RPT- Fitch Rates Indonesia's First Basel III Tier 2 Bonds from UOBI

Thu Apr 17, 2014 3:43am EDT

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April 17 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned PT Bank UOB Indonesia's (UOBI; AAA(idn)/Stable) Basel III-compliant Tier 2 subordinated debt issue - the first such issue in Indonesia - a National Long-Term rating of 'AA(idn)'.

Proceeds from the issue, which will be up to IDR1trn (USD88m) in size and have with a maturity of up to seven years, will be used to support the company's business growth.

'AA' National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherent differs only slightly from that of the country's highest rated issuers or obligations.

KEY RATING DRIVERS

UOBI's Basel III Tier 2 debt will be the first issue after Indonesian regulators issued capital requirements based on the Basel III Framework in December 2013.

Under the new framework, Tier 2 debt instruments issued by banks incorporate terms that allow the debt to be converted to equity or written down (either of the principal in full or in part and/or of the interest in full or in part) when the banks approach the point of non-viability. The new Basel III Tier 2 instruments will still have cumulative deferral features, which already exist in legacy Tier 2 securities. These features allow issuers to defer coupons or principal payments if their capital positions fall below minimum regulatory requirements.

In Fitch's view, new Basel III Tier 2 debt capital instruments do not have material incremental risk, particularly in terms of loss severity, compared with legacy Tier 2 securities because the equity conversion and write-down features will not be easily triggered and Tier 1 instruments are expected to absorb losses before Tier 2 ones.

Fitch rated legacy Tier 2 debt one notch down from the issuer's anchor rating for loss severity, and the agency will do the same for the new Basel III Tier 2 instruments. Legacy Tier 2 debt capital instruments were rated two notches down from the issuer's anchor rating for non-performance risk, mainly to account for the deferral features. With deferral of payments likely to be triggered before the equity conversion and write-down features, Fitch will continue the same notching for Basel III Tier 2 instruments. For foreign-owned banks with institutional support from their parents, the rating on their Basel III Tier 2 instruments will be notched twice from the subsidiary's anchor ratings - once for loss severity and once for non-performance risk as the non-performance risk is partly neutralised by potential parental support, according to Fitch criteria.

Therefore, UOBI's proposed Basel III Tier 2 debt is rated two notches down from its National Long-Term Rating - one notch for loss severity (reflecting the equity conversion and write-down features) and one for non-performance risk (reflecting their subordinated status and coupon and/or principal deferral risk). The notes will represent direct, subordinated and unsecured obligations of UOBI and rank equally with all its other unsecured and subordinated obligations.

UOBI's rating reflects Fitch's view of a high likelihood of timely support from its higher-rated parent, Singapore-based United Overseas Bank Limited (UOB, AA-/Stable), in time of need. This view is based on UOBI's strategic importance to UOB's regional business expansion in south-east Asia, 99% ownership, name association, and operation alignment in most key areas.

RATING SENSITIVITIES

Any changes in UOBI's National ratings would affect the issue ratings. There is no rating upside for UOBI's National Ratings as it is already at the top of the scale.

Downward rating pressure may arise from any developments leading to a weakening of perceived support from UOB, such as major changes to ownership or a significant weakening in the parent's financial ability, although Fitch believes this to be a remote prospect in the near- to medium-term. Deterioration in UOBI's standalone financial profile is unlikely to impact its National Rating unless the factors underpinning the parent's support also weaken.

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