December 18, 2012 / 3:26 PM / 5 years ago

TEXT - Fitch raises UBS AG lower trigger tier 2 notes

(The following statement was released by the rating agency)

Dec 18 - Fitch Ratings has upgraded UBS AG’s (UBS) low-trigger Tier 2 subordinated notes issued through its Jersey (USD2bn; XS0747231362) and Stamford (USD2bn; US90261AAB89) branches to ‘BBB’ from ‘BBB-'. The ratings remain on Rating Watch Positive (RWP) and mirror the RWP on UBS’s Viability Rating (VR). The upgrade reflects a revision of Fitch’s subordinated and hybrid securities rating criteria (see ‘Assessing and Rating Bank Subordinated and Hybrid Securities’, dated 5 December 2012) and is not linked to UBS’s standalone credit profile. UBS is rated Long-term Issuer Default Rating (IDR) ‘A’ with a Stable Outlook, Short-term IDR ‘F1’, VR ‘a-’ on RWP, Support Rating ‘1’ and Support Rating Floor ‘A’. Following the upgrade, the notes are notched down twice from UBS’s ‘a-’ VR to reflect Fitch’s view of high loss severity due to the notes contractual write-down language. The notes will be written down to zero and cancelled upon the occurrence of either a viability event (defined as regulatory intervention or the receipt of extraordinary public sector support) or a trigger event. The capital ratio trigger is defined as 5% of the relevant adjusted core capital or common equity Tier 1 ratio including any converted high trigger instruments. Under Fitch’s revised criteria, Fitch can add between zero and two notches to the rating of Tier 2 contingent capital with a pre-determined capital ratio trigger for incremental non-performance risk relative to the issuer’s VR. According to Fitch’s criteria, the number of additional notches for incremental non-performance risk depends on various factors such as the volatility of the bank’s earnings, the bank’s flexibility in managing risk-weighted assets, the projected capital cushion above the pre-determined trigger and the presence of other capital instruments with higher conversion triggers. For UBS’s Tier 2 contingent capital instruments, Fitch has decided not to add additional notches for incremental non-performance risk, mainly for the following reasons: i) given UBS’s regulatory capital requirements (common equity Tier 1 (CET1) ratio of 10%), the 5% CET1 ratio trigger makes the instrument virtually indistinguishable from “gone concern” capital and thus does give rise to minimal incremental non-performance risk; ii) UBS’s internal capital ratio target (CET1 ratio of 13%) should ensure a significant capital cushion above the pre-determined trigger; iii) UBS’s decision to significantly downscale its investment banking activities (see ‘Fitch Affirms UBS at ‘A’; Puts Viability Rating on Rating Watch Positive’, dated 1 November 2012) will in Fitch’s view likely lead to less volatile earnings, further reducing the risk that the trigger might be hit. RATING SENSITIVITIES The rating of the notes is linked to UBS’s VR and is primarily sensitive to a change in the bank’s VR. A rating action on UBS’s VR would be directly mirrored by a corresponding rating action of the notes’ rating. The notes qualify as low-trigger progressive capital component under Switzerland’s revised capital requirement framework for the country’s largest banks (“too big to fail”, TBTF legislation). As end-Q312, the notes added 1.2% to UBS’s total loss-absorbing capital ratio (CET1 capital plus contingent capital). Depending on its balance sheet size by end-2018, UBS will have to comply with a loss-absorbing capital ratio of between 17.5% and 19%. UBS does not intend to issue high-trigger contingent capital. (Caryn Trokie, New York Ratings Unit)

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