Fitch Downgrades Heta's Government-Guaranteed Tier 2 Notes to 'AA+'
The notes' rating is aligned with Austria's sovereign rating based on Fitch's expectation that the Austrian central government will honour the unconditional and irrevocable guarantee provided to holders of the subordinated notes. Fitch does not rate Heta nor does it rate any other debt instruments issued by Heta or its predecessor, Hypo Alpe-Adria-Bank International AG (Hypo Alpe).
KEY RATING DRIVERS
The notes were issued in 2012 by Hypo Alpe. According to the notes' documentation, the Republic of Austria guarantees the noteholders the "due and punctual" payment of all obligations payable by Hypo Alpe (and, consequently, Heta as Hypo Alpe's legal successor) under the subordinated notes.
The notes remain unaffected by special legislation implemented in August 2014 to impose losses on certain subordinated notes guaranteed by the state of Carinthia, Hypo Alpe's previous owner. The finance ministry publicly stated in a press release dated 11 June 2014 that "subordinated debt guaranteed by the Republic of Austria is not affected by the restructuring".
Consequently, the rated notes were not included in a list of affected notes published by the Austrian Financial Market Authority (FMA) on 7 August 2014. In Fitch's view, the Austrian government's measures to declare sub-national guarantees void does not indicate a materially diminished willingness to honour its own federal guarantees.
We understand that the terms and conditions and, consequently, the effectiveness, of the guarantee are unaffected by Hypo Alpe's reorganisation into Heta in late 2014. Hypo Alpe's banking licence ceased in October 2014 pursuant to FMA ruling in accordance with the Law on the Creation of a Wind-Down Unit (Gesetz uber die Schaffung einer Abbaueinheit), following the decision to spin-off Hypo Alpe's SEE banking assets. Hypo Alpe was then renamed Heta and started operating as a state-owned wind-down institution with a licence to perform relevant wind-down activities.
Since late 2009, Hypo Alpe (and, since late 2014, Heta) has been fully owned by the Republic of Austria, which has supported the institution with sizeable capital injections and capital guarantees.
In Fitch's opinion, the creditworthiness of the notes also remains unaffected by regulatory changes such as the implementation of the EU Bank Recovery and Resolution Directive in Austrian law in early January 2015 with the adoption of the Federal Act on the Recovery and Resolution of Banks (Bundesgesetz uber die Sanierung und Abwicklung von Banken).
According to the guarantee, should the notes - due to regulatory or other developments including statutory loss absorption - bear losses such as a write-down, conversion into equity or any other resolution measure, then the guarantor would guarantee continued and punctual payment of the originally guaranteed payment amount according to the interest and principal payment schedule. The guarantee for the notes has been issued under Austria's 2008 Financial Markets Stability Act (Finanzmarktstabilitatsgesetz; FinStaG). Under the FinStaG, Austria can provide capital and funding support to Austrian banks up to EUR22bn, of which EUR13bn is currently utilised.
RATING SENSITIVITIES
The rating of the notes is sensitive to changes in Austria's sovereign rating. A downgrade or an upgrade of Austria's rating would lead to a downgrade or an upgrade of the notes. The notes' rating is also sensitive to a change in our expectation regarding Austria's propensity to honour the guarantee.
Since Fitch expects the Republic of Austria to honour the guarantee for the Tier 2 notes irrespective of the creditworthiness of Heta, the bank's risk profile does not represent a rating sensitivity for the notes' rating. The responsibility of Heta's resolution in the stock flow adjustment to public debt of around 4.4% of GDP in 2014 is one of the main drivers behind the sovereign downgrade and, as such, is already reflected in Fitch's assessment of Austria's ability to provide Heta with necessary support.
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