OREANDA-NEWS. Fitch Ratings has assigned UBS Group Funding (Jersey) Limited's upcoming issue of unsubordinated notes, guaranteed by UBS Group AG, an 'A(EXP)' expected rating. The notes' final rating is contingent on the receipt of final documentation conforming to information already received.

KEY RATING DRIVERS
The notes are rated in line with the Issuer Default Rating (IDR) of the guarantor, UBS Group AG (A/Stable/a). The issuer is a non-Swiss special purpose vehicle, which is not subject to Swiss withholding tax on interest payments.

The notes are unsubordinated and unsecured obligations of the issuer and benefit from a direct, irrevocable and unconditional guarantee of UBS Group AG.

The terms of the notes stipulate that investors acknowledge and accept to be bound by Swiss resolution powers, and the notes are structured to qualify for inclusion in total loss-absorbing capacity (TLAC). The notes' documentation highlights the wide-ranging power of the Swiss resolution authority, FINMA, which is expected to gain powers to resolve bank holding companies from 1 January 2016 (to date, FINMA's resolution powers are limited to banks).

Although this means that FINMA could in theory impose losses on senior holding company noteholders ahead of the resolution of the operating bank, we believe that the volume of debt and hybrid capital issued by UBS Group AG, the holding company, would be insufficient to restore the group's viability without bailing in junior debt instruments issued by the operating bank.

RATING SENSITIVITIES
The notes are sensitive to changes to UBS Group AG's Long-term IDR. UBS Group AG's Long-term IDR is equalised with that of its main operating subsidiary, UBS AG, reflecting its role as a holding company, our expectation that double leverage at the holding company will remain well below 120% and our view that the Swiss regulator considers the group as a consolidated entity. Increasing holding company double leverage, which could arise from mismatches in down-streaming the proceeds of holding company debt issuance to the operating companies, could result in UBS Group AG's IDR being rated below UBS AG's IDR, and therefore in a downgrade of the notes' ratings.

Together with the creation of separately capitalised subsidiaries, over time further expected debt issuance by UBS Group AG could change the relative position of creditors of different group entities, which would be reflected in different entity ratings, including the holding company's VR and IDRs.