OREANDA-NEWS. Fitch Ratings has assigned KAF Kaerntner Ausgleichszahlungs-Fonds' (KAF) two zero-coupon bonds (XS1484645616 and XS1484645533) with an aggregate principal amount of EUR10.3bn, due 14 January 2032 a final long-term rating of 'AA+'. The zero-coupon bonds are explicitly, unconditionally and irrevocably guaranteed by the Republic of Austria (Austria; AA+/Stable).

KEY RATING DRIVERS

The rating of the zero-coupon bonds is equalised with the rating of Austria as the obligations under the guarantee constitute the sovereign's direct, unsecured, unconditional, irrevocable and unsubordinated debt. They also rank pari passu with all other unsecured and unsubordinated loan or bond indebtedness of Austria resulting from outstanding financial debts from time to time, except for obligations ranking in priority pursuant to mandatory provisions of law.

KAF was established by the KAF Law in November 2015. It is a special purpose vehicle created by the Province of Carinthia (Carinthia) to acquire HETA Asset Resolution AG's (HETA) bonds that are guaranteed by Carinthia and the Holding Company of Carinthia (Kaerntner Landesholding). KAF was formed to take on risks stemming from liabilities assumed by Carinthia and the Holding Company of Carinthia through bond acquisition. The SPV also ensures Carinthia and its legal bodies have the capacity to carry out their designated tasks and prevent serious damage to the national economy.

KAF submitted a tender offer to all HETA creditors on 6 September 2016 to acquire certain debt instruments of HETA. The deadline for the tender offer was 7 October 2016. According to the offered tender HETA creditors were given the option either to settle their holdings by cash or to exchange for the zero-coupon bonds issued by KAF.

The cash settlement option offered to acquire HETA's bonds at a haircut. This corresponded to 75% of senior creditors' outstanding nominal claims of EUR10.2bn and 30% of subordinated creditors' outstanding nominal claims of EUR0.9bn. The zero coupon bond exchange option offered senior creditors to exchange their HETA instruments for the zero coupon bond at a conversion rate of 1 to 1. Subordinated creditors can exchange their HETA instruments for either a zero coupon bond at a conversion rate of 1 to 2 or unsecured assignable loans issued by Austria at a ratio of 1 to 1.

The tender offer is subject to the approval of a minimum of 25% of senior creditors and 25% of subordinated creditors, and two-thirds of all classes. Currently, 99.6% of senior creditors and 89.4% of subordinated creditors and 98.7% of all classes have accepted the offer.

RATING SENSITIVITIES

An upgrade of Austria could result in an upgrade of the rating of the bond, provided the guarantee remains unchanged.

A negative rating action on Austria will be reflected in the rating of the bond. Dilution of support from the guarantor as well as a change in or termination of the guarantee will result in a review of the rating of the bond issue.