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Moody's Investors Service has today affirmed its provisional (P)Aaa long-term debt rating with a continued stable outlook for the debt issuance programme of the European Financial Stability Facility (EFSF). Moreover, Moody's has also affirmed the short-term rating of provisional (P)Prime-1 for the EFSF's debt issuance programme. Moody's assigns a provisional rating when it is highly likely that the rating will become definitive after all documents have been received.
In a related action, Moody's has today affirmed the Aaa and Prime-1 ratings on the EFSF's existing issuances. The affirmation applies both to the issuances occurred under the EFSF's current structure as amended in October 2011, and to the issuances that occurred under the EFSF's structure prior to October 2011.
Today's rating affirmation follows Moody's actions on euro area sovereigns that are EFSF guarantors, including some countries with significant shares in the EFSF's guarantor pool. The actions included changing the outlooks on the Aaa ratings of France (which holds a 21.8% share in the guarantor pool) and Austria (3.0%) to negative from stable. Moreover, Moody's recent actions also included the downgrade of the government debt ratings of Italy (19.2%) and Spain (12.7%) to A3 from A2 and A1, respectively. For full details, please refer to the webpage containing all of Moody's related announcements http://www.moodys.com/newsandevents/topics/euro-area-sovereign-crisis-affected-credits/-/007022/-/-/0/0/-/0/-/-/en/global/rr?WT.mc_id=home_banner_EUPressurePR.
RATIONALE FOR AFFIRMATION OF THE (P)Aaa RATING ON THE EFSF ISSUANCE PROGRAMME
Although the recent actions on the ratings of some of the EFSF's guarantors weaken the quality of the facility's guarantor pool, Moody's decision to affirm the EFSF's (P)Aaa rating is driven by the fact that no Aaa-rated country has lost its top-notch rating. Consequently, the key rationale of the EFSF's (P)Aaa rating -- namely, the full coverage of its issuance (principal and interest) by guarantees from Aaa-rated member states -- remains unchanged.
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 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 STABLE OUTLOOK
The stable outlook for the (P)Aaa rating of the EFSF largely reflects the stable rating outlooks of Germany (the country with the largest share in the guarantor pool, 29.1%), the Netherlands (6.1%), Finland (1.9%) and Luxembourg (0.3%), the 165% over-collateralisation requirement, and Moody's opinion that the euro area countries collectively remain firmly committed to supporting debt issued by the EFSF.
Due to the 165% over-collateralisation requirement, any new issuance by the EFSF would likely carry guarantees amounting to 60% of principal and interest payments guaranteed by sovereigns that have Aaa ratings with stable outlooks. In addition, 40% of any issuance would likely be backed by guarantees from Aaa-rated countries with negative outlooks, while 65% of any issuance would be backed by guarantees from countries rated Aa and A (only Cyprus with a 0.2% share has a lower rating -- its Baa3 rating is on review for possible downgrade).
Moreover, beyond the explicit guarantees, Moody's sees a strong implicit support for this facility from the participating countries, which further reduces migration risk for the EFSF's rating.
RATIONALE FOR AFFIRMATION OF THE Aaa/P-1 RATINGS ON THE EFSF ISSUANCES
In a related action, Moody's has today also affirmed the Aaa and Prime-1 ratings on the EFSF's existing issuances, irrespective of whether the issuance occurred under the amended structure as described above, or under the initial structure of the EFSF. With the initial structure of the EFSF, the over-collateralisation was lower (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.
TRANSITION/DOWNGRADE RISK
Risks that would negatively affect the creditworthiness of the programme, leading to a negative outlook or a downgrade of the EFSF's rating, would include a deterioration in the creditworthiness of the participating euro area member states (as 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.
THE EFSF AS A TEMPORARY STRUCTURE
The EFSF is a temporary structure, whose activity can eventually be transferred to the permanent ESM. At that time, the EFSF may -- upon receiving the unanimous approval of the euro area member states, and after obtaining any requisite consents from investors in funding instruments -- transfer all and any of its rights, obligations and liabilities, including under financial instruments, financial assistance facility agreements and/or financial assistance, to the ESM.
RATING METHODOLOGY
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 and disseminated through Moody's Client Service Desk.
REGULATORY DISCLOSURES
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.
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