Moody's comments on Consortium's acquisition of ABN AMRO following transaction closing
(Moody's) London, 17 October 2007 -- Moody's Investors Service today affirmed the ratings of the members of the consortium following the closing of their offer for ABN AMRO. Moody's also affirmed ABN AMRO's Aa2/P-1 debt and deposit ratings, changing the outlook on the long-term debt ratings to developing from stable. ABN AMRO's B- bank financial strength rating ("BFSR") was affirmed but its outlook was changed to stable from positive. The outlook on all other ABN AMRO ratings is stable.
The members of the bidding consortium ("the Consortium") include the Royal Bank of Scotland Group ("RBSG"), Banco Santander and the Fortis Group. (Please see Moody's press releases dated 17 July 2007 and 30 May 2007 for previous rating actions on this transaction.)
RATING AFFIRMATIONS -- OVERVIEW
Moody's affirmed the Aaa/P-1/B+ ratings of the Royal Bank of Scotland plc and National Westminster Bank plc as well as the Aa1/P-1 ratings of the Royal Bank of Scotland Group plc. The outlook on the BFSRs and long-term debt and deposit ratings remains negative. Moody's also affirmed the ratings of Ulster Bank Ltd (Aa2/P-1/C+), Ulster Bank Ireland (Aa2/P-1/C+) and First Active plc (Aa2/P-1/C) with their stable outlook.
Separately, Moody's affirmed the Aa2/P-1/B ratings of Citizens Financial Group's rated US bank subsidiaries. The outlook is negative on the long-term deposit and debt ratings and stable on the BFSR.
The ratings of Banco Santander (senior at Aa1/P-1/B) and all of the ratings of the Fortis Group and Fortis Bank were affirmed at their current levels with stable outlook. Fortis SA/NV and Fortis NV have issuer ratings of Aa3/stable while the main funding holding companies of the group have senior/subordinated and preferred debt ratings of Aa3/A1/A2/stable. Fortis Bank is rated Aa2/P-1/B-/stable.
Moody's affirmed the Aa2/P-1 ratings of ABN AMRO Bank N.V. but changed the outlook on the bank's BFSR of B- to stable from positive and the outlook on the long-term debt ratings to developing from stable. The outlook on all of the bank's other ratings is stable.
The ratings of Banca Antonveneta ("Antonveneta", A1/P-1/C- stable) and its subsidiary Interbanca (A3/P-2/D+ stable) as well as Banco ABN AMRO Real (foreign currency ratings of Ba2/NP/C stable) were also affirmed.
COMMENTARY ON FORTIS RATINGS
In affirming Fortis' ratings, Moody's noted the good strategic fit with ABN AMRO's businesses to be acquired as well as the expected reasonable impact of the funding package on the capital structure, capitalisation and underlying fundamentals of the group.
"With this deal, there is a clear potential for Fortis to significantly enhance its franchise in the Benelux region," said Jose Morago, a Moody's Assistant Vice-President/Analyst. "Our stable outlook is predicated on the expectation that Fortis will continue to deliver satisfactory operating results, maintain its risk profile and restore its capital position and financial flexibility in the coming months. However, there are material challenges in the short-to-medium term, given the size, complexity and amount of resource necessary for Fortis to integrate and extract value from the new ABN AMRO businesses," Mr Morago added.
Moody's noted that a key factor supporting the success of this transaction has been that relevant components of Fortis' approximately EUR24 billion funding package are already in place, despite the current level of volatility in the capital markets. More particularly, Fortis successfully placed an approximately EUR13.2 billion rights issue last week, issued EUR2 billion of Conditional Capital Convertible Notes (CCENs) over the summer and sold over EUR1.4 billion of non-core assets (i.e. its stake in BCP and 50% of Caifor).
COMMENTARY ON BANCO SANTANDER, ANTONVENETA AND BANCO ABN AMRO REAL RATINGS
In its affirmation of the Aa1/P-1/B ratings of Banco Santander, Moody's cites: (i) the strategic fit of this acquisition, which is fully consistent with Santander's international strategy; (ii) the bank's proven strong track-record of integrating large-scale acquisitions and extracting cost efficiencies from them, (iii) the limited negative implications for pro-forma profitability, both pre- and post-provisions; (iv) the fact that the larger contribution from more volatile markets (Latin America) does not change the group's existing risk profile materially; and (v) Santander's proven prudent management of its economic solvency.
"Although the acquisition will likely increase the group's leverage -- core capital levels are expected to fall to 5.3% from 6.97% -- we expect to see leverage levels restored within 12-18 months," said Maria Cabanyes, a Moody's Senior Vice President and Regional Credit Officer.
Commenting further, Moody's also cautioned about the challenges of turning around Antonveneta and integrating the Brazilian operations, which will double its existing size.
With reference to the rating affirmation on Antonveneta, Moody's said that the ratings already incorporate the expectation of improvements and that the likely positive impact of the acquisition by Santander will not be clear for some time. The rating agency added that the positive effect of expected support from a higher-rated bank appears counterbalanced by the expectation of an only moderate probability of support from its new parent. As regards Interbanca, Moody's commented that there appears to be a degree of uncertainty on the bank's strategic positioning and that the rating affirmation is based on the assumption that this entity will remain a subsidiary of Antonveneta.
With regard to the Brazilian subsidiary, Banco ABN AMRO Real, Moody's decided to affirm the C BFSR and Ba2/NP foreign currency deposit ratings, which the rating agency believes adequately reflect ABN Real's current market positioning and the competitive economic environment in the country.
