OREANDA-NEWS. Fitch Ratings is maintaining Kommunalkredit Austria's (KA) debt issuance programme and most of its senior unsecured debt on Rating Watch Negative (RWN). KA's other ratings are unaffected by the rating action. A full list of the ratings affected is available at the end of this rating action commentary.

The RWN signals a likely downgrade, potentially by several notches, once the affected notes are transferred with a large share of KA's assets and liabilities to a newly established entity owned by financial investors, and which we do not expect to benefit from sovereign support.

KEY RATING DRIVERS - DEBT ISSUANCE PROGRAMME AND SENIOR UNSECURD DEBT
The ratings were placed on RWN on 19 March 2015 after the Austrian government (AA+/Stable), - the present owner of KA with a 99.78% stake - agreed to a partial sale of the bank by spinning off EUR4.5bn of KA's assets and a corresponding volume of its debt to a newly established bank. The new bank will be sold to a consortium consisting of English Interritus Limited and Irish Trinity Investments Limited, managed by London-based asset manager Attestor Capital LLP.

The RWN signals an expected multi-notch downgrade of the notes on transfer to the newly established bank, as they would no longer benefit from sovereign support. We expect this new entity's credit profile to be substantially weaker than necessary to support 'BBB+' ratings.

The extent of the downgrade of the notes could be to below investment grade, depending on whether Fitch considers new capital and liquidity buffers are substantial enough to protect the senior notes at an investment grade level. The extent of the downgrade will also take into account Fitch's view of likely support from the new owners. Fitch does not usually factor in support from private equity investors into its ratings as their ability and/or commitment to fully support creditors typically cannot be relied upon.

The remainder of KA's assets (about EUR6.7bn) and liabilities will be merged into KA Finanz AG (KF; BBB+/Stable), a 100% state-owned entity in charge of winding down KA's legacy assets and liabilities. A failure of KA's sale to the private investors could result in 100% of KA's assets and liabilities being merged into KF. Approval for the transaction is pending from the regulatory authorities. The transaction is expected to complete by end-2015.

KA has published a list of notes which it expects to transfer to KF. We believe that further rated notes might eventually be transferred to KF. However, until the full list has been published, most notes will remain on RWN to reflect the risk that they may be transferred to the private investors.

RATING SENSITIVITIES
DEBT ISSUANCE PROGRAMME AND SENIOR UNSECURD DEBT
Until the transfer is completed, KA's ratings and, hence, its senior debt ratings will remain primarily sensitive to Austria's ability and propensity to provide support. Fitch does not believe that the ability of Austria to support KA will diminish materially as long as the sovereign remains in the 'AA' category.

Fitch will resolve the RWN on transfer of the notes to the new entity. The ratings of the notes to be taken over by KF will be equalised with KF's IDRs while the ratings of the notes to be transferred to the new entity could be downgraded by several notches, potentially to below investment grade, at the time of transfer.

The rating actions are as follows:

Kommunalkredit Austria AG
Long-term senior unsecured notes: 'BBB+'; maintained on RWN
The following notes are affected:
XS0312417313, XS0312417743, XS0972624117, XS0200950599, XS0981809584, XS0238189657, XS0238190150, XS0234510930, XS0236347240, XS1005197477, XS0238071228, XS0241451581, XS0186736228, XS0187975262, XS0247759094, XS1048251091, XS1055031139, CH0025370906, XS1073920255, XS0266826659, XS0223929216, XS0363735712, XS0252593198, XS0171595183, XS0172076365, XS0214564972, XS0190348952, XS0192480977, XS0100920353, AT0000320858, XS0163624504, XS0104786263, XS0208913276, XS0210167218, XS0212470149, XS0213230047, XS0215049395, XS0215865287, XS0218474533, XS0252786669, XS0218874633, XS0221102840, XS0222391632, XS0224859545, XS0231018747, XS0231084293, XS0239396905, XS1013581274, XS0243179354, XS0157911958, XS0161439954, XS0162167398, XS0169415659, XS0170583123, XS0190871409, XS0194530571, XS0201565115, XS0214981812, XS0216184621, XS0222762477, XS0234789351, XS0243771218, XS0253410236, XS0253139686, XS0231118455, XS0184959376, XS0205974701, XS0168795689, XS0169291829, XS0169321832, XS0169641312, XS0170243702, XS0169901328, XS0172801986, XS0173644724, XS0188313414, XS0189430183, XS0200492436, XS0215839019, XS0238702400, XS0242667888, XS0243373247, XS0244638770, XS0245268015, XS0248796749, XS0254901852, XS0254902405, XS0258515443, XS0306952598.

Long-term senior unsecured market-linked notes: 'BBB+emr'; maintained on RWN
The following notes are affected:
XS0227969929, XS0233055424, XS0169312179, XS0172124603, XS0193213393, XS0230962002, XS0340901908, XS0158079540, XS0158239680, XS0164432394, XS0166841121, XS0160009493, XS0162912934, XS0164603036, XS0167712016, XS0167426864, XS0168578317, XS0168909108, XS0170112519, XS0171468746, XS0181793935, XS0185849568.

Debt issuance programme: 'BBB+'/'F2', maintained on RWN.