18 Feb. (Bloomberg) — German banks’ subordinated debt securities valued at 24 billion euros ($33 billion) were downgraded by Moody’s Investors Service on the prospect that new legislation will increase the risk of losses among debt holders.
Moody’s cut the ratings of lower Tier 2 notes, a layer of debt that’s subordinated by coming behind senior bonds in the queue for repayment after a bank collapses. Like other governments seeking to ensure creditors pay up before taxpayers have to contribute, German law now removes the protection Tier 2 bonds enjoyed from the authorities’ preference for saving lenders before they fail.
“The new legislation materially reduces the likelihood of government support for LT2 securities and therefore took out the state support uplift,” BNP Paribas SA analysts Olivia Frieser and Ivan Zubo wrote in a note to clients today. “The downgrades are as harsh as we had expected, which may weigh on sentiment.”
The cost of insuring German bank debt rose, according to CMA prices for credit-default swaps. Contracts on the subordinated debt of Deutsche Bank AG jumped 12 basis points to 160, the highest in five weeks. Swaps linked to Commerzbank AG’s junior debt climbed 25 basis points to 450 and senior contracts rose 10 to 190.