Ratings agency Moody's is considering a downgrade of 81 per cent state backed bank Royal Bank of Scotland (release).
The review for downgrade of RBS's ratings follows the announcement by the UK Chancellor of the Exchequer on 19 June of the commencement of a cost-benefit review to evaluate the merit of breaking up RBS in order to achieve the government's goals of (1) promoting economic growth; (2) maximizing value for taxpayers; and (3) accelerating RBS's return to the private sector.
The accelerated sale of assets, together with the crystallisation of losses could imply a faster erosion of capital than RBS can sustain. Alternatively, a full legal split of RBS, while being costly, complex and disruptive to management, would also have a negative impact on the Group's profitability, could pose a strain on its liquidity and might also result in a capital shortfall depending on the valuation of assets moved to the Bad Bank. Any of these options could therefore have credit negative implications for bondholders.