Commerzbank deal could lift UniCredit’s junior debt ratings, Moody’s says

MILAN (Reuters) -UniCredit’s acquisition of Commerzbank (ETR:CBKG) could prompt Moody’s (NYSE:MCO) to consider raising its rating on the Italian bank’s riskier debt, the credit rating agency said on Wednesday.

Moody’s affirmed UniCredit’s long-term senior unsecured debt rating at ‘Baa1’ – two notches above Italy’s ‘Baa3’ rating and already as high as it can go under Moody’s methodology.

But the agency added it would look at whether the bank’s standalone assessment of ‘baa3’, currently aligned with Italy’s rating, would merit an upgrade to ‘baa2’ in the event of a deal.

Analysts have said Commerzbank’s higher credit rating and the prospect of UniCredit reducing its exposure to Italian debt are among reasons for the Italian bank to pursue a deal.

An upgrade to UniCredit’s standalone assessment would lead to an improvement in the ratings Moody’s assigns to debt riskier than senior unsecured borrowings at the bank – potentially reducing its funding costs.

That comprises senior non-preferred debt, which Moody’s calls ‘junior senior’ debt, other subordinated debts and the riskiest type, Additional Tier 1 bonds (AT1), which are a hybrid funding tool in between debt and equity.

In its latest fixed-income presentation, UniCredit said its senior unsecured debt accounted for 37% of the total, with subordinated debt representing another 10% and AT1 bonds 4%.

UniCredit has built a near 21% stake in Commerzbank, pending supervisory approval, and says it is keen to explore a full takeover.

The move has irked Germany’s establishment and Commerzbank has said its strategy is based on independence. An acquisition would be Europe’s first major cross-border banking deal since the global financial crisis.

Any upgrade “would depend upon the combined group’s degree of international diversification, exposure to Italian sovereign risk, and its post-acquisition capitalization, asset risk, funding and liquidity,” Moody’s said.

Italy’s weak credit standing has traditionally posed a challenge to Italian lenders’ international expansion plans.

On Wednesday, Moody’s confirmed Commerzbank’s ‘A2’ long-term senior unsecured debt rating, which is two notches above UniCredit’s ‘Baa1’.

Before courting Commerzbank, UniCredit underwent a long restructuring and amassed billions of capital in excess of its minimum target.

In the event of a deal, a stronger footprint in triple-A rated Germany, more diversified funding channels, and a lower direct exposures to Italy’s debt relative to capital would “loosen the intrinsic links and correlation” between UniCredit’s and Italy’s ratings.

“We would expect UniCredit’s currently very strong capitalization to be diluted in the event of an acquisition of Commerzbank, but to remain sound and at least consistent with management’s stated target range for a minimum CET1 of 12.5%-13%,” Moody’s said, referring to a key gauge of capital.

“While any acquisition would likely reduce profitability in the short-term given restructuring and other costs, it would in the medium-term enable higher returns through cost synergies in Germany and deliver a stronger combined franchise,” it added.