Fitch rates ADCB’S GMTN programme
Tier 2 notes rated ‘A(EXP)’
LIMASSOL, Feb 25, (RTRS): Fitch Ratings has assigned Abu Dhabi Commercial Bank’s (ADCB) updated $7.5bn GMTN programme an expected rating of ‘A+ (EXP)’ for the senior notes. Fitch has also assigned an expected rating of ‘A(EXP)’ to the bank’s planned subordinated debt (Tier 2 notes) issuance. The subordinated notes, issued by ADCB Finance (Cayman) Limited, and guaranteed on a subordinated basis by ADCB, have a 10-year maturity. The final ratings are contingent upon the receipt of final documents conforming to information already received.
In the case of the senior notes issued under the programme, ADCB’s obligations under the guarantee will be a direct, unconditional, unsubordinated and unsecured obligation of the bank and will rank pari passu and equally with its other unsecured obligations (other than subordinated obligations, if any).
The subordinated notes have no coupon flexibility and no contractual ‘point of non-viability’ loss absorption features. The issue documentation includes neither substitution/variation language nor any references to the potential implementation of statutory bail-in laws in the UAE. They qualify as Tier 2 regulatory capital (Basel II) under current Central Bank of UAE (CBUAE) regulations, but are not expected to be Basel III compliant. They will be unconditionally and irrevocably guaranteed by ADCB on a subordinated basis.
According to the draft transaction documents, Fitch understands that the issuer has the option to redeem the subordinated notes (subject to prior CBUAE approval) in full if these are no longer recognised as regulatory Tier 2 capital such as in the case of a change in applicable CBUAE regulations.
Rating Rationale — GMTN Programme and Subordinated Notes
Fitch has rated the GMTN programme for Senior debt in line with ADCB’s Long-term Issuer Default Rating (IDR) of ‘A+’.
The subordinated notes are rated one notch below ADCB’s IDR (of ‘A+’), rather than the typical notching from the Viability Rating (VR), as allowed in Fitch’s criteria for “Assessing and Rating Bank Subordinated and Hybrid Securities” for issuers in highly supportive jurisdictions, such as the UAE. The notching down from the IDR reflects Fitch’s view that sovereign support is likely to extend to subordinated debt instruments as well as senior obligations, if needed.
Fitch has notched the subordinated notes down once from the IDR to reflect above average loss severity relative to senior debt. As the notes do not have any going concern loss absorption (e.g. interest deferral) features, no additional notches for incremental non-performance risk have been applied. Fitch has, therefore, assigned the notes an expected rating of ‘A(EXP)’.
ADCB’s Long-term IDR is driven by the extremely high probability of support from the Abu Dhabi and UAE federal authorities, reflecting the bank’s systemic importance, a strong track-record of support by the local authorities and the bank’s high degree of government ownership (the Abu Dhabi government indirectly holds a 62% stake).
Rating Sensitivities — GMTN Programme and Subordinated Notes
The senior debt programme ratings are sensitive to a change in ADCB’s IDR, which could be driven by a change in Fitch’s assessment of the ability or propensity of the Abu Dhabi and UAE federal authorities to support the bank.
The subordinated notes are also sensitive to a change in ADCB’s IDR. They are also particularly vulnerable to anything that might cause Fitch to change its assumption that extraordinary sovereign support will extend to subordinated debt. In such an event, the anchor rating for notching purposes would become the bank’s VR, rather than its IDR. At the bank’s current VR of ‘bb+’, this would trigger a multiple notch downgrade of the notes to a non-investment grade level.
In that regard, although the subordinated notes are not expected to be Basel III compliant, Fitch recognises that Basel III is likely to be implemented in the UAE during the term of the notes. In such an event, Fitch’s base case is that the notes would be called. If, however, the notes are subsequently subject to some form of statutory loss absorption e.g. ‘bail-in’ in a resolution regime, and the issuer does not/cannot redeem the notes under the ‘Regulatory Redemption Event’ clause, then the notes would be likely to suffer such a multiple notch downgrade.
ADCB has released early price guidance for a two-tranche bond offering last week. Guidance for a benchmark-sized 5-year senior unsecured bond was issued at 180 basis points over midswaps, while early price talk for a benchmark 10-year subordinated Tier 2 issue was released in the high 200 bps over midswaps area
The capital’s second-biggest lender said last month it would recommend a 25 per cent cash dividend, an increase of 5 percentage points since last year.
A share buy-back programme approved by the Central Bank last month has come into force, with ADCB buying 1.1 million shares so far this month. The bank has approval to buy back 10 per cent of its share capital, which could give the shares a long way to travel yet.