Moody’s has placed on review for downgrade covered bonds issued by Dexia Municipal Agency, as market participants await clarity on how Dexia Group will be restructured and the fate of its three covered bond issuers, Dexia MA in particular.

The review for downgrade of Dexia MA’s obligations foncières was announced yesterday (Tuesday), a day after Moody’s placed on review for downgrade the three main operating entities of Dexia Group, including Dexia Crédit Local, sponsor bank of Dexia MA’s covered bonds.

Uncertainty about the viability of the Dexia group came to a head yesterday, when it announced that it had opened talks with its supporting governments and the relevant supervisory authorities. The French and Belgian finance ministers yesterday announced that their governments would provide state guarantees of financing raised by Dexia.

Moody’s rates Dexia MA obligations foncières Aaa, with a Timely Payment Indicator of “probable-high”. It said that if it cuts the rating of Dexia Crédit Local (A3) then the rating of Dexia MA covered bonds would also be lowered.

“During its review, Moody’s will assess the effect of the Dexia Crédit Local downgrade on the covered bonds,” it said. “The analysis will include a review of the swaps currently in the programme, as entities within Dexia Group provide several of these swaps.”

Speculation about a break-up of Dexia and the creation of a “bad bank” has been rife, with HSBC Trinkaus analysts noting that there will be “considerable” consequences for the group’s covered bonds.

A break-up of the group involving elements such as asset disposals, the separation of Dexia Crédit Local into a bad bank, and the transfer of Dexia MA to a new entity, is on the cards, according to media reports and analysts.

HSBC Trinkaus’s analysts said that it is becoming clear that the group’s credit business with French municipalities will be transferred to a new entity because Dexia cannot disburse credit at acceptable conditions without making losses.

“French senator Marini yesterday made comments to the effect that La Banque Postale or the state bank Caisse des Dépôts et Consignations [CDC] could be the owner,” they said.

The analysts noted that there would have to be a complete change of ownership of Dexia MA because its liabilities – the obligations foncières – are largely backed by Eu50bn of French local authority assets and collateral in such volumes that they cannot easily be obtained from other sources.

Luxembourger covered bond issuer Dexia LDG is “in the hands of” Dexia BIL, which should not render difficult a change of ownership, they said.

A statement on the destination of Dexia Kommunalbank Deutschland, another covered bond issuer, “is currently hardly possible”, they said, adding that in the prevailing market situation it cannot be advisable for any banking group to simply give up a German refinancing possibility.

NordLB covered bond analyst Michael Melms also said that the fate of Dexia Kommunalbank is unclear, but that that its ability to refinance itself via Pfandbriefe is an advantage.

“A sale of Italian Crediop or Spanish Sabadell should not be possible in the current market environment,” he added.

Moody’s today (Wednesday) said that it is extending a review for possible downgrade of Baa2 rated Dexia Sabadell.

Bernd Volk, head of covered bond research at Deutsche Bank, also sees as the likely outcome a transfer of Dexia MA to a “strong entity supporting refinancing and likely wind-down”.

“Hence, short of a further escalation of public sector debt crisis on consequently large scale pool losses, Dexia MA obligations foncières should be supported by the upcoming restructuring,” he said.

A transfer of financing of French municipalities to CDC and La Banque Postale would be very positive, at least in the short term, for investors holding Dexia MA obligations foncières as they would benefit from backing by the French government, he added.

In the long run, the business model of Dexia MA “seems a wind-down case or future agency like business model”, he said.