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S&P : French insurer Groupama ratings lowered on announced non-payments on 2007 hybrids

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Standard & Poor’s Ratings Services has lowered the rating on French insurer Groupama S.A.’s 2007 junior subordinated notes to ‘CC’ from ‘B’. They also lowered the issue ratings on Groupama’s 2005 and 2009 junior subordinated notes to ‘CCC’ from ‘B’.

S&P’s report follows :

At the same time, Standard & Poor’s lowered its long-term counterparty credit and financial strength ratings on Groupama and its guaranteed subsidiaries to ‘BB-‘ from ‘BB’, and on strategically important subsidiary Groupama GAN Vie to ‘B+’ from ‘BB-‘. We also lowered our long-term counterparty credit rating to ‘BB-‘ from ‘BB’ and affirmed our ‘B’ short-term counterparty credit rating on banking subsidiary Groupama Banque. We placed all these ratings on CreditWatch with negative implications.

The downgrade of Groupama’s €1 billion junior subordinated notes due 2007 follows Groupama’s announcement on Friday, Oct. 5, 2012, that it would not pay its coupon at the next interest payment date, Oct. 22, 2012. These notes contain optional payment features that allow the group to cancel coupon payments when Groupama’s solvency margin is above 100%. The rating action reflects the application of our criteria in the article “Criteria For Assigning ‘CCC+’, ‘CCC’, ‘CCC-‘, and ‘CC’ Ratings,” published Oct. 1, 2012, on Standard & Poor’s Global Credit Portal. We will further lower the rating on these notes to ‘C’ following nonpayment on the coupon, in accordance with our criteria.

The downgrade of Groupama’s two other junior subordinated notes issues reflects our view that Groupama’s decision to cancel the coupon increases uncertainty regarding its willingness and ability to continue paying interest on these issues. In the same way as the 2007 note issue, these two note issues are classified as having “intermediate” equity content according to our criteria and were issued in 2005 and 2009, for a total of €1,250 million. They contain optional deferral features when the solvency margin is above 100%, although we understand the next coupon payment on the 2009 notes is mandatory due to look back provisions relating to the interest payment that took place in July 2012 on the 2005 issue. However, it is possible for the regulator to prevent payment on all issues. The next coupon payment dates on Groupama’s 2009 and 2005 notes are respectively Oct. 29, 2012, and July 6, 2013.

The downgrade of Groupama reflects our belief that Groupama’s decision to cancel the coupon payment on the 2007 issue is likely to adversely affect Groupama’s financial flexibility, albeit partly offset by the relatively small positive impact on the group’s solvency margin and liquidity saving. We also believe Groupama’s decision could adversely affect the group’s business franchise in terms of non-life client retention and life policy persistency.

The CreditWatch placement reflects the uncertainty about the potential impact of Groupama’s decision on the group’s creditworthiness. In particular, we will assess the potential longer term benefits and costs associated with Groupama’s decision, including the potential impact on the group’s business and financial profile. In addition, we will assess the progress Groupama is making to improve its solvency position. We aim to resolve or update the CreditWatch action over the next 90 days.

We could potentially lower the long-term ratings on Groupama to the ‘B’ category if our assessment indicated a weaker business risk and/or financial risk profile than we currently expect. Our rating on its 2007 junior subordinated issue will be lowered to ‘C’ following the nonpayment of the coupon on the Oct. 22, 2012, interest payment date. Our ratings on its other two junior subordinated issues would be lowered to ‘CC’ if management notifies investors that coupons on these instruments will also be deferred.