Fitch Ratings Affirms 'AAA' For All Landesbank Guaranteed Obligations.

Business Editors

LONDON--(BUSINESS WIRE)--March 1, 2002

Fitch Ratings, the international rating agency, has affirmed its 'AAA' Long-term rating for all guaranteed obligations of the 12 Landesbanks and DGZ-DekaBank. The Outlooks remain Stable, and the Short-term ratings are affirmed at 'F1+'. This follows the agreement reached yesterday between the EU Competition Commissioner, Mr Mario Monti, and representatives of the German authorities, headed by Mr. Caio Koch-Weser, Germany's state secretary for finance, on the wording of the 'grandfathering' clause for guaranteed obligations of Germany's public sector banks, and reflects Fitch's view that repayment to creditors under these guarantees will be timely.

The situation was becoming critical for the banks in recent weeks, as the European Commission (EC) had given the German authorities until end-March to arrive at an acceptable proposal for the wording of the 'grandfathering' clause covering obligations entered into in the 'transitional' period of the transformation from state-guaranteed banks to banks competing for funding on equal terms with 'normal' commercial banks (i.e. 19th July 2001 to 18th July 2005 and maturing up to end-December 2015). If a compromise had not been reached by end-March, Mr. Monti had told the German press that he would take legal action against the banks. This would certainly have led to downgrades of the 'AAA' ratings.

The EC had declared in July 2001 that the maintenance obligation for the German states to support their banks (Anstaltslast) would no longer legally apply under EU law after 18th July 2005 and that the grandfathering was to be solely in the form of 'Gewaehrtraegerhaftung' (see below). It, therefore, considered that, had the grandfathering clause for obligations entered into between these dates been in the form of a clear guarantee for timely repayment, creditors would have been put in a more advantageous position than they had been when they entered into the obligations - a situation the EC was keen to avoid.

The difference between the grandfathering of these transition obligations and those already in place prior to 19th July 2001 hinges on the obscure distinction between the two forms of public law guarantee in Germany: 'Anstaltslast' and 'Gewaehrtraegerhaftung'. The former is an obligation to ensure that the guaranteed entity (i.e. the Landesbank) is always in a position to meet its obligations as they fall due, so timeliness is ensured. The latter gives the creditor the right to claim against the guarantor directly, but only so long as certain conditions are met. In Fitch's view, meeting these conditions might have taken time and therefore delayed payment. Thus, the question arose whether the wording chosen for the 'Gewaehrtraegerhaftung' would be precise enough to satisfy Fitch that timely payment would be made under the guarantee in case of necessity, so that it could maintain its 'AAA' ratings.

The EC and the German authorities have agreed on the following wording with regard to grandfathered guarantees for obligations entered into in the transition period: 'The guarantors (Traeger) will immediately (umgehend) fulfil their obligations to the creditors under the guarantee (Gewaehrtraegerhaftung) in respect of liabilities entered into up to 18th July 2005, as soon as they [the guarantors] have duly stated in writing on maturity that the creditors of these liabilities cannot be satisfied out of the assets of the institution.'

While the language of this agreed grandfathering clause does not provide clarity on timeliness in the way Fitch had hoped it would, the agency is nevertheless satisfied that these guarantees would be honoured in a timely manner. This view is largely based on the following considerations:

-- There is a legal obligation for the guarantors to repay under the guarantee.


-- Given the close relationship between a Landesbank and its guarantors
(generally its owners), the guarantors would be aware of any financial and
liquidity difficulties in their Landesbanks well in advance of the guarantee
being called upon, and would, therefore, be able to prepare the required
written statement by the time any obligation the banks were unable to pay fell
due.

-- The sentiment of the banks' guarantors is that they should pay under the
guarantees on time, and they have the means to do so. Several German states
(Laender) have come out with statements during the past year indicating their
willingness to guarantee timely repayment.

-- The EC has acknowledged that banks do not have to go through liquidation
proceedings for the guarantor to prove that they cannot pay, and payment under
the guarantees does not have to be notified to the EC, as it is not 'new aid'.

Therefore, Fitch will continue to give an 'AAA' rating to guaranteed obligations entered into during the transition period so long as it is persuaded of the willingness and ability of the guarantors to pay on a timely basis. The agency will meet with the guarantors of every Landesbank each year to assess this support. Should these meetings, or any other events, cause the agency at any time to doubt the willingness or ability of the guarantors to honour their grandfathered guarantees in a timely manner, it will downgrade the ratings of obligations entered into in the transition period, probably by one or two notches.

Fitch understands that there will be no separate mention in the 'grandfathering' clauses of timely payment for obligations issued before 18 July 2001. Although the agency would ideally have liked to have seen timeliness of payment for these obligations laid down in the new laws, it is understood by the German banking community, by the guarantors, by Fitch and by the market in general, that these would have to be repaid by the guarantors on a timely basis. This is because creditors entered into these obligations when they were covered by Anstaltslast, ensuring timely repayment, and under German law, it is not possible to place creditors in a worse position than they could reasonably have assumed themselves to have been (Grundsatz des Vertrauensschutzes). Therefore, Fitch is affirming its 'AAA' ratings for all obligations entered into before 18 July 2001 by any Landesbank or DGZ-DekaBank.

Obligations entered into in the transition period, maturing after end-December 2015 are not guaranteed, and Fitch's 'AAA' Long-term rating does not apply to these. To the agency's knowledge, none of its rated banks has any such obligation to date. However, it will not be long before banks start looking for longer-term funds or entering into other obligations maturing after this date, and certainly no obligations incurred after 19th July 2005 will be guaranteed. The agency will be assigning ratings to such liabilities in due course and has indicated that these ratings are likely to be in the single 'A' range, with the possible exception of one or two banks. These ratings will take into account proposed restructuring measures. Ratings of Landesbanks' Pfandbrief issues may retain a 'AAA' rating.