RPT-Fitch Rates Krung Thai Bank's Basel III Tier 2 Notes Final 'BBB-'

Fri Jul 4, 2014 5:56am EDT

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July 4 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned Krung Thai Bank Public Company Limited's (KTB; BBB/Stable) USD700m 10.5 year Basel III-compliant Tier 2 subordinated notes a final rating of 'BBB-'. The notes are issued under the bank's USD2.5bn euro medium-term note (MTN) programme, and are issued out of KTB's Cayman Islands branch.

The rating action follows the completion of the subordinated notes issue, as well as the receipt of final documents that conform to information previously received. The final rating is the same as the expected rating assigned on 13 June 2014. The notes are the first publicly transacted US dollar-denominated Basel III-compliant Tier 2 subordinated notes out of Thailand.

KEY RATING DRIVERS

The rating is one notch below the anchor rating, which is KTB's Issuer Default Rating (IDR).

While Fitch's typical anchor rating for Basel III Tier 2 securities is the issuer's Viability Rating (which does not factor in any extraordinary government support), the IDR could be used if, in Fitch's view, there is an extremely strong likelihood of state action to prevent non-viability. In this case, if there is a need, Fitch expects there would be pre-emptive equity injections by the Thai government to maintain KTB as a going concern without triggering non-viability, and hence KTB's IDR would be the appropriate anchor.

KTB is 55% held by the Thai government's Financial Institutions Development Fund. It is the only state-owned commercial bank, with no prospects of any significant changes in the shareholding structure. KTB has close operational links with the Finance Ministry, and acts as the main payments and cash management provider to the government. The bank has also previously played a quasi-policy role, and although KTB has become increasingly commercial in its focus, we expect the bank to be called upon to perform policy functions in the future if necessary.

The Basel III Tier 2 notes are rated one notch below the anchor rating to reflect their higher loss-severity risk relative to senior unsecured instruments arising from their subordinated status. Key terms of the notes include a non-viability trigger (defined as emergency capital assistance from the central bank or other empowered government agency), with a partial rather than mandatory full write-down feature. Any write-down would not be worse than that experienced by Tier 1 loss absorbing instruments issued by KTB, and the write-down would be on a pari passu basis with other Tier 2 loss absorbing instruments of the issuer.

RATING SENSITIVITIES

Any change in KTB's IDR would have an impact on the rating of these notes. KTB's IDR is driven by its Support Rating Floor, and any material shift in the ability or propensity of the Thai government to support KTB would have an impact on the IDR. Any reduction in the strategic importance of KTB to the Thai authorities could also lead to a lower rating on the IDR and on the notes.

The other ratings of KTB are unaffected and are as follows:

Long-term IDR: 'BBB'; Outlook Stable

Short-term IDR: 'F3'

Viability Rating: 'bbb-'

Support Rating: '2'

Support Rating Floor: 'BBB'

National Long-Term Rating: 'AA+(tha)'; Outlook Stable

National Short-Term Rating: 'F1+(tha)'

Senior unsecured USD 2.5bn EMTN programme: 'BBB'

Long-term foreign currency senior unsecured notes: 'BBB'

International rating for hybrid Tier 1 securities: 'B'

National Rating on THB30bn short-term debenture programme: 'F1+(tha)'

National Long-Term Rating on subordinated debt: 'AA(tha)'

National Rating for hybrid Tier 1 securities: 'BBB(tha)'

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