OREANDA-NEWS. Fitch Ratings has assigned UBS Group AG's (A/Stable/F1/a) Tier 1 Capital Notes a final rating of 'BB+'. UBS Group AG issued a EUR1bn 5.75% note (ISIN CH0271428309), a USD1.25bn 7% note (ISIN CH0271428333) and a USD1.25bn 7.125% note (ISIN CH0271428317).

The final rating is in line with the 'BB+(EXP)' expected rating Fitch assigned to the notes on 12 February 2015 (see " Fitch Rates UBS Group AG 'A'/Stable; Assigns AT1 Notes Expected Ratings'' at www.fitchratings.com).

KEY RATING DRIVERS
The Tier 1 Capital Notes are additional Tier 1 (AT1) instruments with fully discretionary interest payments and are subject to a full and permanent write-off on breach of a consolidated 5.125% (for the EUR1bn 5.75% and the USD1.25bn 7% notes; the 'low-trigger notes') or 7% (for the USD1.25bn 7.125% 'high-trigger notes') common equity Tier 1 (CET1) ratio, which is calculated on a 'phase-in' basis. Fitch has assigned the same ratings to the 'high-trigger' and the 'low-trigger' notes.

The rating of the securities is five notches below UBS Group AG's 'a' VR, in line with Fitch's 'Assessing and Rating Bank Subordinated and Hybrid Securities' criteria. The securities are notched twice for loss severity to reflect the full and permanent write-off of the notes on a breach of the CET1 ratio trigger, and three times for non-performance risk.

The notching for non-performance risk reflects the instruments' fully discretionary coupon payment, which Fitch considers as the most easily activated form of loss absorption. We expect that any coupon omission on the 'high-trigger' and 'low-trigger' instruments would occur at the same time. Under the terms of the securities, the issuer will be prohibited from making interest payments if the amount of distributable items at UBS Group AG is insufficient, if UBS Group AG is not in compliance with minimum capital adequacy requirements, or if the regulator requires the group not to make payments. We expect a heightened risk of non-payment of interest should UBS Group AG's consolidated CET1 ratio fall below 10%, the level that the group will be required to meet from 1 January 2019.

At end-2014, UBS Group AG reported a 13.4% fully loaded CET1 ratio, which is the strongest in its peer group. At the same date, its phase-in CET1 ratio, which is relevant for triggering a write-down, stood at 19.5%, providing a buffer of about CHF22bn before the group would breach a 10% CET1 ratio. The group targets a 13% full loaded CET1 ratio and a 10% stressed CET1 ratio (using an internal stress test).

Fitch has assigned 50% equity credit to the 'low-trigger notes' and 100% equity credit to the 'high-trigger notes'. The equity credit reflects their full coupon flexibility, their permanent nature and their subordination to all senior creditors. The higher equity credit assigned to the 'high-trigger notes' reflects Fitch's view that they can be converted into common equity well before the bank would become non-viable.

RATING SENSITIVITIES - HYBRID SECURITIES
As the securities are notched down from UBS Group AG's VR, their rating is primarily sensitive to any change to the VR. The securities' rating is also sensitive to changes in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in UBS Group AG's VR. This may reflect a change in capital management in the group or an unexpected shift in regulatory buffer requirements, for example.