Fitch Assigns KT Sukuk's Basel III-Compliant Tier-2 Notes 'BBB-' Final Rating
OREANDA-NEWS. Fitch Ratings has assigned KT Sukuk Company Limited's (KT Sukuk) USD350m issue of Basel III-compliant Tier 2 capital notes a final rating of 'BBB-'.
The final rating is the same as the expected rating assigned on 12 November 2015.
KT Sukuk is a legal entity incorporated in the Cayman Islands, set up for the purpose of issuing the notes and entering into related transaction documents and participating in the transactions contemplated by the transaction documents to which it is a party. The trust certificate issuance programme's rating is driven solely by Kuveyt Turk Katilim Bankasi's (KTKB) Long-term foreign currency Issuer Default Rating (IDR; BBB/Stable), which serves as an anchor for notching. The notes are expected to qualify as Basel III-compliant Tier 2 instruments.
Fitch has given no consideration to any underlying assets or any collateral provided, as we understand that the issuer's ability to satisfy payments due on the certificates will ultimately depend on KTKB satisfying its unsecured payment obligations to the issuer under the transaction documents. The rating also takes into account the sukuk's structure and documentation, which include the following features:
Upon the occurrence of a dissolution event or on the maturity of the certificates, the trustee will be entitled to exercise the purchase undertaking and oblige KTKB to purchase the Wakala Assets at an exercise price equal to the aggregate of outstanding face amount of the certificates; all accrued and unpaid periodic distribution amounts (if any); any outstanding amounts repayable in respect of any liquidity facility; and any outstanding Wakala liabilities amount.
Prior to each periodic distribution date, KTKB will pay revenues in respect of the related income period under the Wakala agreement into the relevant transaction account. The amount is intended to be sufficient to fund the periodic distribution amounts payable.
The notes are expected to qualify as Basel III-compliant Tier 2 instruments and contain contractual loss absorption features, which will be triggered at the point of non-viability of the bank. According to the final 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 KTKB's shareholders, and the management and supervision of the bank, should be transferred to the Savings Deposit Insurance Fund. The notes have a 10-year maturity and a call option after five years.
In the event of an NVE, the notes will be subject to write-down. Write-down of the notes would take place following absorption of losses by equity and any junior (Tier 1) securities.
Furthermore, by assigning ratings to the programme and certificates to be issued under it, Fitch does not express an opinion on the programme structure's compliance with Sharia principles.
KEY RATING DRIVERS: SUBORDINATED DEBT
The notes are notched down once from KTKB's Long-term IDR of 'BBB' in accordance with Fitch's Global Bank Rating Criteria. The trust certificate issuance programme's expected rating is driven solely by KTKB's IDR reflecting Fitch's view that Kuwait Finance House (KFH: /A+/Stable/bb) would support KTKB and its Tier 2 debt holders should the need arise. This view is based on the assumption that support from the Kuwaiti government, on whose support KFH's own ratings rely, would ultimately be forthcoming for KTKB and its Tier 2 debt holders.
The notching includes one notch from KTKB's Long-term IDR 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, based on parental support, 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.
Certain aspects of the transaction will be governed by English law while others will be governed by Turkish law. Fitch does not express an opinion on whether the relevant transaction documents are enforceable under any applicable law. However, Fitch considers KTKB's intention to support KT Sukuk and its obligations; hence Fitch's rating for the certificates reflects the agency's belief that KTKB would stand behind its respective obligations under the documentation.
As the notes are notched down from KTKB's support-driven Long-term IDR, their rating is sensitive to a change in this rating. KTKB's 'BBB' Long-term IDR is driven by potential support from its 62.24% shareholder, KFH.
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 KTKB's IDR, or in its assessment of loss severity in case of non-performance.