OREANDA-NEWS. Fitch Ratings has assigned The Royal Bank of Scotland Group plc's (RBSG, BBB+/Stable/F2/bbb+) forthcoming issue of USD-denominated perpetual subordinated contingent convertible capital notes (CCCN) an expected rating of 'BB-(EXP)'.

The final rating is subject to Fitch receiving final documentation conforming to information already received.

KEY RATING DRIVERS

The CCCN are expected to qualify as additional Tier 1 (AT1) instruments with fully discretionary interest payments and are subject to conversion into RBSG's ordinary shares on breach of a consolidated 7% CRD IV common equity Tier 1 (CET1) ratio, which is calculated on a fully loaded basis.

The rating of the securities is five notches below RBSG's 'bbb+' Viability Rating (VR), in line with Fitch's criteria, for assigning ratings to hybrid instruments. The securities are notched twice for loss severity to reflect the conversion into common shares on a breach of the 7% fully loaded CET1 ratio trigger, and three times for incremental non-performance risk relative to the VR.

The notching for non-performance risk reflects the instruments' fully discretionary coupons, which Fitch views as the most easily activated form of loss absorption. Under the terms of the securities, the issuer will be subject to restrictions on interest payments if it has insufficient distributable items (RBSG's distributable reserves stood at GBP14.6bn at 30 June 2016), is insolvent or fails to meet the combined buffer capital requirements that are being gradually introduced from 2016. Potential other factors are a breach of the minimum regulatory leverage ratio.

RBSG's fully loaded Basel III CET1 ratio at 30 June 2016 was 14.5%, providing it with a buffer in excess of GBP18bn for the 7% CET1 ratio trigger, although non-performance in the form of non-payment of interest would likely be triggered before reaching the 7% trigger, most likely by breaching the bank's regulatory requirements. RBSG's indicative minimum CET1 requirement applicable from 1 January 2019 is 10.8%, made up of 4.5% CET1 requirement under Pillar 1, 2.8% under Pillar 2A, a capital conservation buffer of 2.5% and a 1% G-SIB buffer.

RATING SENSITIVITIES

The CCCN's rating is primarily sensitive to changes in RBSG's VR. The securities' rating is also sensitive to a 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 the VR. This may reflect a change in Fitch's assessment of capital management at RBSG, reducing the holding company's flexibility to service the securities or an unexpected shift in regulatory buffer requirements, for example.

For more details on RBSG's ratings and credit profile, see the rating action commentary, Fitch Affirms Royal Bank of Scotland Group at BBB+; Outlook Stable, dated 6 May 2016.