On Friday, I asked why CAM’s credit default swaps were soaring. This is why? Clearly someone had inside information.
The full Moody’s press release is below.
Moody’s downgrades Banco CAM’s standalone ratings to E+/B3; confirms debt ratings at Ba1, all ratings on review with direction uncertain
Madrid, October 17, 2011 — Moody’s Investors Service has today downgraded Banco CAM’s standalone bank financial strength rating (BFSR) to E+ from D. The E+ standalone BSFR maps to B3 on the long-term scale. At the same time, Moody’s has confirmed Banco CAM’s senior debt and deposit ratings at Ba1/Not Prime and its dated subordinated debt at Ba2. All of Banco CAM’s ratings are on review with direction uncertain, except the government guaranteed debt rated Aa2 on review for possible downgrade.
Today’s action extends the rating review initiated on 8 September 2011. For further details please see "Moody’s reviews Banco CAM’s ratings for downgrade".
DOWNGRADE OF BANCO CAM’S STANDALONE BANK FINANCIAL STRENGTH RATING
Moody’s decision to downgrade Banco CAM’s standalone BFSR by several notches, to E+ from D, reflects the material deterioration on the bank’s credit profile due to (i) its fragile liquidity position with a continuously increasing funding deficit that is only covered by ECB and domestic public debt Repo funding and the EUR3 billion credit facility provided by its owner the state-owned fund ("FROB", Fund for the Orderly Restructuring of the Banking System) (ii) significant deterioration in asset quality indicators, with a problem-loan ratio of 19% and a coverage ratio of 39.4%, compared with 9% and 53.4% as of Q1 2011 (iii) net loss of EUR1.1 billion at end-June 2011 compared with a net profit of EUR39.8 million at end-March 2011, due to the higher than expected level of impairments, and (iv) weak solvency indicators when compared to Moody’s calculation of embedded expected losses in Banco CAM’s balance sheet, despite the EUR2.8 billion capital injection committed by the FROB.
Banco CAM was taken over by the FROB on 22 July 2011, after having committed EUR2.8 billion of capital injection into the bank and having granted a EUR3 billion credit facility as part of the Bank of Spain’s restructuring plan.
Moody’s believes that without the support provided by the Spanish government via its owner (the FROB), Banco CAM would not be able to face its sizable refinancing requirements over the next 12 months given its weakening deposit base and lack of access to wholesale market financing. In addition, Moody’s is concerned by the bank’s very weak risk absorption capacity, with mounting losses and weak solvency indicators, which has been severely impacted by the rapid deterioration of its asset portfolio.
The FROB and Bank of Spain have jointly initiated the auction process of Banco CAM, which is expected to conclude in the following weeks. Moody’s has placed the bank’s BFSR on review with direction uncertain to reflect the different rating implications for Banco CAM in case the sale process is completed or if the FROB fails to conclude it. By placing Banco CAM’s BFSR on review with direction uncertain the rating agency wants to highlight: (i) the possibility for the bank’s rating to be upgraded if it is acquired by a stronger peer, (ii) the possibility of being downgraded if the resulting entity after the sale process displays a weaker credit profile than Banco CAM’s standalone financial strength and (iii) the possibility of Banco CAM’s standalone rating being downgraded if the sale process fails to succeed and the government weakens its current support for the bank.
CONFIRMATION OF BANCO CAM’S SENIOR DEBT AND DEPOSIT RATINGS, AND SUBORDINATED DEBT
In today’s action Moody’s has also confirmed Banco CAM’s debt and deposit ratings at Ba1/Not Prime. Following the downgrade of the bank’s BFSR, Moody’s has broadened the uplift from its standalone rating to five notches, to reflect the strong commitment of the FROB to continue providing support to Banco CAM in terms of liquidity and capital until the auction process is completed.
At the same time Moody’s has confirmed Banco CAM’s dated subordinated debt instruments at Ba2. These dated subordinated debt instruments continue to be rated one notch lower than the senior debt instruments, based on subordination in the case of liquidation.
The bank’s debt and deposits ratings as well as dated subordinated debt are on review with direction uncertain reflecting the review with direction uncertain of its standalone rating. In addition, Moody’s notes that Banco CAM’s debt ratings could be aligned with its standalone BFSR and therefore downgraded by several notches in case the government (via FROB) will provide any signal that it may weaken the support that is currently expected to be forthcoming for the bank in case of need.
The methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody’s Bank Ratings: A Refined Methodology published in March 2007. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Headquartered in Alicante, Spain, Banco CAM had total assets of EUR71.3 billion as of end-June 2011.
For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Moody’s considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.
Moody’s adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody’s considers to be reliable including, when appropriate, independent third-party sources. However, Moody’s is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see Moody’s Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody’s ratings were fully digitized and accurate data may not be available. Consequently, Moody’s provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
About Edward Harrison
Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.
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