The FINANCIAL – Fitch Ratings has assigned Bank of Georgia's (BOG) upcoming issue of USD-denominated perpetual additional Tier 1 (AT1) notes an expected long-term rating of 'B-(EXP)'. The final rating is contingent upon receipt of final documents conforming to information already received.
The notes should qualify as AT1 capital in regulatory accounts due to a full coupon omission option at BOG's discretion and full or partial write-down in case of either BOG's core equity Tier 1 (CET1) ratio falling below 5.125% (versus 4.5% regulatory minimum, excluding buffers) or due to regulatory interventions by the National Bank of Georgia (NBG). Fitch believes the latter is only possible if BOG breaches minimum regulatory capital or liquidity requirements, or local regulation in any other form. This is currently not expected by Fitch, given a Positive Outlook on BOG's 'BB-' Long-Term Issuer Default Ratings (IDRs).
The expected rating assigned to BOG's forthcoming perpetual AT1 notes is three notches lower than the bank's 'bb-' Viability Rating (VR). According to our Bank Rating Criteria (Criteria), this is the highest possible rating that can be assigned to deeply subordinated notes with fully discretionary coupon omission issued by banks with a VR anchor of 'bb-'. The notching comprises:
- Two notches for higher loss severity relative to senior unsecured creditors due to a write-down trigger (CET1 ratio of 5.125%), meaning that AT1 notes may start to absorb losses before BOG breaches its 4.5% minimum Core Tier 1 capital ratio (excluding buffers).
- One notch for non-performance risk, as BOG has an option to cancel the coupon payments at its discretion. This is more likely if combined Pillar 1 and Pillar 2 capital ratios fall below the combined buffer requirements established by the regulator. This risk is somewhat mitigated by BOG's reasonable internal capital generation capacity and the bank's intention to build up its combined capital ratios to about 200bp over the minimum required levels.
The notes will have no established redemption date. However, BOG will have an option to repay the notes after the first coupon reset date (in 2024) subject to NBG's approval.
BOG's regulatory Core Tier 1 and Tier 1 ratios were both 12.2% at end-2018. The required statutory minimums for BOG, including capital conservation buffer (2.5%), systemic importance buffer (1%) and several Pillar 2 buffers, were 9.4% and 11.4%, respectively. The countercyclical buffer also applies, but is currently set at 0%. BOG's regulatory total capital ratio was 16.6% at end-2018 vs. a 15.9% minimum requirement, including buffers.
Fitch may widen the rating notching if non-performance risk increases. For example, this could arise from BOG failing to maintain reasonable headroom over the minimum capital adequacy ratios (including the buffers) or from the instrument becoming non-performing, i.e. if the bank cancels any coupon payment or at least partially writes off the principal. In that case, the issue will be downgraded based on Fitch's expectations about the form and duration of non-performance.
Upside for the notes is limited as per Fitch's criteria the minimum notching of deeply subordinated instruments will increase up to four notches, should the VR be upgraded to 'bb' from 'bb-'.