Fitch Assigns Royal Bank of Scotland Group's AT1 Notes 'BB-' Final Ratings
The final rating is in line with the 'BB-(EXP)' expected rating Fitch assigned to the notes on 30 July 2015 (see "Fitch Publishes Royal Bank of Scotland Group's AT1 Notes Rating at 'BB-(EXP)''' at www.fitchratings.com).
KEY RATING DRIVERS
The CCCN are additional Tier 1 (AT1) instruments with fully discretionary interest payments and are subject to conversion into RBSG'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 RBSG's 'bbb+' 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 incremental non-performance risk relative to the VR.
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, 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.
RBSG's fully loaded Basel III CET1 ratio at 30 June 2015 was 12.3%, providing it with a buffer of GBP17bn for the 7.0% CET1 ratio trigger although non-performance in the form of non-payment of interest would likely be triggered before reaching 7%, most likely by breaching the bank's regulatory requirements. We estimate that RBSG will have to maintain a CET1 ratio of at least 10.5%-12.0% by 2019.
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 CCCN ratings are notched down from RBSG's VR, their rating is mostly sensitive to changes in the VR. The CCCN ratings are 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 RBSG's VR. This could arise from a change in Fitch's assessment of capital management at RBSG, reducing the holding company's flexibility to service the securities or an unexpected shift in regulatory buffer requirements, for example.
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