Rating Action: Moody's concludes reviews of German co-operative banks' ratings

Transcription

1 Rating Action: Moody's concludes reviews of German co-operative banks' ratings Global Credit Research - 19 Jun 2015 Actions follow conclusion of methodology-related reviews and revision of government support considerations Frankfurt am Main, June 19, Moody's Investors Service has today concluded its reviews on seven cooperative banks based in Germany (Aaa stable), including two subsidiaries located in Ireland (Baa1 stable). These reviews were initiated on 17 March 2015 (see press release at following the publication of Moody's new bank rating methodology and revisions in Moody's government support assumptions for these banks. In light of the new bank rating methodology, today's actions reflect the following considerations (1) the macro profiles applicable to each group or bank, based on the geographic breakdown of their asset base; (2) the banks' financial profiles and related qualitative factors; (3) the very high probability and improved strength of affiliate support from the cross-sector mechanism of co-operative banks; (4) protection offered to depositors and senior creditors as captured by Moody's Advanced Loss Given Failure (LGF) analysis, reflecting the benefit of instrument volume and subordination protecting creditors from losses in the event of resolution; and (5) Moody's view of the decline in the likelihood of support from the German government, in case of need. The four co-operative banking groups covered in this press release are: - DZ BANK AG (DZ BANK) and its subsidiaries DVB Bank S.E. (DVB) and DZ BANK Ireland (DZ-I) - WGZ BANK AG (WGZ) and its subsidiary WGZ Bank Ireland Plc (WGZ-I) - Muenchener Hypothekenbank eg (MuenchenerHyp) - Deutsche Apotheker- und Aerztebank eg (apobank) Among the actions taken on the seven affected banks today by Moody's are the following: - six long-term deposit ratings were upgraded, and one was confirmed (MuenchenerHyp) - five short-term deposit ratings were affirmed and two upgraded (DZ-I, WGZ-I) - four long-term issuer/senior unsecured debt ratings were upgraded (apobank, DZ BANK, DVB, WGZ), and one was confirmed (MuenchenerHyp). - four short-term issuer/senior unsecured debt ratings were affirmed (apobank, DZ BANK, DVB, MuenchenerHyp) and one was upgraded (DZ-I) - six baseline credit assessments (BCAs) were affirmed and one was upgraded (apobank) - two adjusted BCAs were affirmed, four were upgraded (DZ BANK, DZ-I, WGZ, WGZ-I) and one was downgraded (DVB) Furthermore, Moody's assigned Counterparty Risk (CR) Assessments to these banks, their rated (backed) subsidiaries and branches. Bank level subordinated debt and hybrid securities ratings have - with one exception - either been affirmed or upgraded as part of this rating action. Only the subordinated debt of DVB has been downgraded to Ba1 from Baa2. Subsequently, and for its own business reasons, Moody's has withdrawn the outlooks for all of the subordinated and hybrid instrument ratings for the banking groups and related subsidiaries or branches covered in this press release. For more information, please refer to "Moody's Investors Service's Policy for Withdrawal of Credit Ratings," available at moodys.com.

