Another one for the counter-intuitive pile. Rather as Northern Rock CDS rose after the government decided to nationalise the bank (before tightening sharply) the bank has just been downgraded by Moody’s.
London, 20 February 2008 — Moody’s Investors Service announced today that it had downgraded to A2, with a developing outlook, the long-term bank deposits and senior unsecured debt of Northern Rock plc (Northern Rock) following the announcement by HM Treasury on February 17 that the government will enact legislation to take the bank into temporary public ownership. The bank’s preference shares were downgraded to C from B3.
Why? Nationalisation “does not improve immediately the intrinsic credit profile of the bank.”
This is the outcome of a review initiated last September. But National Rock’s Bank Financial Strength Rating (BFSR) has been kept at E+ – which on downgrade last December Moody’s said incorporated a low probability that the bank may be liquidated – to reflect the agency’s view that it will take some time for the new regime to shore up the bank’s franchise and financial position. One shred of good news for HMT – the outlook on Northern Rock’s BFSR has been changed to ‘developing’ from ‘negative.’
In fact, what the Gord giveth with one hand – in terms of support through restructuring and additional security to senior debt holder and depositors – he may taketh away with the other.
The change in outlook to developing reflects the uncertainty of nationalisation on the bank’s ability to compete in the mortgage and savings market in the UK within the confines of EU State Aid regulations.
And that uncertainty, and potentially proscribed range of movement, could hamper the process of rebuilding the bank’s franchise and financial footing.