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Fitch Downgrades Carige's VR to 'c'; Maintains 'B-' IDR on Rating Watch Negative
October 6, 2017 / 3:53 PM / in 2 months

Fitch Downgrades Carige's VR to 'c'; Maintains 'B-' IDR on Rating Watch Negative

(The following statement was released by the rating agency) LONDON/MILAN, October 06 (Fitch) Fitch Ratings has downgraded Banca Carige's Viability Rating (VR) to 'c' from 'cc' and maintained the bank's 'B-' Long-Term Issuer Default Rating (IDR) on Rating Watch Negative (RWN). A full list of rating actions is at the end of this rating action commentary. The downgrade of the VR reflects Fitch's view that failure of the bank under Fitch's definitions is inevitable because the proposed conversion of subordinated debt would be considered a distressed debt exchange (DDE) under our criteria. The subordinated debt conversion will represent a DDE because it will result in a material reduction in terms and Fitch believes them to be necessary to avoid resolution or liquidation. Following a change in senior management this year, Carige recently approved a revised restructuring plan. This includes capital strengthening initiatives consisting of an offer to bondholders to convert, at a discount, EUR510 million subordinated and junior notes into newly issued senior debt, a EUR560 million capital increase (of which EUR60 million in the form of a debt-to-equity swap offered to the converted subordinated and junior bondholders) and the gains from the sale of certain assets and activities identified by management as non-core. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT Carige's VR reflects our view that failure of the bank as defined under our criteria is inevitable because it requires an extraordinary injection of capital to meet the gross non-performing loan and coverage targets required by the ECB and remain viable. The capital increase should enable Carige to dispose of EUR1.4 billion gross doubtful loans. The bank has already securitised EUR940 million doubtful loans this year. The VR also reflects that as part of its plans the bank intends to convert part of its outstanding junior and subordinated debt held by institutional investors (for a nominal value of EUR510 million) into newly issued senior notes. Fitch considers that the debt conversion of the subordinated and junior notes, at 70% and 30% of their nominal value, respectively, represents a material reduction in terms and that the conversion is necessary to avoid resolution or liquidation. The conversion therefore will be treated as a DDE under our criteria. Carige's VR also reflects its weak asset quality, with gross impaired loans at a high 33.7% of gross loans at end-1H17, the bank's loss-making business model, a funding franchise that in our opinion remains vulnerable to creditors' sentiment and a liquidity profile that is weaker than most rated Italian peers. Carige's Long-Term IDR is rated three notches above the VR to reflect Fitch's view that the probability that senior creditors will have to bear losses is lower than the probability of the bank's failure. This is primarily because Fitch expects that the bank will receive capital through a new share issue and the conversion of its junior and subordinated debt. If the bank raises capital successfully, senior creditors will not suffer losses. The bank's core shareholders, which own about 30% of its share capital, have expressed their willingness to participate in the capital increase as have some of the subordinated and junior bondholders in adhering to the proposed exchange. The RWN reflects Fitch's view that failure to complete the capital strengthening will increase the risk of losses being imposed on senior creditors, for example in a liquidation or a resolution, and could lead to a downgrade of the Long-Term IDR and senior debt ratings. Carige's senior unsecured bonds are rated in line with the bank's IDRs. The Recovery Rating of '4' (RR4) reflects Fitch's expectation of average recovery prospects in the event of a default of these instruments. The Short-Term IDR is on RWN because it is mapped from the Long-Term IDR. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating and Support Rating Floor reflect Fitch's view that although external support is possible it cannot be relied upon. Senior creditors can no longer expect to receive full extraordinary support from the sovereign in the event that the bank becomes non-viable. The EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for the resolution of banks that requires senior creditors to participate in losses, if necessary, instead of, or ahead of, a bank receiving sovereign support. SUBORDINATED DEBT The rated Tier 1 note (XS0372143296), which is offered 30% of its nominal value in newly issued senior notes in the proposed exchange, has a 'RR5' recovery rating, which is in line with our expectation of recoveries in the range of 11% to 30% for bondholders. We downgraded the note's long-term rating to 'C' in line with our criteria for rating non-performing hybrid obligations. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT Fitch expects to downgrade Carige's VR to 'f' after fresh capital has been raised through the new share issue and the debt conversion, before upgrading the VR to a level commensurate with the bank's subsequent risk profile and capitalisation. If the capital strengthening is completed successfully, the bank's still weak capitalisation in relation to its risks and asset quality, its unprofitable business model and franchise, and its limited earnings potential are likely to constrain its VR at 'b-' following the completion of the transactions. We would also downgrade the VR in the event of a regulatory action if the planned transactions fail. However, we consider this less probable at this stage. Fitch expects to resolve the RWN on the Long-Term IDR when Carige's capital increase and debt conversion are completed and when more details on the disposal of non-core assets has become available. Following the resolution of the RWN, Fitch expects the Long-Term IDR to be rated at the same level as the VR. The resolution of the RWN could take longer than the typical six months if the bank's plans and regulatory authorisations are delayed. If the bank fails to complete the capital increase and debt conversion, then Fitch believes there would be a heightened probability of liquidation or other resolution action. In this scenario, the Long-Term IDR and senior debt ratings would be downgraded to a level commensurate with our view of heightened risk of senior creditors bearing losses. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of the Support Rating and any upward revision of the Support Rating Floor would be contingent on a positive change in the sovereign's propensity to support Carige. While not impossible, this is highly unlikely, in Fitch's view. SUBORDINATED DEBT The ratings of notes exchanged in the voluntary conversion would be withdrawn shortly after the completion of the transaction, as the securities are extinguished in the exchange. The rating actions are as follows: Long-Term IDR: 'B-', maintained on RWN Short-Term IDR: 'B', maintained on RWN Viability Rating: downgraded to 'c' from 'cc' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured notes (including EMTN): Long-term rating of 'B-'/'RR4' maintained on RWN, Short-term rating of 'B' maintained on RWN Subordinated notes (XS0372143296): downgraded to 'C'/'RR5' from 'CC'/'RR5'. Contact: Primary Analyst Francesca Vasciminno Senior Director +39 02 879 087 225 Fitch Italia S.p.A. Via Privata Maria Teresa 8 20123 Milan Secondary Analyst Manuela Banfi Associate Director +39 02 879 087 202 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Stefano Bravi, Milan, Tel: +39 02 879 087 281, Email: stefano.bravi@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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