2 Outlooks, which provide an opinion on the likely rating direction over the medium term, are now assigned only to long-term deposit and senior unsecured debt or issuer ratings. Where outlooks are either positive (for most deposit ratings) or negative (for most debt ratings), outlooks primarily reflect prospective changes to insolvency legislation affecting the seniority of depositors and senior unsecured debt investors in Germany. Please click on for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer. Moody's has also published a Special Comment entitled "Key Analytic Considerations in Our Rating Actions on German Banks", providing more background on today's rating action. Subscribers can access the report under the following link: Please click here to access Moody's new bank rating methodology ("Banks" published on 16 March 2015) RATINGS RATIONALE The new methodology includes a number of elements that Moody's has developed to help accurately predict bank failures and determine how each creditor class is likely to be treated when a bank fails and enters resolution. These new elements capture insights gained from the crisis and the fundamental shift in the banking industry and its regulation. (1) MACRO PROFILES RANGING FROM "STRONG+" TO "VERY STRONG-" The Macro Profile constitutes an assessment of the macroeconomic environment in which a bank operates. The co-operative banks' macro profiles derive from their asset base, which is dominated by exposures to borrowers and issuers in Germany which has a macro profile of "Very Strong-". Given only modest concentrations outside Germany, with foreign exposures mostly to countries within the EU, the banks' individual macro profiles are either "Strong+" or "Very Strong-". German banks benefit from operating in an environment with very high economic, institutional and government financial strength and very low susceptibility to event risk. Low and declining private sector debt and a stable house price cycle support credit conditions. Funding conditions benefit from a strong domestic deposit base and good wholesale market access. However, operating conditions for the German banking system are constrained by high fragmentation in an over-saturated market, low fee income generation and intensifying competition for domestic business. (2) THE CO-OPERATIVE BANKS' BCAs MOSTLY REFLECT ADEQUATE CAPITAL AND SATISFACTORY FUNDING, ALTHOUGH DZ BANK, WGZ AND MUENCHENERHYP SHOW CONSIDERABLE LEVERAGE Moody's affirmed the BCAs of six co-operative banks at the same level, i.e., for DZ BANK, DZ-I, DVB, MuenchenerHyp, WGZ and WGZ-I, and upgraded by one notch the BCA of apobank. Except for the ba2 BCA of MuenchenerHyp and the ba3 BCA of DVB, all BCAs are positioned in the baa range, reflecting their modest asset risk, adequate regulatory capitalisation and overall satisfactory funding profiles. DZ BANK and WGZ' baa2 BCAs remain constrained by considerable leverage, which is inherent to their business model, but Moody's expects their leverage to reduce somewhat over time to more comfortably meet future regulatory requirements. The banks' capital market dependence for funding is mitigated by their access to the co-operative group's ample sector funds. (3) STRENGTHENED FUNDAMENTALS OF THE GERMAN CO-OPERATIVE SECTOR RESULT IN HIGHER AFFILIATE SUPPORT UPLIFT FOR FOUR BANKS As part of the review, Moody's has reassessed the sector's financial capacity to provide support to its members, based on the co-operative group's combined financial strength. Given the material improvement of capital levels in recent years, the reassessment has resulted in a higher level of support capacity than assessed previously, which has resulted in additional rating uplift from cross-sector support for four banks, i.e., DZ BANK, WGZ, and their two Irish subsidiaries, whose ratings now include three notches of affiliate support uplift instead of two. MuenchenerHyp's ratings maintain four notches of support, given the bank's lower BCA of ba2, and apobank's ratings two notches instead of three, reflecting the bank's higher baa1 BCA, from which the effect of support uplift is less pronounced. Affiliate support for DVB was reduced to three notches, which is better aligned with the affiliate support of its fellow co-operative members. All members of the co-operative group of banks are highly likely to receive affiliate support in case of need, based

3 on their proven cross-sector support mechanism. This support materially reduces the probability of default as the cross-sector support mechanism aims to stabilise its members by avoiding any form of loss-participation by creditors, or bail-in. Affiliate support provides two to four notches of uplift, as reflected in the individual banks' or banking groups' adjusted BCAs. (4) PROTECTION OFFERED TO DEPOSITORS, SENIOR AND OTHER CREDITORS CAPTURED BY MOODY'S ADVANCED LGF LIABILITY ANALYSIS German and Irish banks are subject to the EU Bank Resolution and Recovery Directive (BRRD), which Moody's considers to be an Operational Resolution Regime. To reflect this, Moody's has introduced its Advanced Loss Given Failure (LGF) analysis, thereby mostly applying its standard assumptions. These assumptions include a residual tangible common equity of 3%, losses post-failure of 8% of tangible banking assets, a 25% run-off in junior wholesale deposits, a 5% run-off in preferred deposits, and a 25% probability of deposits being preferred to senior unsecured debt. Moody's also assumes that the junior proportion of deposits is in line with its estimated EU-wide average of 26%. The Advanced LGF analysis results generally in a "very low" loss-given-failure for long-term junior deposits as well as senior unsecured debt ratings, reflecting the banks' substantial volume of wholesale deposit funding as well as the amount of senior unsecured debt and other securities more subordinated to it. Based on these parameters and considering the banks' individual subordinated instruments in their capital structure, which afford a buffer for the banks' more senior creditors in resolution, as well as the volumes of senior debt and deposits, the banks' debt and deposit ratings include up to two notches derived from Moody's LGF analysis. For more information on Moody's LGF analysis and a discussion of the differences in creditor hierarchies, see Moody's "How Resolution Frameworks Drive Our Creditor Hierarchies" at (in addition to the methodology itself) and "Germany considers changes to insolvency hierarchy of bank creditors" at (5) DECLINE IN THE LIKELIHOOD OF GOVERNMENT SUPPORT Moody's has lowered its expectations about the degree of support that a government might provide to a bank in Germany in the event of need. The main trigger for this reassessment is the introduction of the BRRD. However, low or very low expected loss assumptions under the new LGF framework and/or higher adjusted BCAs either fully or even more than offset the impact on ratings. With the implementation of bank resolution legislation, Moody's has either eliminated or lowered its assumption about the probability of government support for the banks in the EU. That said, given their size on a consolidated basis, Moody's considers the group of German co-operative banks to be systemically relevant. The agency therefore attributes a "moderate" probability of German government support -- from mostly "high" previously -- for all members of the sector which is in line with support assumptions for other systemically relevant banking groups in Europe. This results in one notch of government support uplift in the senior debt and deposits ratings of those co-operative banks that are incorporated in Germany. RATIONALE FOR THE OUTLOOK ON DEBT AND DEPOSIT RATINGS The different outlooks on deposits and debt reflect the potential for legislation in Germany that could subordinate senior debt to deposits to the benefit of depositors and to the detriment of senior unsecured creditors. The corresponding draft law which proposes to modify the insolvency order laid out in the German Banking Act (KWG) is subject to the ongoing parliamentary process in Germany. If enacted, depositors would - in insolvency as well as in bail-in - benefit from the subordination of senior unsecured debt instruments, reducing further the loss-given-failure expectations for deposits. In contrast, the subordination of senior unsecured debt instruments would increase the loss-given-failure expectations for senior debt instruments, offering lower protection for senior bondholders. --- BANK SPECIFIC ANALYTIC FACTORS -- DEUTSCHE APOTHEKER- UND AERZTEBANK EG

