OREANDA-NEWS. Fitch Ratings says the resolution measures imposed by the Austrian banking regulator on Heta Asset Resolution AG do not affect the rating of Heta's EUR1bn government-guaranteed Tier 2 subordinated notes.

We affirmed the notes (XS0863484035), issued in 2012 and maturing in 2022, at 'AA+' on 4 March 2016. The rating is aligned with Austria's Long-term Issuer Default Rating (AA+/Stable). This alignment is based on our expectation that the Austrian government will continue to honour the unconditional and irrevocable guarantee provided to the noteholders.

On 10 April 2016, the Austrian Financial Market Authority (FMA) announced a series of resolution measures in its capacity as resolution authority under the law transposing the Bank Recovery and Resolution Directive's bail-in tool in Austria. The measures include the cancellation of outstanding interest payments, haircuts of 54% and 100% on the principal amounts on Heta's senior and subordinated debt, respectively, and a deferral of maturities to 2023. The FMA's decision follows the rejection in March 2016 by a qualified majority of Heta's creditors of a voluntary tender offer submitted by the province of Carinthia to Heta's creditors covered by Carinthia's deficiency guarantees.

The resolution measures apply to the rated notes. But according to the sovereign guarantee, should the notes - due to regulatory or other developments including statutory loss-absorption - bear losses such as a write-down, conversion into equity or any other resolution measure, the sovereign would ensure continued and punctual payment of the originally guaranteed amounts.

The government has effectively ensured that payments on the notes have continued to be made in accordance with their original terms since the start of the moratorium imposed by the FMA on Heta's debt in March 2015. We expect it to continue to ensure full and timely payments until the notes' scheduled maturity and irrespective of further developments affecting Heta's resolution. In our opinion, the government has very little incentive not to honour its guarantee as doing so would severely and durably damage its own standing in the capital markets.