OREANDA-NEWS. Fitch Ratings has assigned Standard Chartered PLC's (SC; AA-/Negative/F1+/aa-) upcoming issue of perpetual subordinated contingent convertible securities (CCS) an expected rating of 'BBB(EXP)'.

The final rating assignment is contingent on the receipt of final documentation conforming to information already received.

KEY RATING DRIVERS
The CCS are additional Tier 1 (AT1) instruments with fully discretionary interest payments and are subject to conversion into SC's ordinary shares on breach of a consolidated 7% CRD IV common equity Tier 1 (CET1) ratio, which is calculated on a "fully loaded" basis. The rating of the securities is five notches below SC's 'aa-' Viability Rating (VR), in line with Fitch's criteria, for assigning ratings to hybrid instruments. The securities are notched twice for loss severity to reflect the conversion into common shares on a breach of the 7% fully loaded CET1 ratio trigger, and three times for non-performance risk.

The notching for non-performance risk reflects the instruments' fully discretionary coupons, which Fitch considers as the most easily activated form of loss absorption. Under the terms of the securities, the issuer will be subject to restrictions on interest payments if it has insufficient distributable items (USD12bn at end-2014), is insolvent or fails to meet the combined buffer capital requirements that will be gradually introduced from 2016. Potential other factors are a breach of the minimum regulatory leverage ratio. The UK authorities' proposed leverage framework would see buffers being applied in a similar way to those being phased in under the risk-weighted framework.

Management targets to increase its consolidated fully loaded CET1 ratio to 11%-12% in 2015. The ratio stood at 10.7% at end-2014, providing SC with a buffer of USD6.8bn or 200bps over its indicative consolidated minimum CET1 requirement of 8.7%, applicable from 1 January 2019. The indicated ratio is made up of 4.5% CET1 requirement under Pillar 1, 0.65% under Pillar 2A, a capital conservation buffer of 2.5% and a 1% G-SIB buffer. This means CCS non-performance by way of non-payment of coupon is likely to occur before SC breaches the 7% CET1 conversion trigger in the notes.

The CCS' rating captures Fitch's expectation that SC will continue to accrete solid levels of capital. Its track record is strong with an average of 93bps capital retained between 2005 and 2014, even though capital generation slowed to 17bps net of dividends (79bps gross) in 2014.

Additional non-performance risk stems from the possibility that the combined consolidated buffer requirements for SC could increase over time and that additional buffers for cyclicality or sector concentrations could be introduced. The increase in the Pillar 2A requirement in 2014 to around 115bps (2013: 0.7%), of which 56% has to be met by CET1, demonstrates this risk.

Fitch has assigned 100% equity credit to the securities, which reflects their full coupon flexibility, ability to be converted into common equity well before the bank would become non-viable, permanent nature and subordination to all senior creditors.

RATING SENSITIVITIES
As the CCS are notched down from SC's VR, their rating is mostly sensitive to any change in this rating. The CCS' rating is also sensitive to a wider notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in SC's VR. This could arise due to a change in Fitch's assessment of capital management at SC, reducing the holding company's flexibility to service the securities or an unexpected shift in regulatory buffer requirements, for example.