OREANDA-NEWS. Fitch Ratings has assigned HSBC Holdings plc's (AA-/Stable/F1+/aa-) issue of perpetual subordinated contingent convertible securities (CCS) a final rating of 'BBB'. The US dollar-denominated CCS priced on 23 March 2015 and are due to settle on 30 March 2015, with an expected issuing amount of USD2.45bn. The securities have an initial fixed rate of 6.375% and the first call date is 30 March 2025.

KEY RATING DRIVERS
The securities are rated five notches below HSBC Holding plc's 'aa-' Viability Rating (VR). They are notched twice for loss severity to reflect the additional Tier 1 (AT1) instruments' conversion into common shares on a breach of a consolidated 7% CRD IV fully loaded common equity Tier 1 (CET1) ratio trigger. Three additional notches apply for the CCS' non-performance risk due to fully discretionary coupons.

Interest payments will be restricted if HSBC has insufficient distributable items (2014: USD48.9bn) or if it breaches the combined buffer requirements that will be phased in from 2016. Additional non-performance risk stems from the possibility that the combined buffer requirements for HSBC could change over time, and that additional buffers for cyclicality or sector concentrations could be introduced. The increase in the Pillar 2A requirement in February 2015 by 50bp to 2%, of which 56% has to be met by CET1, demonstrates this risk.

HSBC's consolidated end-point CET1 ratio reached 11.1% at end-2014, resulting in a 50bp (or USD6bn) buffer relative to the indicative minimum CET1 requirement of 10.6% from 1 January 2019, which is made up of 4.5% CET1 requirement under Pillar 1, 1.1% under Pillar 2A, a capital conservation buffer of 2.5% and a 2.5% G-SIB buffer.

The CCS' rating captures Fitch's expectation that HSBC will continue to accrete solid levels of capital. Its track record is strong with an average of 85bp capital retained annually between 2004 and 2014, even though capital generation slowed to 42bp net of dividends (104bp gross) in 2014. Management built its performance targets on a target CET1 ratio of 12%-13%.

If the securities are fully converted, holders of the new CCS would account for 3% of HSBC Holdings plc's enlarged share base, while they and holders of the similar securities issued in September 2014 would account for 9% of the enlarged base.

Fitch has assigned 100% equity credit to the securities.

RATING SENSITIVITIES
The long-term rating of the securities is primarily sensitive to any change to the group's consolidated strength, as reflected in HSBC Holdings plc's VR. The rating could be downgraded if locally held resources are unavailable to allow HSBC's main entities to be mutually supportive in periods of stress. In addition double leverage significantly exceeding 120% over a prolonged period, a change in the role of the holding company or how it manages its liquidity, could result in wider notching of the holding company's VR from the consolidated group and hence a downgrade of the securities.

Changes in the notching differential could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in HSBC Holdings plc's VR. This could arise due to a change in Fitch's assessment of HSBC's conservative approach to capital management, reducing HSBC's flexibility to service the securities, or an unexpected shift in regulatory buffer requirements, for example.