Norwegian Municipal Funding Agency Kommunalbanken#s Proposed Tier 1 Capital Notes Assigned Preliminary #A+# Rating

Stocks and Financial Services Press Releases Thursday May 18, 2017 17:35
STOCKHOLM--18 May--S&P Global Ratings

STOCKHOLM (S&P Global Ratings) May 18, 2017--S&P Global Ratings said today that it has assigned its preliminary 'A+' long-term issue rating to the proposed Norwegian krone (NOK) 1.2 billion (about $144 million) additional Tier 1 capital notes (AT1) to be issued by municipal funding agency KBN Kommunalbanken Norway (AAA/Stable/A-1+). We understand that the AT1 issuance will comply with the EU's latest Capital Requirements Directive (CRD IV), which implements Basel III in the EU.

We note that Kommunalbanken is not a member of the EU but that the Norwegian Financial Supervisory Authority (FSA) tends to mirror the same capital requirements. Furthermore, we note that the purpose of the hybrid bond issuance is to obtain a leverage ratio above 3% to meet the requirements of the Norwegian FSA as of June 30, 2017.

In addition, we understand that the notes will be subordinated to debt.

Our 'A+' rating reflects our analysis of the proposed instruments and our 'AAA' issuer credit rating (ICR) on Kommunalbanken (see "Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions," published Jan. 29, 2015, on RatingsDirect). The 'A+' issue rating is four notches below our long-term ICR on Kommunalbanken. We used the ICR as the starting point for notching because we see an extremely high likelihood of Kommunalbanken receiving extraordinary support from its owner, the Kingdom of Norway.

We derive this four-notch difference as follows:
One notch for subordination; Two notches for Tier 1 regulatory capital status; and One notch because the instruments allow for a full or partial temporary write-down.

The terms and conditions of the notes specify a mandatory write-down of the notes if the common equity Tier 1 ratio--at the company level or on a consolidated basis--falls below a 5.125% trigger level. We consider such a low level to be a "nonviability" trigger.

In addition to the write-down trigger, there is a risk of coupon nonpayment if capital levels were to fall within the regulatory capital conservation buffer.

The proposed instruments meet the conditions for intermediate equity content under our criteria as they are perpetual, with a call date expected to be approximately 10 years from issuance. The instruments do not contain a coupon step-up and have loss-absorption features on a going-concern basis because the bank has the flexibility to suspend the coupon at any time.

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