12/4/2018/Fitch Ratings
Fitch Ratings has assigned Barclays Africa Group Limited’s (BAGL: BB+/Stable/bb+) planned issue of USD denominated Basel III-compliant Tier 2 capital notes an expected rating of ‘BB(EXP)’.
The final rating is subject to the receipt of final documentation conforming to information already received by Fitch.
The notes qualify as Basel III-compliant Tier 2 instruments and contain contractual loss absorption features, which will be triggered at the point of non-viability of the issuer. According to the draft terms, the notes are subject to permanent partial or full write-down upon the occurrence of a non-viability event (NVE), as determined by the South African regulator. There are no equity conversion provisions in the terms. The notes have an expected 10-year maturity and a call option after five years.
KEY RATING DRIVERS
The notes are rated one notch below BAGL’s Viability Rating (VR) of ‘bb+’. The notching includes zero notches for incremental non-performance risk relative to the VR and one notch for loss severity. Fitch has applied zero notches for incremental non-performance risk, given that write-down of the notes will only occur at the point of non-viability and there is no coupon flexibility. The one notch for loss severity reflects Fitch’s view of below-average recovery prospects for the notes relative to senior creditors in the case of a NVE.
RATING SENSITIVITIES
As the notes are notched down from BAGL’s VR, their rating is primarily sensitive to a change in the VR. BAGL’s ratings are aligned with that of its main operating subsidiary, Absa Bank Limited. BAGL’s VR could move below that of Absa in the event that exposure to lower or unrated markets in sub-Saharan Africa increases significantly. In addition, a noticeable increase in double leverage at BAGL could also result in the VR being notched down from Absa.
The notes’ rating is also sensitive to a change in notching due to a revision in Fitch’s assessment of the probability of the notes’ non-performance risk relative to the risk captured in BAGL’s VR, or in its assessment of loss severity in case of non-performance.