S&P cuts Groupama rating over interest non-payment

Groupama SA’s financial strength rating has been cut another notch after it decided not to pay interest on a bond.

However, the ratings of its UK subsidiary are unaffected thanks to its pending takeover by Ageas.

Standard & Poor’s (S&P) lowered Groupama SA’s financial strength rating - a measure of an insurer’s ability to pay claims - one notch to BB- from BB.

The ratings are on negative watch, which means they could face a further downgrade.

The cut follows Groupama’s decision not to pay the next interest payment on the €1bn of junior subordinated bonds it issued in 2007. The interest payment was due on 22 October.

The downgrade, however, does not affect Groupama’s UK business, which is being bought by Ageas. Its rating remains at BB. As reported by Insurance Times on Friday, the UK arm’s ratings are expected to be raised to the BBB range by S&P once the deal is completed in the fourth quarter of 2012.

Groupama UK’s rating has historically been constrained by Groupama SA’s, but S&P will start applying stand-alone rating criteria to Groupama UK once the FSA approves the Ageas takeover. In the interim, S&P contends Groupama has little ability or incentive to weaken Groupama UK’s financial risk profile.

Groupama SA announced on Friday that it had decided not to pay the interest on its 2007 bonds, prompting S&P to downgrade its issue rating on the bonds to CC from B. It will downgrade the bonds further to C after the interest is not paid on 22 October.

The non-payment decision also triggered downgrades of Groupama’s other junior subordinated bonds because the rating agency believes “Groupama’s decision heightens the group’s business risk and financial risk, particularly its willingness and ability to pay coupons on its other hybrids.”

The non-payment decision triggered a downgrade of Groupama SA’s financial strength rating because the interest payment cancellation on the 2007 bonds “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,” S&P said.

It added: “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.”