4 The upgrade of apobank's deposit ratings to Aa2 and of its senior unsecured debt rating to Aa3 (both from A1) incorporate (1) an upgrade of the bank's BCA to baa1 from baa2; (2) the offsetting effect of two notches (instead of three) of affiliate support from apobank's higher BCA, resulting in the affirmation of the a2 adjusted BCA; (3) Moody's LGF analysis that provides two notches of uplift from the bank's adjusted BCA for the deposit ratings, and one notch of uplift for the senior unsecured debt ratings; and (4) Moody's assumption of "moderate" government support, resulting in an unchanged one notch of rating uplift. The upgrade of apobank's BCA reflects (1) a further strengthening of apobank's very strong capitalisation which mitigates its exposure concentration to the health sector and related regulatory risks; and (2) the bank's progress in generating additional fee income, which offsets the continued pressure on its net interest margin. Under Moody's Advanced LGF analysis, apobank's long-term deposit ratings take into account their very low loss-given-failure (for senior debt: low loss-given failure) because of the bank's considerable volumes of senior unsecured debt outstanding as well as its large (institutional) deposit base. The outlook on the long-term deposit rating is positive and the outlook on the long-term senior unsecured debt rating is negative, indicating that a modified insolvency order in Germany would place diverging pressures on apobank's senior debt and deposit ratings. --DZ BANK The two-notch upgrade of DZ BANK's deposit and senior unsecured debt ratings to Aa2 incorporates (1) the affirmation of the bank's baa2 BCA; (2) an upgrade of the adjusted BCA to a2, as Moody's assessment of a higher support capacity of the co-operative sector has led to an additional notch of affiliate support uplift; (3) Moody's LGF analysis that provides two notches of uplift from the bank's adjusted BCA for the deposit and senior unsecured debt ratings; which more than offset (4) the effect of a reduced likelihood of DZ BANK receiving government support. Moody's revised support assumptions result in one notch of ratings uplift instead of two. Moody's affirmation of DZ BANK's baa2 BCA is underpinned by its satisfactory regulatory capital ratios and solid funding profile which benefits from the cash surplus in the co-operative sector. However, the group's considerable balance sheet leverage constrains the BCA. Under Moody's Advanced LGF analysis, DZ BANK's long-term deposit and senior unsecured debt ratings take into account their very low loss-given-failure because of the group's high volume of subordinated and senior unsecured debt outstanding, leading to a two-notch uplift, respectively, from the bank's a2 adjusted BCA. The outlook on the long-term deposit ratings is positive and the outlook on the long-term senior unsecured debt ratings is negative, indicating that a modified insolvency order in Germany would place diverging pressures on DZ BANK's senior debt and deposit ratings. -- DZ-BANK IRELAND PLC The one-notch upgrade of DZ-I's long-term deposit ratings to A2 and of its short-term debt and deposit ratings to Prime-1 incorporates (1) the affirmation of the bank's baa2 BCA (which remains aligned with the BCA of its Frankfurt-based parent bank); (2) an upgrade of the adjusted BCA to a2, as Moody's assessment of a higher support capacity of the co-operative sector has led to an additional notch of affiliate support uplift; and (3) Moody's unchanged assumption that DZ-I would not receive government support. Moody's LGF analysis - performed at the group level and resulting in two notches of uplift -- could principally also benefit DZ-I's deposit ratings, based on the assumption that resolution would be performed for the parent and the subsidiary at the same time. However, DZ-I's ratings are capped at a level two notches above the government debt ratings of Ireland (Baa1 stable), limiting any such rating uplift to a ceiling of A2. The outlook on DZ-I's A2 long-term deposit rating is stable, mirroring the stable outlook on the Irish government's debt rating. -- DVB BANK S.E. The one-notch upgrade of DVB's long-term deposit and senior unsecured debt ratings to A3 incorporates (1) the affirmation of the bank's ba3 BCA; (2) a downgrade of its adjusted BCA to baa3 from baa1, whereby the three notches of uplift better align the affiliate support assumptions incorporated in DVB's ratings with that of fellow members in the co-operative banking sector; and (3) Moody's LGF analysis that provides two notches of uplift from the bank's adjusted BCA for the deposit and senior unsecured debt ratings; (4) Moody's assessment of a

