The proposed change to QBE Insurance Group’s outstanding US$400 million Additional Tier 1 (AT1) notes will not affect its ratings, according to Fitch.
In a release, the international ratings agency said the proposed change to the loss-absorption feature of the group’s AT1 notes issued in November 2017, will have no impact. Fitch’s view, it said, remains unchanged to the subordination, recovery or non-performance risk of the instrument.
The notes are rated ‘BBB-’, three notches below QBE’s Issuer Default Rating (IDR), with two notches for subordination or recovery and one for non-performance risk, the release added.
According to current terms, in the event the Australian Prudential Regulation Authority (APRA) determines QBE has become non-viable, the notes will be converted into ordinary shares, or written off if for any reason the required conversion had not occurred within a certain period of time.
QBE is asking for approval from bondholders to amend the terms, allowing the notes to be written off rather than converted into ordinary shares. According to the insurer, the proposed change will align the loss-absorption features of the November 2017 AT1 notes with QBE’s AT1 notes issued in May 2020, and will also allow the instrument to be treated as equity on the balance sheet.
Fitch said that it takes into account two key aspects when rating insurance hybrid instruments – the level of subordination and what that means for expected recovery in a liquidation; and non-performance risk, which reflects the risk of investors facing a loss before a general default event for the issuer. Furthermore, it believes that the APRA is unlikely to activate the non-viability trigger unless the event is sustained, leading to QBE’s non-viability.
“We consider management’s discretion to cancel interest as the key feature driving the level of notching for non-performance risk as this would probably be triggered before any mandatory conversion or write-off,” Fitch said. “The change to write-off only would not affect the notching as the key feature driving the notching is unchanged.”
