OREANDA-NEWS. Fitch Ratings has assigned an expected rating of 'BBB(EXP)' to Heritage Bank Limited's (Heritage; BBB+/Stable) Basel-III compliant Tier 2 instruments, issued under the bank's AUD2bn debt issuance programme. The instruments will be offered to domestic and international institutional investors, and are due to settle in June 2015. This is the first instrument of its type to be issued by an Australian mutual financial institution.

Final maturity is in 2025, although an early redemption is possible five years after issuance in 2020 and each interest payment date thereafter, subject to prior written approval by the Australian Prudential Regulation Authority (APRA). The notes include a non-viability clause and will qualify as regulatory Tier 2 capital for Heritage. The final size of the deal is to be determined.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The instrument is classified as subordinated debt and is rated one notch below Heritage's Viability Rating (VR) of 'bbb+' to reflect its below-average recovery prospects compared to senior unsecured instruments. The notes would be subject to a partial or full write-off should APRA deem that without write-off, Heritage would become non-viable. Full write-off would be triggered should Heritage require a public sector injection of capital to avoid non-viability. No additional notching from the VR for non-performance is applied as the VR already captures the point of non-viability. Under Fitch's methodology, the instrument does not qualify for any equity credit.

RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Heritage's subordinated debt ratings are broadly sensitive to the same considerations that might affect the bank's VR.