5 moderate probability of DVB receiving government support, resulting in one notch of rating uplift. A somewhat higher degree of government support was previously included in the (higher) affiliate support uplift, referenced to the fully supported debt and deposits ratings of its parent bank, DZ BANK. Moody's affirmation of DVB's ba3 BCA is underpinned by the bank's adequate funding structure and liquidity position, whereby the former benefits from access to funding from its parent, DZ BANK. However, the bank's concentrated exposure to cyclical asset-based finance activities and the resulting risks to capital in a (severe) downturn constrain the BCA. For its LGF analysis, Moody's assumes that DVB, as a domestic subsidiary, would be resolved together with DZ BANK which owned 95.45% of its shares as of year-end Therefore the same LGF notching applies to DVB as to DZ BANK. DVB's long-term deposit and senior unsecured debt ratings benefit from two notches of uplift from its baa3 adjusted BCA. This uplift accounts for the very low loss-given-failure because of the group's high volume of subordinated and senior unsecured debt outstanding. The outlook on the long-term deposit ratings is positive and the outlook on the long-term senior unsecured debt ratings is negative, indicating that a modified insolvency order in Germany would place diverging pressures on DVB's senior debt and deposit ratings. --MUENCHENER HYPOTHEKENBANK EG The confirmation of MuenchenerHyp's deposit and senior unsecured debt ratings at A2 incorporates (1) the affirmation of the bank's BCA of ba2 and adjusted BCA of baa1, which continues to include four notches of affiliate support uplift; (3) Moody's LGF analysis that provides one notch of uplift from the bank's adjusted BCA for the deposit and senior unsecured debt ratings; which offset (4) the effect of a reduced likelihood of MuenchenerHyp receiving government support. Moody's revised government support assumptions result in one notch of ratings uplift instead of two. Moody's affirmation of the ba2 BCA is underpinned by moderate asset risk and its satisfactory funding profile; however, the group's dual-line business model and the resulting sector concentration and considerable balancesheet leverage constrain the BCA. Under Moody's Advanced LGF analysis, MuenchenerHyp's long-term deposit and senior unsecured debt ratings take into account their low loss-given-failure because of the group's high volume of senior unsecured debt and deposits outstanding, leading to a one-notch uplift respectively from the bank's baa1 adjusted BCA. The outlook on the long-term deposit ratings is positive and the outlook on the long-term senior unsecured debt ratings is stable, indicating that a modified insolvency order in Germany would place positive pressure on MuenchenerHyp's long-term deposit rating. --WGZ BANK AG The two-notch upgrade of WGZ's deposit and senior unsecured debt ratings to Aa2 incorporates (1) the affirmation of the bank's baa2 BCA; (2) an upgrade of the adjusted BCA to a2, as Moody's assessment of a higher support capacity of the co-operative sector has led to an additional notch of affiliate support uplift; (3) Moody's LGF analysis that provides two notches of uplift from the bank's adjusted BCA for the deposit and senior unsecured debt ratings; which, more than offset (4) the effect of a reduced likelihood of WGZ receiving government support. Moody's revised support assumptions result in one notch of ratings uplift instead of two. Moody's affirmation of WGZ's baa2 BCA is underpinned by its good asset quality, solid regulatory capitalisation and strong liquidity position, which benefits from the cash surplus in the co-operative sector. However, WGZ's balance-sheet leverage and modest profitability constrain the BCA. Under Moody's Advanced LGF analysis, WGZ's long-term deposit and senior unsecured debt ratings take into account their very low loss-given-failure because of the group's high volume of senior unsecured debt outstanding, leading to a two-notch uplift respectively from the bank's a2 adjusted BCA. The outlook on the long-term deposit ratings is positive and the outlook on the long-term senior unsecured debt rating is negative, indicating that a modified insolvency order in Germany would place diverging pressures on WGZ's senior debt and deposit ratings. --WGZ BANK IRELAND PLC

