 2015).

In line with its "Assessing and Rating Bank Subordinated and Hybrid Securities Criteria", in the absence of a VR or alternative rating that could act as an anchor, Fitch has adopted a bespoke analysis of the risks of non-performance and loss severity risks for Depfa's lower-Tier 2 subordinated debt.

Fitch differentiates between Depfa's subordinated lower Tier 2 debt ratings and those of its wind-down bank peers within the 'B' category by comparing these banks' respective operating income forecasts, credit exposures and related potential losses and available capital buffers to determine the potential need for further extraordinary state support. The notching differences reflect Fitch's view of the somewhat different probability of further state support for each bank.

The instrument's rating is sensitive to the risk of burden-sharing. Given the high degree of concentration in Depfa's asset portfolio, this scenario could be driven by large single credit losses that would mean the bank requiring further state support. Should this instrument be bailed in, loss severity would likely be high, which could result in a downgrade to 'CC' or 'C'.

Depfa's non-performing hybrid securities (Depfa Funding II, III and IV LP) are rated 'C' to reflect the deferral of coupon payments and Fitch's view that payments are unlikely to be resumed given that Depfa is in wind-down. The state-aid agreement with the EC does not permit distribution on Depfa's profit-related capital instruments - unless they are issued by SoFFin or payment is mandatory - prior to 31 December 2015. In light of Depfa's weak performance prospects, Fitch does not expect that any of these instruments will become performing and therefore sees no upside for the instruments' ratings.

In January 2015 Depfa announced that FMS WM proposed to launch a tender offer (subject to regulatory approval) to repurchase these hybrid securities and that FMS WM had entered into a commitment agreement with a qualifying majority of holders of these securities to purchase the securities at prices between about 58% and 60% of their nominal values. Consequently, according to the notification of the proposed tender offer, investors who do not tender their securities could become subject to redemption of the securities at the option of the issuer or Depfa at a price between about 57% and 59% of nominal value.

The rating actions are as follows:

Erste Abwicklungsanstalt
Long-term IDR affirmed at 'AAA', Outlook Stable
Short-term IDR affirmed at 'F1+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'AAA'
Senior Debt affirmed at 'AAA'/'F1+'
State-guaranteed/grandfathered debt affirmed at 'AAA'/'F1+'
State-guaranteed/grandfathered market-linked securities affirmed at 'AAA emr'

Long-term IDR affirmed at 'AAA'; Outlook Stable
Short-term IDR affirmed at 'F1+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'AAA'
Commercial paper affirmed at 'F1+'
Senior unsecured affirmed at 'AAA'/'F1+'

Portigon AG
Long-term IDR affirmed at 'A+'; Outlook Stable
Short-term IDR affirmed at 'F1+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A+'
State-guaranteed/grandfathered debt: affirmed at 'AAA'
State-guaranteed/grandfathered subordinated debt: affirmed at 'AAA'

Depfa Bank plc
Long-term IDR affirmed at 'BBB+'; Outlook Negative
Short-term IDR affirmed at 'F2'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB+'
Debt Issuance Programme affirmed at 'BBB+'/'F2'
Senior unsecured affirmed at 'BBB+'
Market-linked securities affirmed at 'BBB+emr'
Subordinated notes (lower Tier 2, ISIN: XS0229524128): 'B+'

Long-term IDR affirmed at 'BBB+'; Outlook Negative
Short-term IDR affirmed at 'F2'
Support Rating affirmed at '2'
Debt Issuance Programme affirmed at 'BBB+'/'F2'

Hypo Public Finance Bank
Long-term IDR affirmed at 'BBB+'; Outlook Negative and withdrawn
Short-term IDR affirmed at 'F2', withdrawn
Support Rating affirmed at '2', withdrawn

Depfa Funding II LP hybrid capital instruments (XS0178243332) affirmed at 'C'
Depfa Funding III LP hybrid capital instruments (DE000A0E5U85) affirmed at 'C'
Depfa Funding IV LP hybrid capital instruments (XS0291655727) affirmed at 'C'