RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has assigned an expected long-term rating of 'BB+(EXP)' to Caixa Economica Federal's (Caixa) proposed subordinate securities. The expected ratings are two notches below Caixa's long-term Issuer Default Rating (IDR) of 'BBB'. The final rating is contingent upon the receipt of final documents conforming to the information already received.
The proposed subordinate notes will have a maturity of 10 years, and can be called by Caixa after five years, subject to the prior approval of the Central Bank of Brazil. They are unsecured, subordinated to senior debt and rank senior to Common Equity Tier 1 (CET1) and Additional Tier 1 (AT1) capital. Coupons are not deferrable. They have a full and permanent write-down feature, which will be triggered if Caixa's CET1 capital falls below 4.5% of RWA or if the Central Bank determines that the notes should be written-off.
Caixa expects to qualify these securities as Tier 2 (T2) capital in accordance with Resolution 4192, subject to the Central Bank of Brazil's approval.
Under the proposed terms, these subordinate notes will not receive any equity credit from Fitch for the purposes of assessing capital adequacy.
KEY RATING DRIVERS
The expected rating of the subordinate notes is two notches below Caixa's long-term foreign currency Issuer Default Rating (IDR) 'BBB'. The notching is driven by the expected high loss severity of the notes. No notching for nonperformance is applied, because coupons are not deferrable and the write-down trigger is close to the point of non-viability. As a result, Fitch believes that the nonperformance risk is not material from the rating perspective. In addition, as Caixa is a fully government owned domestic systemically important bank, it would likely receive owner (i.e. government) support before the loss absorption features of the notes are triggered. This also explains why the anchor rating for the notes' rating is Caixa's IDR.
Caixa's long-term foreign and local currency IDRs are equal to Brazil's sovereign rating and driven by support from the federal government. They reflect full ownership by the federal government, its systemic importance, and the role it plays in the implementation of government economic programs. Fitch believes the probability of support by the government would be high should it be required.
Fitch's base case projections do not take into consideration any potential change in government support nor a potentially negative decision by the Brazilian Supreme Court regarding the constitutionality of the monetary correction indices applied to certain savings deposits in the past decades. An unfavorable decision would likely pressure Caixa's capital and, possibly, its liquidity, depending on the specifics of the ruling's outcome.
Caixa's IDR and issue ratings would be affected by potential changes in the sovereign ratings and/or its shareholder's willingness to provide support. As long as there is no change in the propensity of support, the rating of these subordinate notes will typically remain two notches below Caixa's long-term IDR.
Fitch currently rates Caixa as follows:
--Foreign and local currency long-term IDRs 'BBB', Outlook Stable;
--Foreign and local currency short-term IDRs 'F2';
--Support rating '2';
--Support rating floor 'BBB';
--National long-term rating 'AAA(bra)', Outlook Stable;
--National short-term rating 'F1+(bra)';
--Foreign currency long-term rating of senior unsecured USD notes maturing in 2017, 2018, 2019 and 2022 'BBB'.
Additional information available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);
--'Assessing and Rating Bank Subordinated and Hybrid Securities' (Jan. 31, 2014);
--'Fitch's Approach for Basel III Hybrids in Brazil' (Mar. 24, 2014);
--'Caixa Economica Federal: Improved Capital Alleviates Likely Pressure from Expected Credit Cost Rise' (May 21, 2014);
-- 'Fitch Affirms Banco do Brasil, Banco Votorantim and Caixa Economica Federal's IDRs' (July 3, 2014).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Assessing and Rating Bank Subordinated and Hybrid Securities Criteria
Fitch￢ﾀﾙs Approach for Basel III Hybrids in Brazil (Recent Regulatory Changes Lead to Wider Notching, but also to Some Equity Content)
Caixa Econￃﾴmica Federal (Improved Capital Alleviates Likely Pressure from Expected Credit Cost Rise)