Sell Side

Europe Hit By Credit Crisis; Rescue Plans In the Works

European governments continued this weekend to search for solutions to the credit crisis, reworking rescue plans for a number of financial institutions that provide credit enhancement in the U.S. public finance market.

The governments' efforts could impact the tax-exempt money market funds as Dexia Group and Depfa Bank PLC are two of the leading providers of standby bond purchase agreements. Dexia ranks first as an SPA provider this year, working on 72 issues with a par value of $7.5 billion, according to Thomson Reuters data. Depfa ranks sixth this year - working on four deals with a par value of $962.8 million - but has placed in the top three as an SPA provider each of the last four years.

Dexia also acts as a top provider of letters of credit, ranking third this year and working on 45 issues with a par value of $3.9 billion. Its subsidiary Financial Security Assurance Inc. has insured 45 variable-rate demand obligations with a par value of $4.9 billion this year, according to Thomson Reuters data.

Depfa parent Hypo Real Estate Holdings AG this weekend received 50 billion Euro - $68 billion - in aid from the German government and financial institutions after a smaller plan fell apart last week. Belgium worked out a deal for French bank BNP Paribas to take a 75% stake in Fortis Bank NA after the Dutch government nationalized Fortis's Dutch operations Friday.

In addition, Belgium Prime Minister Yves Leterme yesterday said that within "hours or days" his government and others would announce plans to further support Franco-Belgian bank Dexia - parent of FSA - which last week received a $9.2 billion capital injection from governments and institutional shareholders, according to press reports. Luxembourg Economy Minister Jeannot Krecke had said earlier in an interview with Bloomberg Television that the French portion of Dexia might be split from the rest of it.

The recent development of government support will likely encourage fund managers to keep issues linked to Dexia and Depfa, but the effects could be wide-ranging if they do not, according to Municipal Market Advisors managing director Matt Fabian. Weekly remarketings will take place on Wednesday.

"Because of the muni short-term market's massive reliance on Dexia/FSA and Depfa, sweeping decisions to put back related floaters could dramatically change the muni landscape," Fabian wrote in his weekly report. "Not only would floating [funding] rates rise sharply once again [possibly driving more fixed rate selling and weakness], but - with few alternative money fund eligible investments available - the money fund industry could be forced to contract sharply."

A California money market fund manager yesterday said lack of alternative investment opportunities in the current market will likely deter money fund managers from getting rid of the paper. He believes most large muni money market fund managers will hold onto their short-term floaters with letters of credit from the affected banks rather than put the securities back and stay in cash.

"Having it invested or not having it invested - that's the decision to be made," he said of Dexia and FSA-backed securities. "There are some people putting back securities already, but there's not a wholesale sell off of the name at this point.

Although some smaller funds may have the opportunity to put back paper, larger funds would have difficulty dealing with the excess cash.

Money market mutual funds received a boost last month when the Treasury Department opened a temporary $50 billion insurance program designed to stem the outflow of cash from the funds.

"I think the biggest funds are going to tend to hold onto their VRDOs as long as they can," the manager said. "A big fund family ... could have billions in exposure, and if they put back billions and are already sitting on a million in cash, then they would have to believe that there's a serious problem that's not going to be resolved and is beyond saving.

"I think most credit people - while they are not thrilled [with the bailouts] - are willing to say it will be worked out," he said of the European bank bailouts of Dexia, Depfa, and Fortis.

Standard & Poor's and Fitch Ratings yesterday took a number of actions related to the deals. Standard & Poor's put the A-2 short-term and BBB-plus long-term counterparty credit ratings of seven Hypo Group banks, including Depfa, on CreditWatch negative. Fitch said the announcement of the new deal had no impact on the A-minus long-term issuer default rating of Hypo Real Estate group.

In addition, Standard & Poor's yesterday lowered the short-term ratings on 52 Depfa Bank liquidity-backed issues to A-2 from A-1 following the rating agency's downgrade of Depfa last week. Moody's Investors Service also placed 23 triple-A-rated local housing finance agency transactions on watch for possible downgrade because of exposure to Depfa through guaranteed investment contracts.

Standard & Poor's also placed the A long-term counterparty credit rating on Fortis Bank SA/NV on CreditWatch positive, while affirming the AA-plus long-term counterparty rating of BNP Paribas and moving its outlook to negative from stable. Fitch placed Fortis Bank's A-plus rating on rating watch positive, while affirmed in the double-A long-term issuer default rating of BNP Paribas with a stable outlook.


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