Fitch Maintains Carige's 'CCC' IDR on Rating Watch Evolving
27 JUN 2019 10:19 AM ET
Fitch Ratings-Milan/London-27 June 2019: Fitch Ratings has maintained Banca Carige S.p.A. - Cassa di Risparmio di Genova e Imperia's (Carige) 'CCC' Long-Term Issuer Default Rating (IDR) on Rating Watch Evolving (RWE). Fitch has affirmed Carige's Viability Rating (VR) at 'f'. A full list of rating actions is at the end of this commentary.
Since we placed Carige's ratings on RWE in January 2019 the bank's temporary administrators have presented a new strategic plan, which encompasses raising fresh capital to comply with its overall capital requirement, reducing impaired loans and revamping its franchise. The success of the capital increase remains highly uncertain. The administrators' negotiations with potential third-party financial or industrial investors in the bank have not yet led to tangible results. However, the bank announced on 24 June 2019 a proposal from Apollo Global Management to support the bank. .
The maintained RWE reflects Fitch's opinion that Carige's senior creditors might either avoid or incur losses depending on how successful the bank is in completing the strategic plan. At this stage, alongside the capital intervention of third-party investors, possible alternative scenarios include a (private) capital increase by the Italian Deposit Guarantee Scheme (which on 24 June 2019 announced its firm intention to intervene in the solution of the bank's crisis, provided the Italian banking sector agrees to it), or a precautionary recapitalisation by the state. Should these fail, we believe that the bank is at risk of a regulatory action such as resolution or liquidation.
KEY RATING DRIVERS
IDRS, VR AND SENIOR DEBT
Carige's Long-Term IDR is above its VR because we believe that the probability of a default on the bank's senior obligations is less likely than what Fitch would consider a failure of the bank under its criteria. The Long-Term IDR reflects Fitch's view that the government's guarantee on the senior debt issued by Carige (with potential to issue additional EUR1 billion) has helped stabilise the bank's funding and liquidity profile. However, the latter remains at high risk without a solution to restore the bank's viability. In our view, senior creditors could still avoid losses if the bank manages to somehow raise equity (for example if some form of private sector intervention is organised) or if, in a liquidation scenario, its assets and liabilities are transferred to an acquiring group.
The RWE on the Long-Term IDR reflects Fitch's view that the rating could be upgraded or downgraded depending on developments.
Carige's 'f' VR reflects our view that the government's funding guarantee on EUR2 billion senior debt issued by the bank in January 2019 under the framework of a decree law and the additional available guarantees constitute extraordinary and bank-specific support on which the bank remains reliant from a liquidity standpoint. The VR also reflects our view that the bank's ability to generate new business is limited while it is under temporary administration, which makes it difficult for it to maintain its franchise and could further weaken its business model.
Carige does not meet the regulatory definition of a bank that is failing or likely to fail, but according to our criteria the government funding guarantee constitutes an external, bank-specific, provision of extraordinary support, which in our opinion was required by the bank to stabilise its liquidity. This circumstance meets Fitch's definition of a 'f' VR.
The business plan of the temporary administrators envisages a capital increase of EUR630 million, partly undertaken through the conversion or repayment of the outstanding EUR320 million Tier 2 notes. The capital raise would allow the bank to reach a total capital ratio of about 14% at end-2019 compared with an overall capital requirement of 13.75%.
Carige's asset quality also remains weak, with a gross impaired loans ratio of about 22% at end-2018. However, Societa per la Gestione di Attivita SpA (SGA; BBB-/Negative), the debt servicer fully-owned by the Italian state, has in place a binding offer to Carige to acquire a large portion of its gross impaired loans. If Carige accepts the offer, its gross impaired loan ratio could reduce dramatically.
Carige's senior unsecured debt rating is rated two notches below the Long-Term IDR based on an estimated Recovery Rating of 'RR6'. Poor recovery prospects for senior unsecured bond holders in a hypothetical liquidation are a consequence of the introduction of full depositor preference in Italy from 1 January 2019 and of the bank's liability structure, which relies heavily on customer deposits and secured or other forms of preferred funding.
Carige has an ESG Relevance Score of 4 for Governance due to the appointment of temporary administrators, which, in our opinion, has a positive impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
DEPOSIT RATING
Carige's Long-Term Deposit Rating is in line with the bank's Long-Term IDR. We do not grant any Deposit Rating uplift because in our opinion, current debt buffers are not sustainable over time given significant reliance on senior state-guaranteed debt with reasonably short maturities, the bank's weak standalone credit profile and very uncertain access to the unsecured debt market.
SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating and Support Rating Floor reflect Fitch's view that although external support from the government is being provided and further support is possible, this cannot be relied upon in the longer term. Senior creditors can no longer expect to receive full extraordinary support from the sovereign in the event that the bank is deemed to have become unviable, and external sovereign support in the form of a precautionary recapitalisation would not be available if the bank is not deemed solvent by the authorities. The EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for the resolution of banks that requires senior creditors to participate in losses, if necessary, instead of or ahead of a bank receiving sovereign support.
RATING SENSITIVITIES
IDRS, VR AND SENIOR DEBT
Carige's Long-Term IDR and senior debt ratings could be upgraded if the bank is acquired by a higher-rated entity.
The IDRs, VR and senior debt ratings could also be upgraded if the bank completes a capital increase, manages to strengthen its financial profile by reducing impaired loans and returns to sustainable profitability, the latter of which we believe will be more challenging in the short term. Any upgrade of the VR would also require evidence that Carige's funding and liquidity have stabilised on a sustained basis without full reliance on government guarantees.
The Long-Term IDR and senior debt rating would be downgraded if Fitch believes that the likelihood of senior creditors facing losses increases. This could be the case if, for example, a potential request for a precautionary recapitalisation is not granted by the EU authorities. In Fitch's opinion, a refusal would increase the risk of a further regulatory intervention, which could result in losses for senior creditors. Under the decree law approved in January 2019, Carige can request a precautionary recapitalisation of up to EUR1 billion. A precautionary recapitalisation would only be possible if the ECB confirms that Carige is solvent and would be subject to state aid approval by the European Commission. Junior creditors (the EUR320 million Tier 2 bondholders) would be subject to 'burden-sharing' under a precautionary recapitalisation.
The senior debt rating could be upgraded and the Recovery Rating revised upwards if recovery prospects for senior unsecured bondholders in a hypothetical liquidation improve. This could be the case if the volume of junior or senior unsecured bonds increases significantly.
DEPOSIT RATING
The long-term Deposit Rating is primarily sensitive to changes in the bank's Long-Term IDR. The Deposit Rating is also sensitive to an increase in the buffers of senior and junior debt being maintained by the bank, and to a change in Fitch's opinion regarding their sustainability over time.
SUPPORT RATING AND SUPPORT RATING FLOOR
An upgrade of the Support Rating and upward revision of the Support Rating Floor would be contingent on a positive and sustainable change in the sovereign's propensity to support Carige. While not impossible, this is highly unlikely, in Fitch's view.
