Fitch Downgrades Postbank to 'BBB+/F2'; Rating Watch Evolving
OREANDA-NEWS. Fitch Ratings has downgraded Deutsche Postbank's (PB) Long-term Issuer Default Rating (IDR) to 'BBB+' from 'A-' and its Short-term IDR to 'F2' from 'F1'. The Rating Watch for the IDRs has been revised to Evolving (RWE) from Negative (RWN). At the same time, the agency has downgraded PB's Support Rating (SR) to '2' from '1', which remains on RWN. A full list of rating actions is available at the end of this rating action commentary.
The downgrade of PB's IDRs and senior debt ratings reflects the downgrade of the PB's parent Deutsche Bank (DB, A-/Stable/a-) as PB's ratings are based on institutional support from its owner. DB announced in April 2015 its plan to divest PB. PB's ratings reflect our expectation that support from DB remains highly probable until the planned divestment of PB has been finalised.
The RWE on PB's Long- and Short-term IDRs and senior unsecured debt ratings reflects our view that PB's IDRs and debt ratings could be affirmed, upgraded or downgraded, depending on our assessment of either its stand-alone strength after the divestment, as expressed by a Viability Rating (VR), or on support from a more highly rated buyer with a strong ability and propensity to provide support. We expect to resolve the RWE when more detailed information on PB's stand-alone strength after the divestment is finalised, which could take more than six months.
The RWN on PB's 'SR' reflects Fitch's view that an IPO is the most likely route for deconsolidation, in which case we would downgrade the SR to '5'. However, a sale to an entity that has the ability and propensity to support PB at the current 'BBB+' Long-term IDR, or higher, while not our base case, cannot be ruled out.
KEY RATING DRIVERS
IDRS, SENIOR DEBT AND SR
PB's Long-term IDR is rated one notch below DB's to reflect that despite the initiated sale process there is, in our opinion, a high probability that DB would support PB if needed as long as it remains the majority owner. PB's role in the group has become less strategic since the announced disposal, but we believe that a default of PB would constitute a huge reputational risk to DB and damage its franchise. In our opinion, this reputation risk is a strong incentive for DB to support PB if needed.
Although the support is underpinned by a control and profit and loss transfer agreement (PLT) between PB and DB Finanz-Holding GmbH (the wholly-owned subsidiary of DB that holds the majority of shares in PB) and a declaration of backing from DB, Fitch assigns limited value to these commitments in light of the upcoming deconsolidation. The PLT can be terminated at the earliest on 31 December 2016 with six months' notice, or at any time for 'good cause'. We understand from management that the currently planned transfer of the shares held by the remaining minority shareholders of PB to DB through a squeeze-out will give DB the flexibility to terminate the PLT earlier in light of the envisaged deconsolidation of PB.
Hybrid capital issued by PB's issuing vehicles are currently notched off DB's VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles and our expectation that DB's support for PB would extend to its hybrid instruments. Consequently, we have downgraded these instruments by one notch in line with the downgrade of DB's VR. They will likely be notched from PB's future VR, when the bank's stand-alone strength can be determined, absent a sale to a higher rated bank that in our opinion would support PB's hybrid instruments.
Deutsche Postbank Funding Trust I-IV's securities are notched twice for non-performance risk and twice for loss severity whereas the Upper Tier II instruments issued by ProSecure Funding Limited Partnership are notched twice for non-performance risk and once for loss severity.
POSTBANK'S LEGACY UNSECURED GUARANTEED DEBT RATINGS ISSUED BY DSL
The ratings of the legacy guaranteed debt (originally issued by the former DSL and acquired and ultimately merged with PB) are based on our expectation that the Federal Republic of Germany (FRG, AAA/Stable) has strong incentives to make timely payments under its grandfathered deficiency guarantee for these notes. The notes are rated two notches below the guarantor's Long-term IDR as Fitch believes that there is only a limited amount of uncertainty around timeliness of payments as a result of the high reputational risks the FRG would face if investors in this debt would incur losses in a default scenario of PB.
IDRS, SENIOR DEBT AND SR
Postbank's IDRs and senior debt ratings are primarily sensitive to the outcome of Fitch's assessment of PB's stand-alone strength as expressed in its future VR. Fitch expects to resolve the RWE when more information about PB's future stand-alone strength becomes available. In the absence of a highly-rated acquirer, PB's IDRs could be affirmed, upgraded or downgraded, depending on its VR. We expect that the review could take longer than six months.
In October 2015, DB concluded its strategic review, and Fitch expects that more details will be made available on the plans for PB's capitalisation before a disposal, the composition of its non-core assets unit, and projections about its recurring earning power, considering especially its agreements with Deutsche Post for using its branches and with DB for using the services of PBC Banking Service GmbH. Fitch believes that the bank's VR will be affected by PB's strategy to improve efficiency and profitability as a stand-alone bank in the highly competitive German retail banking market and potentially further regulatory headwinds for the sector.
Fitch expects to resolve the RWN on PB's SR once the deconsolidation has been finalised as the SR will reflect Fitch's assessment of any new owner's ability and propensity to provide support if needed. If the divestment takes the form of an IPO, which is Fitch's base case, Fitch expects to downgrade the SR to '5' to reflect our view that sovereign support for even the larger German banks cannot be relied on. Until the disposal is completed, PB's SR continues to be sensitive to changes in Fitch's assessment of DB's propensity and ability to provide support for PB.
The ratings of the legacy guaranteed debt is sensitive to a change to Germany's rating or to a change in Fitch's assessment of the likelihood that Germany will honour the guarantee in a timely manner.
The hybrid capital securities issued by PB's issuing vehicles are primarily sensitive to the sale of the bank by DB. Upon completion of a sale they will likely be notched off PB's VR. Prior to that, the securities' ratings are sensitive to a change in their notching from DB's VR, which could increase if Fitch's assessment of support available from DB changes.
In addition, if Fitch assigns a VR to PB before the sale is finalised it would become the new anchor rating for PB's hybrids debt ratings.
The rating actions are as follows:
Long-term IDR: downgraded to 'BBB+' from 'A-'; Rating Watch changed to Evolving from Negative
Short-term IDR: downgraded to 'F2' from 'F1'; Rating Watch changed to Evolving from Negative
Support Rating: downgraded to '2' from '1'; maintained on RWN
Senior debt, including programme ratings: downgraded to 'BBB+'/'F2' from 'A-'/'F1'; Rating Watch changed to Evolving from Negative
Unsecured guaranteed bonds issued by former DSL Bank: affirmed at 'AA'
Deutsche Postbank Funding Trust I (Germany): downgraded to 'BB+' from 'BBB-'; Rating Watch changed to Evolving from Negative
Deutsche Postbank Funding Trust II (Germany): downgraded to 'BB+' from 'BBB-'; Rating Watch changed to Evolving from Negative
Deutsche Postbank Funding Trust III (Germany): downgraded to 'BB+' from 'BBB-'; Rating Watch changed to Evolving from Negative
Deutsche Postbank Funding Trust IV (Germany): downgraded to 'BB+' from 'BBB-'; Rating Watch changed to Evolving from Negative
ProSecure Funding Limited Partnership (LP Jersey): downgraded to 'BBB-' from 'BBB'; Rating Watch changed to Evolving from Negative