COMMENTARY ON ABN AMRO RATINGS
In revising the outlook on ABN AMRO's B- BFSR to stable from positive, Moody's said that this rating action followed the withdrawal of the bid by Barclays Bank plc to acquire all of the bank (please see press release of 8 October), as well as the narrower franchise of ABN AMRO following its sale of LaSalle Bancorp to Bank of America (see Moody's press release of 1 October). In Moody's opinion, the sale of LaSalle has weakened the bank's franchise value in terms of geographic diversification and stability of earnings and has marginally increased its risk profile. Prospectively ABN AMRO's franchise will be further narrowed and changed as the break-up of the bank takes place over a period of up to three years as the Consortium plans to separate ABN AMRO into three parts once the Dutch regulators, the DNB, have approved the break-up plan which the Consortium is expected to submit before year-end 2007.
Nevertheless, Moody's recognises ABN AMRO's generally solid financial fundamentals and expects its operating efficiency and quality of earnings to show continued improvement under its new management. Furthermore, Moody's expects that its core Tier 1 and Tier 1 ratios will be maintained at the bank's stated near-term target of 6% and 8% respectively and 6.5% and 8.5% over the medium term, net of the one-time impact from the proceeds of the sale of LaSalle.
The BFSR outlook change also incorporates Moody's expectation that remaining regulatory issues with the US regulators stemming from past weakness in internal controls will be resolved in the near future. The rating agency notes that the Dutch regulator lifted its regulatory action in July 2007.
The change in outlook on ABN AMRO's Aa2 long-term debt rating to developing from stable reflects the lack of clarity regarding the future allocation of the company's outstanding debt, which has yet to be announced by the Consortium.
In affirming ABN AMRO's Aa2/P-1 debt and deposit ratings, Moody's said these are based on the bank's baseline credit assessment of A1 (which is mapped from the BFSR of B-) but also on Moody's assessment that the probability of systemic support in the Netherlands is very high given the bank's importance in its home market. Moody's expects that this systemic importance will continue notwithstanding the break-up of the bank's operations, which will primarily impact its foreign operations -- principally in Italy and Brazil -- and its Global Wholesale and International Retail client businesses, and the integration of its BU Netherlands with those of Fortis Bank Nederland (Holding), rated Aa2/P-1/B-, stable.
COMMENTARY ON RBSG RATINGS
With reference to RBSG, Moody's said that the maintained negative outlook on the ratings reflects the integration challenges in relation to ABN AMRO's Global Wholesale Businesses and International Retail Businesses, as well as the negative short-term impact of the proposed transaction on the quality of RBSG's capital and historically strong earnings as the bank integrates ABN AMRO's under-performing Global Clients unit. Moody's commented that, of the three Consortium banks, the integration challenges are, in its opinion, greatest for RBSG. The negative outlook also incorporates the ongoing uncertainty with regard to the performance of all banks involved in leveraged finance and related capital markets activities given the recent market turmoil.
Nevertheless, notwithstanding the additional complexities presented by the integration of parts of ABN AMRO, Moody's recognises RBSG's strong track record in integrating past acquisitions and the group's robust core earnings capacity and internal capital generation. The rating agency also acknowledges other transaction benefits including enhancing RBSG's presence in Asia-Pacific and diversification of earnings, as well as expanding the reach of its corporate and institutional banking franchise, noting that the enlarged group will have market-leading positions in products such as international bonds and international cash management. Moody's cautions, however, that the increased contribution from wholesale banking operations could introduce a greater element of earnings volatility, which could have negative rating implications.
Moody's said that progress in integrating ABN AMRO and rebuilding RBSG's core capital and profitability in line with its current BFSR within 12-18 months could ultimately lead to the rating outlook being changed back to stable. Conversely, failure to resolve these issues within the same timeframe could lead to negative rating actions.
COMMENTARY ON TERMS OF FINAL OFFER
Commenting on the terms of the Final Offer, Moody's said that the total consideration for the transaction was approximately Eur 70 billion of which 94% was paid in cash with the balance paid with new RBS shares. Other features of the transaction remained unchanged from the previous announcement. Moody's noted that the Consortium has nominated management from the three banks to the Supervisory and Management Boards of ABN AMRO.
Moody's noted that the transaction is subject to various conditions including the following:
1) The Dutch Ministry of Finance, in issuing its 17 September Declaration of "No Objection" to the transaction, stipulated that the Consortium maintain the "status quo" with regard to the bank until it has acquired sufficient control and filed a Transition Plan with the regulator as well as Capital and Liquidity Plans. It also imposed measures on Fortis Bank Nederland (Holding). The Consortium will only be able to begin the formal integration of the bank once the regulator has approved these plans, which is expected by year-end 2007.
2) The European Commission's approval to Fortis to acquire ABN AMRO's BU Netherlands (BU NL) is subject to the divestment of certain assets of the BU including Hollandsche Bank Unie NV, 13 advisory branches and two Corporate Clients departments and the sale of the Dutch factoring company IFN Finance B.V.
As discussed above, a major uncertainty for ABN AMRO's bondholders is the future allocation of the company's outstanding debt, which has yet to be announced by the Consortium. Moody's will take appropriate rating actions when the details are made public. Moody's will also comment further on the prospective profile of ABN AMRO and the implications for the relevant rated legal entities of the Consortium once the transition plan has been approved by the relevant authorities. Furthermore, Moody's will monitor any uncertainties surrounding the due diligence process to be carried out by the members of the Consortium during 45 days after the closing in terms of initial asset and liability valuations.
COMPANY BACKGROUND
As of 30 June 2007, ABN AMRO Bank NV reported total assets of EUR1,120 billion, while the banking operations of Fortis had total assets of approximately EUR918 billion, RBSG had total assets of GBP1,011 billion and Banco Santander had total assets of EUR886 billion.
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