Editor’s note: The following press release was issued by Moody’s in connection with yesterday’s ratings action on the temporary European bailout fund, the European Financial Stability Facility.
Moody’s Investors Service has today changed the outlook on the provisional (P)Aaa long-term rating of the European Financial Stability Facility (EFSF) to negative from stable. The action follows the assignment of a negative outlook earlier this week on the Aaa debt ratings of three of the EFSF’s guarantors: Germany, the Netherlands and Luxembourg. The provisional (P)Aaa long-term and (P)Prime-1 short-term ratings for the debt issuance programme of the EFSF remain unchanged. A provisional rating for a debt facility is an indication of the rating that the rating agency would likely assign to future draw-downs from the facility, pending the receipt of documentation detailing the terms of the debt issuance. Moody’s also affirmed the Aaa ratings on all of the facility’s outstanding drawn-downs.
For additional information on Sovereign ratings, please refer to the webpage containing Moody’s related announcements http://www.moodys.com/eusovereign
–RATIONALE FOR NEGATIVE OUTLOOK
The change in the outlook on the EFSF’s (P)Aaa rating to negative follows the recent changes in rating outlooks announced by Moody’s on euro area sovereigns that are EFSF guarantors, including some countries with significant shares in the EFSF’s guarantor pool. Specifically, Moody’s changed the outlooks on the Aaa ratings of Germany (which holds a 29.1% share in the guarantor pool), Netherlands (6.1%) and Luxembourg (0.3%) to negative from stable. Hence, the change in the outlook on the (P)Aaa rating of the EFSF reflects the now negative rating outlooks on all but one of its Aaa guarantors — namely Finland, which has a stable rating outlook.
–RATIONALE FOR UNCHANGED (P)Aaa/(P)P-1 RATING ON EFSF ISSUANCE PROGRAMME
Although recent outlook changes for some of the EFSF’s Aaa guarantors imply an increased likelihood that the EFSF might be downgraded over the next 12 to 18 months, Moody’s has left the EFSF’s (P)Aaa rating unchanged because all of the guarantors that carried Aaa ratings at the time that a (P)Aaa rating was assigned to the EFSF under its current structure remain Aaa-rated. The key rationale supporting the EFSF’s (P)Aaa rating remains in place; that is, each new issuance of the EFSF will benefit from a full guarantee of principal and interest by Aaa-rated member states.
The EFSF’s debt issuance programme is primarily backed by (i) the supported countries’ promise to repay the loan or the debt instrument that the EFSF has acquired; (ii) Aaa-rated guarantees, which are sufficient by themselves to cover all of the associated debt service if the supported countries do not honour their debt obligations; and (iii) guarantees from non-Aaa-rated member states that participate in the EFSF.
More specifically, each euro area member state issues an irrevocable and unconditional capped guarantee in proportion to its share in the capital of the European Central Bank (ECB). Its share in the guarantor pool is proportionally increased to make up for the stepped-out guarantors — namely, Greece, Ireland and Portugal — leading to guarantees that exceed the value of the issued debt by up to 65%. Due to the EFSF’s over-collateralisation of 165% and the 62.2% share of Aaa-rated countries in the EFSF’s guarantor pool, the facility’s issuance is therefore fully covered by Aaa-rated guarantees.
–RATIONALE FOR UNCHANGED Aaa/P-1 RATINGS ON EFSF ISSUANCES
The Aaa and Prime-1 ratings on the EFSF’s existing issuances are also unchanged, irrespective of whether the issuance occurred under the amended structure as described above, or under the initial structure of the EFSF. Under the initial structure of the EFSF, the over-collateralisation was lower than currently (120% rather than 165% in the amended structure), but investors benefited from a loan-specific cash buffer (which is not employed in the amended structure). The loan-specific cash buffer was sized such that the portion of the debt issuance, which was not backed by cash held by the EFSF, was fully covered by Aaa-rated government guarantees.
For a more detailed discussion of the rating rationales for the amended structure and the initial structure, please see the Press Release, entitled "Moody’s affirms (P)Aaa Rating to European Financial Stability Facility (EFSF)", published on 29 October 2011, and the Special Comment, entitled "Key Elements of EFSF’s (P)Aaa Rating ", published on 20 September 2010, respectively.
–WHAT COULD MOVE THE RATING DOWN
Risks that would negatively affect the creditworthiness of the EFSF programme, leading to a downgrade of the EFSF’s rating, would include a deterioration in the creditworthiness of the participating euro area member states (as would be reflected by a change in Moody’s ratings for these states). In this context, the EFSF’s rating is sensitive to changes in the ratings of Aaa countries with large EFSF contribution keys, i.e. Germany, France and the Netherlands. Moreover, a weakening of the commitment among euro area member states to the EFSF could also have negative rating implications.
–WHAT COULD MOVE THE OUTLOOK BACK TO STABLE
Conversely, the outlook on the EFSF’s ratings could return to stable if the outlooks on the ratings of Aaa countries with large EFSF contribution keys, i.e. Germany, France and the Netherlands, were moved to stable.
The EFSF’s ratings were assigned by evaluating factors relevant to the specific characteristics of the facility, reflecting its dual nature as a financing facility and vehicle of public policy. These attributes were compared against those of other issuers, and Moody’s believes the EFSF’s ratings to be similar to other issuers of similar credit risk.
Moody’s assigns a provisional rating when it is highly likely that the rating will become definitive after all documents have been received. Moody’s will monitor the transaction on an ongoing basis to ensure that it continues to perform in the manner expected. Any subsequent changes in the rating will be publicly announced.