OREANDA-NEWS. Fitch Ratings has assigned Russia-based Absolut Bank's RUB5bn 'new-style' subordinated bonds with a write-off feature a Long-term rating of 'B' and a National Long-term rating of 'BBB+(rus)'. The bonds' Recovery Rating is 'RR5'. They were placed through the Moscow Exchange on 29 April 2016.

KEY RATING DRIVERS
Fitch rates Absolut's 'new-style' Tier 2 subordinated debt one notch lower than the bank's 'b+' Viability Rating (VR). This includes (i) zero notches for additional non-performance risk relative to the VR, as Fitch believes these instruments should only absorb losses once a bank reaches, or is very close to, the point of non-viability (PONV); (ii) one notch for loss severity, reflecting below-average recoveries in case of default.

The bonds' coupon is 14.5% and payable semi-annually. The principal is due on 22 October 2021.

The bonds have a principal and coupon write-down feature triggered in case of (i) the core Tier 1 capital adequacy ratio decreasing below 2%; or (ii) bankruptcy prevention measures being introduced in respect to the bank. Although legally the latter is possible as soon as a bank breaches any of its mandatory capital ratios or is in breach of certain other liquidity and capital requirements, Fitch's base case assumes the regulator will not trigger loss absorption until a bank has reached (or is very likely to reach) PONV.

According to the issue terms, the bank's management defines the order in which loss-absorbing subordinated instruments are written down in case of default, which means that these bonds might not rank pari passu with other subordinated instruments. At end-1Q16, Absolut had only one other subordinated instrument, a loan for RUB6bn from the state Deposit Insurance Agency (DIA), which according to the loan agreement with DIA, is senior to other subordinated obligations.

For more details on Fitch's approach to rating subordinated debt issues of Russian banks see 'Fitch Affirms Russian State-Owned Banks' Old Sub Debt, Indicates Approach For Rating New Issues' dated 18 April 2013, and 'Implementation of New Capital Rules in Russia: Moderately Positive, Unlikely to Lead to Rating Changes', dated 19 April 2013, at www.fitchratings.com.

RATING SENSITIVITIES
The issue rating is notched down once from the bank's VR, which also drives the bank's Long-term Issuer-Default Ratings of 'B+'/Negative. The issue rating could be downgraded if Absolut's VR is downgraded.

The Negative Outlook on Absolut's IDRs reflects the probability that the bank, and hence the issue rating, will be downgraded in case of further deterioration of its asset quality and capitalisation. Thus losses reported in 2H15 (in IFRS accounts) and 1Q16 (in regulatory accounts) have resulted in greater pressure on capital since the last review of the bank in October 2015, somewhat increasing the risk of a downgrade of the bank and the issue rating.

Stabilisation of asset quality and an improvement in performance could lead to the Outlook being revised to Stable and stabilise the issue at its current levels.

Absolut's other ratings (below) are unaffected:
Long-term foreign and local currency IDR: 'B+'; Outlook Negative
Short-term foreign currency IDR: 'B'
National Long-term rating: 'A-(rus)'; Outlook Negative
Viability Rating: 'b+'
Support Rating: '5'
Support Rating Floor: 'No floor'
Senior unsecured debt: 'B+'/'A-(rus)'; Recovery Rating 'RR4'