RPT-Fitch Rates Credit Suisse AG's Tier 2 Low-trigger Contingent Capital Instruments 'BBB+(EXP)'

Mon Jul 29, 2013 4:49am EDT

July 29 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned Credit Suisse AG's (A/Stable/F1/a) potential issue of Tier 2 capital notes an expected rating of 'BBB+(EXP)'.

KEY RATING DRIVERS

The notes are Tier 2 instruments with a 10-year maturity. The notes are subject to full and permanent write-down if the bank has been declared non-viable by the regulator or if it has received state aid to avoid a default. The notes will also be fully and permanently written down if the sum of Credit Suisse Group AG's consolidated Basel III common equity Tier 1 capital (CET1) ratio and the ratio of Credit Suisse Group's high-trigger contingent capital instrument to risk-weighted assets falls below 5%. The notes are structured to qualify as progressive component capital ("low-trigger" contingent capital instruments) under Switzerland's revised capital requirement framework for the country's largest banks.

The notes are rated two notches below Credit Suisse's Viability Rating (VR) in accordance with Fitch's criteria for "Assessing and Rating Bank Subordinated and Hybrid Securities" (dated 5 December 2012). The notching reflects the notes loss severity given the full and permanent write-down feature.

Fitch has not applied additional notching for incremental non-performance risk because the agency considers that the 5% trigger is virtually indistinguishable from the point of non-viability given Credit Suisse Group's minimum regulatory CET1 ratio requirements of 10% and the presence of an additional buffer of high-trigger contingent capital instruments that become loss absorbing on the breach of a 7% CET1 ratio trigger.

Credit Suisse Group AG maintains a sizeable buffer above the 5% trigger. The group reported a 15.3% Basel III CET1 ratio on 30 June 2013 based on capital and risk-weighted asset regulations in place at the time. Its 'look-through' CET1 ratio based on Basel III regulations as of 2019 at the same date was 9.3%. Given the absence of coupon deferral features and Fitch's view that loss absorption is unlikely to occur until the bank is close to reaching the point of non-viability, Fitch has assigned no equity credit to the securities.

RATING SENSITIVITIES

As the notes are notched from Credit Suisse's VR, their rating is primarily sensitive to any change in this rating. The notes' rating is also sensitive to any change in notching that could arise if Fitch changed its assessment of the probability of the notes' non-performance risk relative to the risk captured in Credit Suisse's VR. This might reflect a change in capital management or an unexpected shift in regulatory buffers, for example.

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