Fitch Expects to Rate Caixa's Proposed Subordinate Notes 'BB+'
RIO DE JANEIRO -- July 8, 2014
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
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
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,
--'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)
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