Moody’s downgraded public sector covered bonds issued by Hypo Alpe-Adria-Bank International, Hypo Tirol and Kommunalkredit Austria yesterday (Monday) after cutting the ratings of 13 Austrian banks on Friday, which Kommunalkredit responded to by terminating several Moody’s ratings.

The bank rating actions come after an 11 June proposal by the Austrian government to enact legislation designed to allow the government to bail-in nationalised Hypo Alpe-Adria-Bank’s (HAA) subordinated debt-holders and void a State of Carinthia deficiency guarantee on that portion of the bank’s debt.

“The unprecedented nature of the government’s decision to place taxpayers’ interests above the rights of creditors who had previously benefited from a public sector guarantee indicates, in Moody’s opinion, that Austrian authorities are now generally more willing to countenance bank resolutions in which losses may also be imposed on senior creditors,” said the rating agency.

“As a result, today’s rating actions reflect Moody’s decision to lower its assessment of the probability of systemic support being made available for all Austrian banks, as well as very limited value Moody’s now places on deficiency guarantees for senior unsecured debt only, to ensure full and timely payment of interest and principal of related debt obligations.”

The rating agency downgraded Hypo Alpe-Adria-Bank International guaranteed public sector covered bonds from A1 to Baa3 and unguaranteed public sector covered bonds from A3 to Baa3, after having downgraded the rating on the issuer’s guaranteed senior unsecured debt from Ba1 to Caa1.

It cut Hypo Tirol guaranteed public sector covered bonds from Aaa to Aa1 and unguaranteed public sector bonds from Aa1 to Aa2. The downgrade of Hypo Tirol’s guaranteed public sector-backed covered bonds was prompted by a downgrade of the issuer’s guaranteed debt rating from Aa2 to Baa2, while the downgrade of its unguaranteed public sector-backed covered bonds was prompted by a downgrade of the issuer’s senior unsecured and deposit ratings from Baa2 to Baa3.

Moody’s also downgraded public sector-backed covered bonds issued by Kommunalkredit Austria from Aa2 to Aa3, following a downgrade of the issuer’s senior unsecured rating from Baa3 to Ba1 on Friday.

Kommunalkredit Austria (KA) announced on Friday, after Moody’s rating actions, that it has ended all ratings for unsecured funding instruments from Moody’s, only keeping its public sector covered bond rating. The bank said that this decision had been taken due to differences in opinion between Moody’s and itself regarding the propensity of the Republic of Austria to support the Austrian banking sector.

“In the view of KA and the Republic of Austria the abovementioned draft legislation, which is still subject to the parliamentary legislative process of the Republic of Austria, does not indicate a change in the support propensity of the Republic of Austria,” said Kommunalkredit Austria. “This was also communicated to the rating agency.”

Among other banks downgraded by Moody’s on Friday were euro benchmark covered issuers Erste Group Bank (from A3 to Baa1), Raiffeisenlandesbank Niederösterreich-Wien (A2 to A3) and Raiffeisen-Landesbank Steiermark (A2 to A3). Bawag’s and UniCredit Bank Austria’s ratings were affirmed. All these banks’ ratings are on negative outlook.

Bernd Volk, head of covered bond research at Deutsche Bank, said that HAA is a very specific case, and that the downgrades announced by Moody’s “clearly lack differentiation”. He added that the rating actions and tone of the Moody’s announcement is “extremely aggressive”.