Fitch Rates Yapi ve Kredi Bankasi's Basel III-Compliant Tier 2 Notes 'BBB-(EXP)'
OREANDA-NEWS. Fitch Ratings has assigned Yapi ve Kredit Bankasi A.S.'s (Yapi; BBB/Stable/bbb-) planned issue of Basel III-compliant Tier 2 capital notes an expected rating of 'BBB-(EXP)'. The size of the issue is not yet determined but is likely to be in the range of USD0.5bn-USD1.0bn.
The assignment of the final rating is subject to the receipt of final documentation conforming to information already received by Fitch.
The notes qualify as Basel III-compliant Tier 2 instruments and contain contractual loss absorption features that will be triggered at the point of non-viability of the bank. According to the draft terms, the notes are subject to permanent full or partial write-down upon the occurrence of a non-viability event (NVE). There are no equity conversion provisions in the terms. An NVE is defined as occurring when the bank has incurred losses and has become, or is likely to become, non-viable as determined by the local regulator, the Banking and Regulatory Supervision Authority (BRSA). The bank will be deemed non-viable when it reaches the point at which either the BRSA determines that its operating license is to be revoked and the bank liquidated, or the rights of Yapi's shareholders, and the management and supervision of the bank, should be transferred to the Savings Deposit Insurance Fund. The notes have an expected 10-year maturity and a call option after five years.
In the event of an NVE, the notes, along with any other parity (Tier 2) loss-absorbing instruments, will be subject to write-down. These write-downs will be made pro rata with other parity instruments. Write-down of the notes would take place following absorption of losses by equity and any junior (Tier 1) securities. Yapi currently has around USD1bn of parity loss-absorbing instruments (subordinated debt) outstanding.
KEY RATING DRIVERS
The notes are notched down once from Yapi's Long-term IDR of 'BBB' in accordance with Fitch's criteria for "Assessing and Rating Bank Subordinated and Hybrid Securities". The notching includes one notch for loss severity but zero notches for non-performance risk.
Fitch has applied zero notches for incremental non-performance risk, as the agency believes that write-down of the notes will only occur once the point of non-viability is reached and there is no coupon flexibility prior to non-viability.
The one notch for loss severity reflects Fitch's view of below-average recovery prospects for the notes in case of an NVE. Fitch has applied one notch, rather than two, for loss severity, as partial, and not solely full, write-down of the notes is possible. In Fitch's view, there is some uncertainty about the extent of losses the notes would face in case of an NVE given that this would be dependent on the size of the operating losses incurred by the bank and any measures taken by the authorities to help restore the bank's viability.
As the notes are notched down from Yapi's support-driven Long-term Issuer Default Ratings (IDR), their rating is sensitive to a change in this rating. The notes' rating is also sensitive to a change in notching due to a revision in Fitch's assessment of the probability of the notes' non-performance risk relative to the risk captured in Yapi's IDR, or in its assessment of loss severity in case of non-performance.
Yapi's ratings are listed below:
Long-term foreign currency and local currency IDRs: 'BBB'; Stable Outlook
Short-term foreign currency and local currency IDRs: 'F2'
National Long-term Rating: 'AAA(tur)'; Stable Outlook
Viability Rating: 'bbb-'
Support Rating: '2'
Senior unsecured debt: 'BBB'
Subordinated debt (legacy Tier 2): 'BBB-'
Basel III-compliant Tier 2 notes: 'BBB-(EXP)'