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May 9 (The following statement was released by the rating agency)
Fitch Ratings has assigned Banco Bilbao Vizcaya Argentaria's (BBVA) USD1.5bn non-step-up non-cumulative perpetual tier 1 capital securities (preferred securities) with fully discretionary coupons and pre-set triggers for contingent conversion a final rating of 'BB-'.
The final rating is in line with the expected rating assigned on 29 April 2013 (see "Fitch Assigns BBVA's Tier 1 Capital Securities 'BB-(EXP)'" at www.fitchratings.com).
KEY RATING DRIVERS
The preferred securities are rated five notches below BBVA's 'bbb+' Viability Rating (VR), in accordance with Fitch's criteria for "Assessing and Rating Bank Subordinated and Hybrid Securities" dated 5 December 2012 at www.fitchratings.com.
The notes are notched twice for loss severity as recoveries are expected to be poor, because the preferred securities will rank junior to all liabilities, including subordinated debt and because of conversion into common equity on breach of one of the pre-set triggers. These triggers are set at a 5.125% common equity Tier 1 ratio at a consolidated and unconsolidated level, a 7% consolidated core Tier 1 (CT1) ratio as defined by the European Banking Authority (EBA) and a 7% capital principal (Spain's adaption of EBA CT1 ratio) ratio on a consolidated basis. At end-March 2013, BBVA's capital ratios were well in excess of these triggers.
To reflect the incremental non-performance risk of the notes relative to the risk incorporated by the VR, the notes are notched three times given the instrument's fully discretionary coupon payment, which is deemed to be the most easily activated form of loss absorption.
Fitch has assigned 100% equity credit to the securities, given that they are permanent, subordinated to all senior creditors and senior to common equity and mandatory convertible bonds, and have full coupon flexibility and the ability to be converted into common equity well before the bank would become non-viable.
The agency considers that the 7% EBA CT1 and capital principal triggers would be breached well before the bank became non-viable. Should these ratios be subject to change and triggers lowered because of a change in applicable banking regulations, Fitch will review the level of equity credit assigned, which could fall to 50%.
As the notes are notched off BBVA's VR, their rating is primarily sensitive to any change in that rating. The rating sensitivities of the bank's VR include a potential downgrade of the sovereign or a marked deterioration of asset quality and/or profitability as a result of a sustained tough operating environment in Spain. BBVA's vulnerability to weaknesses in the Spanish market are somewhat mitigated by its international diversification, supporting a VR that is one notch above the sovereign Long-term IDR, but at the same time it is not immune to developments in Spain.