Moody's assigns Ba2(hyb) rating to BIL's AT1 securities
Moody's Investors Service, has assigned a Ba2(hyb) rating to Banque Internationale a Luxembourg (BIL)'s additional Tier 1 (AT1) securities issued in June 2014 and listed on the Luxembourg Stock Exchange since 19 September 2017.
These perpetual non-cumulative AT1 securities rank junior to Tier 2 capital, pari passu with other outstanding deeply subordinated Tier 1 instruments and senior only to ordinary shares in BIL. Coupons may be cancelled in full or in part on a non-cumulative basis at the discretion of the issuer and/or the financial regulator, or mandatorily if the issuer exceeds the Distributable Items or if solvency requirements are not satisfied as a result of such coupon payments. The notes will convert into equity if BIL's Basel 3 Common Equity Tier 1 (CET1) ratio falls below 5.75 per cent. However, this trigger can be prompted at seven per cent at the bank's discretion.
The Ba2(hyb) rating assigned to BIL's AT1 securities is based on the likelihood of BIL's capital ratio reaching the conversion trigger, the probability of a bank-wide failure and loss severity, if either or both events occur. Moody's assesses these probabilities using an approach that is model-based, incorporating the bank's creditworthiness, reflected in its baa2 baseline credit assessment (BCA), its most recent CET1 level and other qualitative considerations, particularly with regard to how the firm may manage its CET1 level on a forward-looking basis. Moody's rates these notes to the lower of the model-based outcome and BIL's non-viability security rating, which also captures the risk of coupon suspension on a non-cumulative basis. This approach leads to a Ba2(hyb) rating for these instruments, three notches below BIL's baa2 BCA.
BIL's AT1 securities rating could be upgraded as a result of an upgrade of the bank's BCA. The latter could result from BIL's improved profitability and/or asset risk while maintaining its capital base, or if uncertainties stemming from the bank's recent acquisition by a new shareholder are reduced.
Conversely, AT1 securities rating could be downgraded as a result of a downgrade of BIL's BCA. This could result from an unexpected deterioration in its profitability or material losses caused, for instance, by widening sovereign spreads and/or a severe downturn in the Luxembourg macroeconomic environment. However, given the positive outlook currently assigned to BIL's long-term deposit, issuer and senior unsecured ratings, the likelihood of a downgrade is low.