OREANDA-NEWS. Fitch Ratings has placed most of Kommunalkredit Austria AG's (KA, A/Negative/F1) senior unsecured notes - rated 'A' - on Rating Watch Negative (RWN). KA's other ratings are unaffected. A full list of the securities placed on RWN is available at the end of this rating action commentary.

The rating action follows KA's announcement on 13 March 2015 that its 99.78% owner, the Austrian government, will transfer about EUR4.3bn of KA's assets and a corresponding volume of its debt to a newly established bank to be sold to a consortium consisting of English Interritus Limited, initiated by Dr. Patrick Bettscheider, and Irish Trinity Investments Limited, managed by London-based asset manager Attestor Capital LLP.

The transaction, which is pending approval from KA's relevant governing bodies, regulatory and competition authorities and the European Commission (EC), is expected to be completed by mid-2015. The legal entity KA and the remainder of KA's assets (about EUR7bn) and liabilities will then be merged into 100% state-owned KA Finanz AG (KF, A+/Negative/F1+). KF, whose ratings are not affected by this announcement, is thus likely to become KA's legal successor and we expect it to retain all rights and obligations attached to this status.

KEY RATING DRIVERS - SENIOR DEBT RATINGS
The RWN reflects our expectation that the notes that will be transferred to the new entity will no longer benefit from sovereign support once the transaction is completed. We expect this new entity's standalone credit profile to be significantly weaker than the notes' 'A' and 'Aemr' ratings, which are based on KA's support-driven Long-term IDR. Fitch does not usually factor support from private equity investors into its ratings as their ability and/or commitment to fully support creditors typically cannot be relied upon.

We expect that support from the Austrian sovereign (AA+/Stable) will continue to drive KF's ratings (and, thus, the ratings of the notes to be transferred to KF) until the bank has been wound down, and will drive KA's ratings until the transaction nears completion. The Negative Outlooks on both banks' ratings reflect our general expectation of decreasing sovereign support due to Austria's implementation of the EU's Bank Recovery and Resolution Directive (BRRD) including early adoption of the bail-in tool on 1 January 2015 along with the introduction of the Single Resolution Mechanism for banks in the eurozone from January next year. KA's and KF's rating drivers are detailed in our rating action commentary dated 20 February 2015 ('Fitch Affirms KA at 'A' & KF at 'A+', Negative Outlook').

KA has published a list of notes which it expects to transfer to KF and are, therefore, unaffected by this rating action. The notes on this list rated by Fitch are: XS1017111029, XS1072804484, XS1003354252, XS0235597068, XS1020014608, XS1016032457, XS1040273267, XS1015492595, AT0000329859 and XS0255439803. We believe that further rated notes might eventually be transferred to KF. However, until the full list has been published, these notes will remain on RWN to reflect the risk that they may be transferred to the private equity consortium.

RATING SENSITIVITIES - SENIOR DEBT RATINGS
KA's and KF's IDRs (and, thus, the ratings of the notes to be transferred to KF) will remain primarily sensitive to Austria's ability and propensity to provide support. We expect to downgrade KA's and KF's Long- and Short-term IDRs, Support Ratings and revise down Support Rating Floors by end-1H15 to reflect progress with the practical implementation of resolution legislation. These ratings' sensitivities are detailed in our rating action commentary dated 20 February 2015. We expect KA's and KF's Long-term IDRs to remain in the 'BBB' range. However, we believe that the recent measures taken by the Austrian authorities to resolve Heta Asset Resolution AG (Heta), which have resulted in a moratorium on debt payment, could indicate a further decrease in the Austrian state's propensity to provide support for wind-down banks. This could result in KA's and KF's IDRs being downgraded to the lower 'BBB' range.

If, as we believe is likely, this downgrade of KF's and KA's ratings occurs before the transfer of the notes to the new entity, the notes would be likely to be downgraded to KA's Long-term IDR and remain on RWN until the transfer of the liabilities to the new entity. Any notes currently on RWN that the issuer later confirms will not be transferred to the private equity consortium but will instead be transferred to KF will be removed from RWN and affirmed at KA's Long-term IDR.

Fitch will resolve the RWN on transfer of the notes to the private equity consortium. The extent of the downgrade of the notes could be to below investment grade, depending on whether Fitch considers new capital and liquidity buffers substantial enough to protect the senior notes at an investment grade level. The extent of the downgrade will also take into account Fitch's view of likely support from the new owners.

KA's planned merger into KF could necessitate some formal changes to the existing support structures in place for KF and agreed with the EC. However, we would expect any changes to have limited effects because the planned merger of KA into KF is unlikely to hinder their wind-down, which has thus far been progressing in accordance with their respective plans.