PARIS (MNI) – Moody’s Investors Service has given a provisional
long-term rating of Aaa to the first debt issuance program of Europe’s
new rescue fund, the European Financial Stability Facility (EFSF),
Moody’s announced on Wednesday.
The issuance program is expected to total E27 billion, which will
be used to fund the EU’s share of the E85 billion aid package for
Ireland and to provide a cash reserve and buffer required under the
rules.
The EFSF’s first bond sale is expected next week, when it will
issue between E3 billion and E5 billion of new 5-year bonds.
The text of Moody’s statement is below:
Moody’s Investors Service has today assigned a provisional Aaa
long-term rating to the first debt issuance programme of the European
Financial Stability Facility (EFSF) and to the first drawdown under this
programme. The provisional rating on the drawdown will become definitive
when the final terms of the first issuance are known.
The overall size of the issuance programme is EUR27 billion. The
proceeds of the issuance programme will be used to fund part of the
EUR85 billion EU/IMF support program for Ireland, as announced on 28
November 2010. Due to the structure of EFSF, which has a significant
in-built cash buffer, the maximum disbursement to Ireland (EUR17.7
billion) is lower than the programme’s issuance limit.
RATING RATIONALE
The (P)Aaa rating is based on the issuance programme’s contractual
elements, including the irrevocable and unconditional guarantees by the
participating states. All EFSF member states, apart from Greece and
Ireland, collectively provide a 120% guarantee for the entire EFSF debt
issuance, apportioned by their respective shares in the capital of the
European Central Bank (ECB).
The EFSF debt issuance will be used to fund the loan disbursement
to Ireland and various cash retentions, including the EFSF cash reserve
and a loan-specific cash buffer, which are set aside to support
repayment of the debt. The loan-specific cash buffer is sized so that
the portion of the debt issuance that is not backed by cash held by EFSF
will be fully covered by Aaa-rated government guarantees.
“As a result, the EFSF debt issuance is backed first by Ireland’s
promise to repay the loan; by Aaa-rated guarantees and cash sufficient
by themselves to cover all of the associated debt service if the loan is
not repaid; and guarantees from the non-Aaa-rated members states
participating in the EFSF support programme,” explains Dietmar Hornung,
Vice President — Senior Credit Officer in Moody’s Sovereign Risk Group.
RATIONALE FOR STABLE OUTLOOK
The outlook on the rating is stable, in line with the stable rating
outlooks of the guarantor countries, except for Spain, Portugal and
Cyprus whose government bond ratings are currently under review for
possible downgrade (as announced in Moody’s rating actions published on
15 and 21 December 2010, and 13 January 2011, respectively).
DOWNGRADE RISK
Risks that could negatively affect the creditworthiness of the
programme include a potential deterioration in the creditworthiness of
the participating guarantor countries. The creditworthiness of the
issuance programme is particularly 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 Eurozone Member
States’ commitment to EFSF could have negative rating implications.
CREDIT ENHANCEMENTS
Whereas the issuance is primarily backed by the EFSF’s loan to
Ireland, the following features are in place to mitigate the risk of
Ireland defaulting on its loan:
(i) Over-guarantee mechanism. The guarantors have issued
irrevocable and unconditional guarantees, which jointly amount to an
overall 120% over-guarantee of the EFSF issuance (principal and
interest). If a supporting state becomes a borrower, it may — if all
guarantors agree — step out as a guarantor for prospective issuances,
but this would not affect its liability under the existing guarantee for
the Irish issuance.
(ii) EFSF cash reserve. An additional credit enhancement is
represented by the EFSF’s cash reserve. The funds distributed to Ireland
are net of an up-front service fee (calculated as 50 basis points on the
aggregate principal amount of the loan) and the net present value of the
interest rate margin that would accrue on the loan at the contractual
rate to its scheduled maturity date. The cash reserve will ultimately
provide remuneration for the guarantors, but is initially retained by
the EFSF as loss-absorbing capital.
(iii) Loan-specific cash buffer. In addition to the cash reserve,
the EFSF establishes a loan-specific cash buffer which is sized such
that the EFSF loan is fully covered by Aaa guarantees and/or an amount
of cash equal to the relevant portion of the EFSF cash reserve, plus any
loan-specific cash buffer, plus an amount sized to cover negative carry
on the loan-specific cash buffer.
(iv) Potential additional support. While a pure quantitative
analysis of the contractual arrangements per se supports the assignment
of a (P)Aaa rating, the downgrade risk of the programme is mitigated by
the strong implicit support for this facility evident among the
participating countries. Statements by the Eurozone Members’ respective
heads of state reflect the high-level commitment to the EFSF. “A default
on EFSF debt would also result in considerable reputational risks for
core European countries like Germany and France, and would likely
increase their borrowing costs,” says Mr. Hornung.
GERMAN COURT PROCEEDINGS
Moody’s has considered the likelihood and possible effect of the
German constitutional court concluding that the legislation enabling
Germany to guarantee EFSF’s debt obligations is unlawful. According to a
legal opinion reviewed by Moody’s, the risk that the statute violates
German or EU law is minimal. In addition, Moody’s understands that, even
if the constitutional court rules otherwise, there are strong arguments
why Germany’s obligations under guarantees that are in place at the time
of the ruling should not be affected. For these reasons, Moody’s
considers that the risks associated with the ongoing German
constitutional court proceedings are commensurate with the (P)Aaa
rating.
PREVIOUS RATING ACTION AND METHODOLOGIES
Moody’s last rating action affecting the EFSF was implemented on 20
September 2010, when the rating agency assigned a provisional long-term
rating of Aaa to the prospective debt issuance program of EFSF.
EFSF’s ratings were assigned by evaluating factors relevant to the
specific characteristics of the Facility, reflecting its dual nature as
financing facility and a vehicle of public policy. These attributes were
compared against other issuers, and its ratings are believed 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 final after all documents are 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.
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