OREANDA-NEWS. Fitch Ratings has assigned Banco Popular Espanol S.A.'s (Popular) issue of additional tier 1 high trigger contingent convertible perpetual preferred securities (AT1) a rating of 'B-'.

KEY RATING DRIVERS
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The notes are AT1 instruments with fully discretionary interest payments and are subject to conversion to common equity on a breach of the common equity tier 1 (CET1) ratio at 7%, which is calculated on a 'phase-in' basis using Popular's individual and consolidated accounts.

The rating of the securities is three notches below Popular's 'bb-' Viability Rating (VR), in accordance with Fitch's criteria for assigning ratings to hybrid instruments. The rating of the AT1 instrument takes into account the Positive Outlook on the bank's rating, reflecting Fitch's expectation of an improvement in its financial profile, as well as the bank's strong SME franchise.

The rating also considers Popular's end-2015 CET1 ratio of 13.1% and a CET1 ratio of 16.1% on an unconsolidated basis, which provide it with a buffer from the equity conversion trigger level. Fitch expects the non-payment of interest on this instrument will occur before it breaches the notes' 7% CET1 trigger level, as Popular's Supervisory Review and Evaluation Process (SREP) requirement was set at 10.25%. Payment of coupons is made with the parent's distributable reserves, which totalled EUR3.1bn at end-2015, the last available date.

RATING SENSITIVITIES
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The notes' rating is primarily sensitive to a change in the VR. The securities' rating is also sensitive to changes in their notching from Popular's VR, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in the VR. This may reflect a change in capital management in the group or an unexpected shift in regulatory buffer requirements, for example. Under Fitch's criteria, a one-notch upgrade of the AT1 instrument would be conditional upon a two-notch upgrade of Popular's VR.