6 WGZ-I's long-term deposit ratings were upgraded by one notch to A2. Concurrently its short term rating was upgraded to Prime-1. The rating action incorporates (1) the affirmation of the bank's baa2 BCA (which remains aligned with the BCA of its parent bank, WGZ); (2) an upgrade of the adjusted BCA to a2, as Moody's assessment of a higher support capacity of the co-operative sector has led to an additional notch of affiliate support uplift; and (3) Moody's assumption that WGZ-I would not receive government support. Moody's LGF analysis - performed at the group level and resulting in two notches of uplift - could principally also benefit WGZ-I's deposit ratings, based on the assumption that resolution would be addressed for the parent and the subsidiary at the same time. However, WGZ-I's ratings are capped at a level two notches above the government debt ratings of Ireland (Baa1 stable), limiting any such rating uplift to a ceiling of A2. The outlook on WGZ-I's long-term deposit ratings is stable, mirroring the stable outlook on the Irish government's debt rating. RATIONALE FOR COUNTERPARTY RISK ASSESSMENT As part of today's actions, Moody's has assigned CR Assessments to the co-operative groups and their branches and rated subsidiaries. CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails, and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than expected loss; and (2) apply to counterparty obligations and contractual commitments rather than to debt or deposit instruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities. The CR Assessment takes into account the issuer's standalone strength as well as the likelihood of affiliate and government support in the event of need, reflecting the anticipated seniority of these obligations in the liabilities hierarchy. The CR Assessment also incorporates other steps authorities can take to preserve the key operations of a bank should it enter a resolution. The starting point for the CR Assessments is a bank's Adjusted BCA, to which Moody's then applies an Advanced LGF approach that takes into account the level of subordination in the bank's liability structure, and incorporates the same government support assumptions as applied to deposit and senior unsecured debt ratings. As a result, the CR Assessment for the co-operative banks is typically one notch higher than their senior unsecured debt and deposit ratings, reflecting Moody's view that authorities are likely to honour the operating obligations the CR Assessment refers to in order to preserve a bank's critical functions and reduce potential for contagion. WHAT COULD CHANGE THE RATINGS UP/DOWN The banks' BCAs could be upgraded following (1) a reduction (or mitigation) of asset risk, including market risk; (2) a strengthening of common equity levels, in particular leverage ratios; and/or (3) greater profit stability for those banks whose profits have previously shown volatility. The banks' BCAs could be downgraded due to (1) a material deterioration in its asset quality, particularly for those banks that display risk concentrations; (2) a failure to improve leverage at an appropriate pace as higher regulatory requirements are introduced or phased in; and/or (3) a material deterioration of profits, which have recently benefitted from very low risk charges. Pressure on the long-term debt and deposit ratings could develop if the individual banks' subordinated instruments increase (or decrease) relative to their tangible banking assets. This could result in additional (or fewer) notches of uplift resulting from Moody's LGF analysis. The prospective change in insolvency legislation in Germany that aims to subordinate senior unsecured debt to deposits in resolution would -- if implemented -- place downward pressure on senior unsecured debt ratings (if not compensated by additional subordination) and upwards pressure on deposit ratings. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Banks published in March Please see the Credit Policy page on for a copy of this methodology. REGULATORY DISCLOSURES Please click on this link ( for the List of

7 Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items: Unsolicited ratings Non participating issuers [EU only] participation in unsolicited ratings Person approving the credit rating Releasing office For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity. The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(j) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on for each credit rating as indicated: Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person(s) that paid Moody's to determine this credit rating. The ratings of rated entity DVB Bank S.E. were initiated by Moody's and were not requested by these rated entities. The rated entity DVB Bank S.E. or related third parties did not participate in the rating process. Moody's was not provided, for purposes of the rating, access to books, records and other relevant internal documents of the rated entity or related third party. The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings. Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review. Please see for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating. Please see the ratings tab on the issuer/entity page on for additional regulatory disclosures for each credit rating. Katharina Barten VP - Senior Credit Officer Financial Institutions Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322

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It would be dangerous for retail clients to make any investment decision based on MOODY S credit rating. If in doubt you should contact your financial or other professional adviser. For Japan only: MOODY'S Japan K.K. ( MJKK ) is a wholly-owned credit rating agency subsidiary of MOODY'S Group Japan G.K., which is wholly-owned by Moody s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody s SF Japan K.K. ( MSFJ ) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ( NRSRO ). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as

10 municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.