Fitch Rates AIB's Upcoming Perpetual AT1 Notes 'B-(EXP)'
(AT1) notes an expected rating of 'B-(EXP)'.
The assignment of the final rating is contingent on receipt of final documentation confirming to information already received.
KEY RATING DRIVERS
The proposed notes are CRD IV-compliant perpetual non-cumulative resettable AT1 instruments with fully discretionary interest payments and are subject to write-down if AIB's Basel III common equity Tier 1 (CET1) ratio falls below 7%. The trigger ratio is calculated on a 'phased-in' basis under the EU capital requirement regulations (CRR).
The rating is four notches below AIB's 'bb' Viability Rating (VR), the maximum rating under Fitch's Global Bank Rating Criteria that can be assigned to deeply subordinated notes with fully discretionary coupon omission issued by banks with a VR anchor of 'bb'.
The notching reflects the notes' higher loss severity relative to senior unsecured creditors (two notches) and higher non-performance risk (two notches) given the fully discretionary coupon payments. Fitch considers the latter to be the most easily activated form of loss absorption.
AIB's transitional CET1 ratio, which includes the bank's government-held preference shares (EUR3.5bn), was 18.2% at end-3Q15, well above the trigger point of 7%. We expect the phased-in CET1 ratio to fall to 15% by end-2015 following a capital reorganisation announced by AIB on 6 November 2015. The capital reorganisation plan has received regulatory approval and is aimed at simplifying its capital stack. It includes the issuance of at least EUR500m AT1 securities and the partial conversion of its government-held preference shares (EUR1.8bn) into ordinary bank shares. The bank will redeem its convertible securities (EUR1.6bn) as they mature in July 2016 and also repay the balance of preference shares still outstanding (EUR1.7bn). The capital reorganisation also includes the EUR750 Tier 2 capital notes issued on 18 November 2015.
We understand from management that the expected 15% transitional CET1 ratio remains well above the bank's combined buffer requirement (SREP) and that the bank plans to maintain a buffer above its requirement to avoid any regulatory restriction on the payment of AT1 distributions if its SREP is breached.
At end-1H15, the amount available to AIB for distribution to AT1 holders amounted to more than EUR5bn, although we expect this to reduce by EUR1.7bn upon redemption of the preference shares. Nonetheless, the bank forecasts restoring this fairly swiftly to ensure it has sufficient amounts to honour interest payments on the notes at all times.
Fitch expects to assign 100% equity credit to the securities. This reflects their full coupon flexibility, the ability to be converted into ordinary shares before the bank becomes non-viable, their permanent nature and their subordination to all senior creditors.
RATING SENSITIVITIES
As the securities are notched down from AIB's VR, their rating is mostly sensitive to any change in this rating. The Positive Outlook on AIB's Long-term IDR reflects Fitch's view that as improvements in the bank's capital profile and deleveraging of problematic assets continue to feed through to its credit profile, the VR and the IDR may be upgraded.
However, if any of Fitch's expectations are not met, or if macroeconomic conditions reverse and cause further weakening of asset quality to the extent that impairment charges would compromise the bank's profitability and therefore capital flexibility, this would be negative for the rating.
The securities' ratings are also sensitive to a change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance or loss-severity relative to the risk captured in AIB's VR. This could reflect a change in capital management or flexibility or an unexpected shift in regulatory buffers, for example. The notching would also likely increase to five notches if AIB's VR anchor rating is upgraded to at least 'bbb-', in line with Fitch's criteria.
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