ACRA downgrades subordinated bonds issued by «Bank Otkritie Financial Corporation» (PJSC) to D(RU)

Credit rating rationale. The downgrade of credit ratings assigned to three issues of subordinated Eurobonds of «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) (hereinafter, the Bank) to D(RU) reflects: 1) the Bank’s coupon yield payment default under USD 500 mln subordinated Eurobonds issue (ISIN: XS0776121062), and 2) information disclosed as at October 1, 2017 regarding the Bank’s capital adequacy ratios declining to 0% within 11 consecutive working days in September 2017, which is below the thresholds triggering write-off of USD 200 mln and USD 300 mln subordinated Eurobonds of the Bank (ISIN: XS0944741833, XS0940730228, respectively). The D(RU) rating highlights an extremely high probability of a full write-off of the above subordinated Eurobonds in compliance with the legislation of the Russian Federation including regulations of the Bank of Russia.

XS0944741833 bond. BKM FINANCE DAC, a special purpose vehicle (SPV) registered in Ireland, issued the USD 200 mln Eurobonds in June 2013 and transferred all issue proceeds in form of a subordinated loan to Khanty-Mansiysk Bank which later merged into Bank Otkritie. In late August 2015, the subordinated loan was reclassified into perpetual. The loan terms comply with the Bank of Russia Regulation No. 395-P (Basel III), so that the loan may be included into additional Tier-1 capital. Commitments of BKM FINANCE DAC within the context of this issue are secured by obligations of Bank Otkritie under subordinated loan agreements.

The issue implies a significant subordination to priority unsecured creditors and the right of the Bank to cancel, at its discretion, coupon payments with the creditors having no right to claim unpaid interest. The issue terms and conditions provide for a full write-off of the loan in the event the Common Equity Tier 1 Ratio N1.1 goes down below 5.125%, or if the Deposit Insurance Agency (DIA) institutes a bankruptcy prevention procedure.

XS0940730228 bond. OFCB Capital Plc (previously, NOMOS CAPITAL PLC), an Irish SPV, issued the USD 300 mln Eurobonds in June 2013 and transferred all issue proceeds in form of a subordinated loan to OJSC NOMOS-BANK which was later renamed to Bank Otkritie. The loan terms comply with the Bank of Russia Regulation No. 395-P (Basel III), so that the loan may be included into additional Tier-2 capital. Commitments of OFCB Capital Plc in the context of this issue are secured by obligations of Bank Otkritie under subordinated loan agreements.

The issue implies a significant subordination to priority unsecured creditors. The issue terms and conditions provide for a full write-off of the loan in the event the Common Equity Tier 1 Ratio N1.1 goes down below 2.0%, or if the Deposit Insurance Agency (DIA) institutes a bankruptcy prevention procedure.

XS0776121062 bond. OFCB Capital Plc issued the USD 500 mln Eurobonds in April 2012 and transferred all issue proceeds in form of a subordinated loan to OJSC NOMOS-BANK which was later renamed to Bank Otkritie. The loan terms comply with the Bank of Russia Regulation No. 215-P, so that the loan may be included into additional Tier-2 capital.

Commitments of OFCB Capital Plc in the context of this issue are secured by obligations of Bank Otkritie under subordinated loan agreements.

The issue implies a significant subordination to priority unsecured creditors.

According to the ACRA methodology, the final ratings of the above three issues of subordinated obligations have been previously set at CC(RU), i.e. 5 notches below the Bank’s standalone creditworthiness assessment (SCA) which is bb-.

The credit rating of Bank Otkritie reflects its moderately low standalone creditworthiness combined with a high level of support from the state. The rating takes into account the appointment of a temporary administration to the Bank by the Bank of Russia undertaking to ensure the Bank’s financial stability and guaranteeing its business continuity, which mitigates short-term risks of a significant deterioration of the Bank’s financial position. In view of the above, ACRA considers the subordinated debt separately from any other obligations of the Bank to its creditors.

Issue highlights

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

For the first time, the credit rating has been assigned to subordinated bonds of «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) (actual issuers: BANK FINANCE DAC, OFCB Capital Plc) on September 18, 2017. The credit rating has been revised on November 2, 2017. The next revision of the credit rating is expected within one year following the rating action (November 2, 2017).

The assigned credit rating is based on the data provided by «Bank Otkritie Financial Corporation» (Public Joint-Stock Company), information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) in its financial statements have been discovered.

ACRA provided an additional service to «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) in the form of informational support (a practical seminar). No conflicts of interest were discovered in the course of credit rating assignment.