OREANDA-NEWS. Fitch Ratings has assigned Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A.'s (Rabobank Nederland; AA-/Negative) EUR1.5bn issue of additional Tier 1 capital notes a final rating of 'BBB'. Rabobank Nederland is the central organisation of Rabobank Group (Rabobank; AA-/Negative/aa-).

The final rating is in line with the expected rating Fitch assigned to the notes on 15 January 2015.

KEY RATING DRIVERS
The notes qualify as additional Tier 1 capital instruments with fully discretionary coupon payment and are subject to partial or full temporary write-down if Rabobank's consolidated common equity Tier 1 (CET1) ratio falls below 7% or if the CET1 ratio of the Local Rabobank Group (Local Group, composed of the local banks and Rabobank Nederland) falls under 5.125%. In addition, any coupon payments may be cancelled at the discretion of the group.

The rating is five notches below Rabobank's Viability Rating (VR) of 'aa-' in accordance with Fitch's criteria for assessing and rating bank subordinated and hybrid securities. The notching reflects the notes' high loss severity relative to senior unsecured creditors (two notches) and materially higher risk of non-performance than that reflected in the VR (three notches).

The notching for non-performance risk reflects the instruments' fully discretionary coupon payment, which Fitch considers as the most easily activated form of loss absorption. The phased-in CET1 ratio of the Local Group (where the 5.125% trigger applies) was 14.97% and Rabobank's consolidated ratio (where the 7% trigger applies) was 12.6% at end-June 2014.

In addition to the standard CRDIV capital requirements, including a 2.5% capital conservation buffer, Rabobank will be subject to a 3% systemic risk buffer imposed by the Dutch Central Bank (the Dutch banking regulator). The CRDIV capital requirements and buffers are being gradually implemented and will result by 2019 in a minimum CET1 ratio for Rabobank of 10% (4.5% minimum CET1 ratio plus capital buffers of 5.5%). The risk of non-performance would first materialise if Rabobank's CET1 falls below the minimum capital and buffers requirement (ultimately 10% in 2019), in which case coupons would be restricted by the maximum distributable amount.

Given Rabobank's robust capital position, its targeted 14% CET1 ratio by 2016 (phased-in), the current level of distributable items and Fitch's expectations for their evolution, the agency has limited the notching for non-performance to three notches.

Given the securities are perpetual, their deep subordination, coupon flexibility and going concern mandatory write-down of the instruments, Fitch has assigned 100% equity credit.

RATING SENSITIVITIES
As the notes are notched down from Rabobank's VR, their rating is sensitive to a change to the VR. The notes' rating is also sensitive to any changes in notching, if Fitch changes its assessment of the notes' non-performance risk relative to that captured in Rabobank's VR.

As such, the rating of the notes is sensitive to the amount of distributable items at Rabobank Nederland on an unconsolidated level, which amounted to EUR5.7bn at end-September 2014. Given the fairly stable net income reported by Rabobank Nederland over the past years, Fitch expects that distributable items will be maintained at least at the current level. In the last 15 years, Rabobank Nederland has been consistently profitable with net profit averaging around EUR1bn in the past five years.

Should the level of distributable items fall, this could lead us to widen the notching for the notes' rating. In addition, more aggressive capital management at Rabobank or Local Group level as well as an unexpected increase in required regulatory capital buffers or changes to risk-weighted assets calculations could also lead to wider notching.