Fitch Rates Coventry's Perpetual Contingent Convertible Securities 'BB+(EXP)'

Tue Jun 17, 2014 1:02pm EDT

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(The following statement was released by the rating agency) LONDON, June 17 (Fitch) Fitch Ratings has assigned Coventry Building Society's (A/Stable/F1/a) upcoming issue of perpetual subordinated contingent convertible securities an expected rating of 'BB+(EXP)'. The assignment of the final rating is contingent on receipt of final documentation confirming to information already received. KEY RATING DRIVERS The notes are additional Tier 1 (AT1) instruments with fully discretionary interest payments and are subject to conversion into core capital deferred shares (CCDS) on breach of a 7% CRD IV common equity Tier 1 (CET1) ratio. Although Coventry does not yet have any CCDS in issuance, it has received members' approval to issue these at any time. The securities are notched five levels below Coventry's 'a' Viability Rating (VR), in accordance with Fitch's criteria for "Assessing and Rating Bank Subordinated and Hybrid Securities". The notes are notched twice for loss severity to reflect the conversion into CCDS on breach of the trigger, and three times for non-performance risk. The notching for non-performance risk reflects the instruments' fully discretionary interest payment, which Fitch considers the most easily activated form of loss absorption. The issuer will not make an interest payment if it has insufficient distributable items or if it is insolvent. The issuer will also be subject to restrictions on interest payments if it fails to meet the combined buffer capital requirements that will be gradually phased in from 2016. Coventry's fully loaded Basel III CET1 consolidated ratio on 1 January 2014 was 22.7%. This provides it with a buffer of around GBP590m for the 7% CET1 ratio trigger. However, as non-performance in the form of non-payment of interest could be triggered before reaching the 7% CET1 ratio trigger, this buffer could be reduced considerably. Fitch expects Coventry's capital ratios to strengthen further given its sound internal capital generation, increasing the headroom it will have over its regulatory minimum requirements. Fitch has assigned 100% equity credit to the securities. This reflects their full coupon flexibility, the ability to be converted into CCDS before the society becomes non-viable, their permanent nature and their subordination to all senior creditors. RATING SENSITIVITIES As the securities are notched down from Coventry's VR, their rating is mostly sensitive to any change in this rating. The securities' ratings are also sensitive to any change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in Coventry's VR. This could reflect a change in capital management or flexibility or an unexpected shift in regulatory buffers, for example. Contact: Primary Analyst Claudia Nelson Senior Director + 44 20 3530 1191 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Marc Ellsmore Analyst +44 20 3530 1438 Committee Chairperson Christian Scarafia Senior Director +44 203 530 1012 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1003, Email: Elaine.Bailey@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available at www.fitchratings.com Applicable criteria, "Global Financial Institutions Rating Criteria," dated 31 January 2014, is available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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