RPT-Fitch Downgrades ICBC Asia's Basel III-Compliant Tier 2 Notes to 'BBB+'

Wed Jul 10, 2013 4:18am EDT

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July 10 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has downgraded Industrial and Commercial Bank of China (Asia) Ltd's (ICBC Asia) RMB1.5bn Basel III-compliant Tier 2 subordinated notes to 'BBB+' from 'A-'.

The rating downgrade reflects Fitch's reassessment of the notes' recovery prospects stipulated in their and other Basel III instruments' write-down clauses.

Key Rating Drivers

Fitch has decided to widen the notching from ICBC Asia's 'A' Issuer Default Rating (IDR) from one to two levels for loss severity given the automatic, complete and permanent write-down feature as well as the clearly-defined role of these instruments in a bank resolution.

At the point of non-viability, holders of the Basel III bond could suffer a full loss, even if ICBC Asia were to return to financial health, while legacy bondholders could continue to receive coupon and principal payment. Fitch's previous assessment had focused on bankruptcy on the anticipation that the Chinese authorities, being the majority owners of ICBC Asia's 100% parent Industrial & Commercial Bank of China (ICBC, A/Stable), will not allow ICBC Asia to become non-viable. While Fitch continues to believe this to be true, should the point of non-viability be triggered the potential for loss is greater than for the legacy instruments.

Fitch continues to use the bank's IDR as an anchor rating, which reflects the agency's view that parental support for the notes will be strong. Notching for non-performance risk remains unchanged in Fitch's analysis of Basel III debt instruments.

ICBC Asia's Basel-III compliant Tier 2 subordinated notes carry a 6% fixed coupon throughout their 10-year tenor. They will be callable by ICBC Asia after five years and represent direct, unsecured, and subordinated obligations of ICBC Asia. The notes include a non-viability trigger event for capital recognition under the Banking (Capital) Rules of Hong Kong.

Rating Sensitivities

Any changes to ICBC Asia's Long-Term IDR would impact the issue's rating; ICBC Asia's IDRs are sensitive to any changes in ICBC's IDRs or its propensity to extend extraordinary support.

The other ratings of ICBC Asia are unaffected and are as follows:

Long-Term IDR: 'A'; Outlook Stable

Short-Term IDR and commercial paper: 'F1'

Support Rating: '1'

Subordinated notes without non-viability clauses: 'A-'

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