OREANDA-NEWS. March 30, 2015. Fitch Ratings has assigned Standard Chartered PLC's (SC; AA-/Negative/F1+/aa-) issue of perpetual subordinated contingent convertible securities (CCS) a final rating of 'BBB'. The US dollar-denominated CCS priced on 26 March 2015 and are due to settle on 2 April 2015, with an expected issuing amount of USD2bn. The securities have an initial fixed rate of 6.5% and the first call date is 2 April 2020.

KEY RATING DRIVERS
The CCS are rated five notches below SC'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 SC has insufficient distributable items or if it fails to meet the combined buffer capital requirements that will be gradually introduced from 2016. Additional non-performance risk stems from the possibility that the combined buffer requirements for SC could change 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 115bp (2013: 0.7%), of which 56% has to be met by CET1, demonstrates this risk.

SC's consolidated end-point ratio stood at 10.7% at end-2014, providing SC with a buffer of USD6.8bn or 200bp 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 93bp capital retained annually between 2005 and 2014, even though capital generation slowed to 17bp net of dividends (79bp gross) in 2014. Management targets to increase its consolidated fully loaded CET1 ratio to 11%-12% in 2015.

If the securities are fully converted, holders of the new CCS would account for 7% of SC's enlarged share base.

Fitch has assigned 100% equity credit to the securities.

RATING SENSITIVITIES
As the CCS are notched down from SC's VR, their rating is mostly sensitive to any change in this rating, which is likely to be downgraded over the next one to two years should Fitch conclude that the bank's capital position relative to its risks and to peers has weakened.

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.