OREANDA-NEWS. Fitch Ratings has affirmed Heta Asset Resolution AG's (Heta) EUR1bn government-guaranteed Tier 2 subordinated notes (ISIN: XS0863484035) maturing in 2022 at 'AA+'. The affirmation follows the announcement of Heta's moratorium imposed by the Austrian Financial Market Authority (FMA) on 1 March 2015. Fitch does not rate Heta or any other debt instruments issued by Heta or its predecessor, Hypo Alpe-Adria-Bank International AG (Hypo Alpe).

KEY RATING DRIVERS
The notes were issued in 2012 by Hypo Alpe. According to the notes' documentation, the Republic of Austria guarantees the noteholders the "due and punctual" payment of all obligations payable by Hypo Alpe (and, consequently, Heta as Hypo Alpe's legal successor) under the subordinated notes.

The notes' rating remains aligned with Austria's sovereign rating (AA+/Stable), based on Fitch's expectation that the Austrian central government will honour the unconditional and irrevocable guarantee provided to holders of the subordinated notes. The notes are affected by the temporary moratorium on Heta's liabilities, enforced on 1 March 2015 by the FMA as part of Heta's resolution after a capital shortfall in the range of EUR4bn to EUR7.6bn was identified. This is likely to trigger the guarantee at the next coupon payment date, should the moratorium still be in place at that time. We understand that the Austrian central government will ensure full and timely payment of the next coupon due in December 2015. The finance ministry publicly stated in a press release dated 1 March 2015 that "creditors of the sovereign guaranteed subordinated bond 2012 - 2022, issued by former HBInt [Hypo Alpe], now HETA, will not suffer any delay of payment".

We expect that the notes will be fully repaid by the Republic of Austria if the notes' principal is written down, which could happen if the bail-in tool is applied to the notes in accordance with the EU Bank Recovery and Resolution Directive (BRRD). The BRRD was implemented in Austria in early January 2015 with the adoption of the Federal Act on the Recovery and Resolution of Banks (Bundesgesetz uber die Sanierung und Abwicklung von Banken).

In Fitch's view, Heta's resolution under BRRD indicates the sovereign's clearly diminished willingness to support the broader banking sector. The Negative Outlooks on the Issuer Default Ratings (IDRs) of most rated Austrian banks reflect this perception, and Fitch expects to downgrade the IDRs of these banks in 1H15. However, Heta's resolution does not imply a materially diminished willingness of the central government to honour its own guarantees. In Fitch's view, the government has little incentive not to honour its guarantee as doing so would be likely to severely and durably damage its own standing in the capital markets.

According to the 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 guarantor would ensure continued and punctual payment of the originally guaranteed payment amount. The guarantee for the notes has been issued under Austria's 2008 Financial Markets Stability Act (Finanzmarktstabilitatsgesetz; FinStaG). Under the FinStaG, Austria can provide capital and funding support to Austrian banks up to EUR22bn, of which EUR13bn are currently utilised.

RATING SENSITIVITIES
The rating of the notes is sensitive to changes in Austria's sovereign rating, which would be reflected in a change of the notes' rating. The rating of the notes is further sensitive to timely execution of the payments from the sovereign when the guarantee is triggered. As Fitch expects the Republic of Austria to honour the guarantee for the Tier 2 notes irrespective of the creditworthiness of Heta and in a timely manner, the issuer's risk profile does not represent a rating sensitivity for the notes.