OREANDA-NEWS. Fitch Ratings has assigned Japan-based Mitsubishi UFJ Financial Group, Inc.'s (MUFG) USD5bn senior unsecured notes a final rating of 'A'. The notes are expected to count towards MUFG's total loss-absorption capacity (TLAC) requirements, which have been set by the Financial Stability Board at 16% of its risk-weighted assets, effective 1 January 2019.

The senior bonds will constitute direct, unconditional, unsecured and unsubordinated general obligations of MUFG and rank pari passu without any preference among themselves and with all of its other unsecured indebtedness, other than subordinated indebtedness and except for statutorily preferred indebtedness. The notes will be structurally subordinated to the liabilities of MUFG's subsidiaries, including Bank of Tokyo-Mitsubishi UFJ (BTMU; A/Stable) and Mitsubishi UFJ Trust & Banking Corporation (MUTB: A/Stable).

The proceeds will be down-streamed in full to the operating subsidiaries as obligations that rank pari passu other senior unsecured obligations of the operating subsidiaries. The final rating is the same as the expected rating assigned on 11 February 2016.

KEY RATING DRIVERS
The rating of the notes is aligned with the Long-Term Issuer Default Rating (IDR) of MUFG. MUFG's IDR is based upon its Viability Rating (VR) and reflects the banking group's strong and very sound domestic franchises, solid liquidity profiles in yen, sound asset quality and adequate capital positions, which Fitch expects will continue improving through consistent retained earnings. The ratings also consider MUFG's improved capital position that counters a rising appetite for risk outside Japan, although modest earnings and market risks still expose the group to volatility.

The senior unsecured notes issued by MUFG are intended to qualify as TLAC debt, as they will be subordinated to certain operational "excluded liabilities" (which in any case currently do not exist at MUFG) and structurally subordinated to the operating subsidiary banks' senior debt.

A resolution plan stipulating the resolution process in Japan has not yet been made public by the Financial Services Agency, but Fitch believes it is highly likely that Japan would adopt a Single Point of Entry approach, with MUFG being the groups' resolution entity. Fitch believes Japan's Deposit Insurance Law (DIL) provides the legislative framework to enable the resolution authority to bail-in senior debt (convert to equity or write-off the notes) and Specified Measure 2 (SM2) set forth in Article 126-2 of the DIL to be the mechanism by which an "orderly resolution" can be achieved.

Fitch's understanding is that losses to holders of these notes would only occur in the event that resolution by way of a court process (that is, winding up) was determined by the resolution authority under SM2, in which case MUFG would be insolvent (that is, net capital deficiency). In Fitch's view, it is difficult to assess today whether any losses incurred by noteholders at that point would be significantly different from other general senior debt (if issued).

RATING SENSITIVITIES
The rating of the senior unsecured notes issued by MUFG would be directly affected by a change in MUFG's IDRs, which would stem from a downgrade of its VR. However, the ratings of the senior unsecured notes would also be then underpinned by its 'A-' Support Rating Floor.

Negative action could stem from an unexpected change in the regulatory framework that clearly and materially increases the loss severity of the notes relative to other senior unsecured debt.