OREANDA-NEWS. S&P Global Ratings today said it has assigned its 'BBB+' long-term issue ratings to Japan-based Mitsubishi Corp.'s (Mitsubishi; A/Negative/A-1) proposed unsecured subordinated hybrid bonds. The general trading and investment company ("sogo shosha") will issue the bonds in three tranches--series 4, 5, and 6. We arrive at our 'BBB+' issue rating on the proposed bonds by notching down from our 'A' long-term corporate credit rating on Mitsubishi. The two-notch differential reflects our notching methodology, whereby we deduct one notch for the subordination of the bonds and one additional notch for the issuer's option to defer interest payment.

We classify the proposed bonds as having intermediate equity content until 2021 for series 4 and 5 and 2026 for series 6. Their characteristics--the issuer's option to defer interest payments; sufficient permanence; and subordination in liquidation or bankruptcy proceedings--meet our standards for intermediate equity content of hybrid capital instruments.

We see an improvement in Mitsubishi's capital adequacy in terms of adjusted capital against risk-based capital. This is because we incorporate half of the issue amount as adjusted capital based on our assessment of intermediate equity content. However, this does not lead us to revise our assessment of its capital adequacy upward. We will continue to assess the company's financial risk profile as modest. As a result, the issuance of the subordinated bonds will not directly affect our ratings on the company. Nevertheless, we believe taking out this subordinated bond reflects the company's effort to improve its financial health.

KEY FACTORS IN OUR ASSESSMENT OF THE BONDS' DEFERABILITYMitsubishi retains the option to defer interest payments on the proposed bonds. Any outstanding deferred interest is cumulative and will be settled in cash if Mitsubishi pays dividend on its stocks or interest on debt that is pari passu with these bonds. However, this condition will not affect our equity content categorization of the bonds under our criteria. The proposed bonds do not have a look-back period, during which the company is prohibited from deferring interest payment on the bonds if it pays a dividend on its stocks or interest on debt that is pari passu with these bonds.

KEY FACTORS IN OUR ASSESSMENT OF THE BONDS' PERMANENCE While the proposed subordinated bonds will come due in 60 years, interest to be paid on the bonds will increase by 25 basis points (bps) in 2026 (year 10), and by a further 75 bps in 2041 (year 25) or 2046 (year 30). Because we consider the cumulative 100 bps for the bonds as a material step-up under our criteria, in our view, the step-up provides an incentive for Mitsubishi to call the bonds on the second step-up dates in 2041 or 2046. Consequently, we will consider the second step-up dates as the effective maturity dates because the issuer has not included intent-based replacement provisions that meet our criteria. We will reclassify the equity content as minimal when the remaining period to effective maturity of such bonds shortens to less than 20 years.

We believe Mitsubishi adequately positions its proposed hybrid bonds as a form of loss-absorbing capital over the long term. The company has expressed its intent to replace the bonds with hybrid securities with equivalent or higher equity content if it redeems the hybrid bonds before they mature, unless certain conditions hold true, including that the redemption does not result in the lowering of our corporate credit ratings on the company. In addition, Mitsubishi has a track record of adhering to its financial policy and of controlling its financial standing under stress, in our view. Considering these factors, we currently believe the company's financial policy and its intent to refinance meet our assessment of intermediate equity content. But any change in the company's financial policy or management's intention might affect our categorization of the equity content.

KEY FACTORS IN OUR ASSESSMENT OF THE BONDS' SUBORDINATIONThe proposed bonds (and coupons) would constitute unsecured and subordinated obligations of Mitsubishi.