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Fitch Places Santander UK plc & Abbey National Treasury Services on Rating Watch Positive
October 9, 2017 / 3:35 PM / 2 months ago

Fitch Places Santander UK plc & Abbey National Treasury Services on Rating Watch Positive

(The following statement was released by the rating agency) LONDON, October 09 (Fitch) Fitch Ratings has placed Santander UK plc (San UK) and its subsidiary, Abbey National Treasury Services plc's (ANTS) 'A' Long-Term Issuer Default Ratings (IDR) and Derivative Counterparty Ratings (DCR) on Rating Watch Positive (RWP). San UK's Viability Rating and the ratings assigned to San UK's and ANTS' subordinated debt are unaffected by the rating action. A full list of rating actions is at the end of this rating commentary. The RWP reflects our view that San UK's and ANTS' external senior creditors will receive additional protection when the terms of the senior debt received by San UK from its parent holding company, Santander UK Group Holdings plc (SGH; the holdco; A/Stable/a/), are amended so that the debt becomes junior to San UK's external senior obligations. We believe that the terms will be amended shortly after the bank has received clarification from the UK's resolution authority, the Bank of England, on how to downstream this debt in an appropriate manner so that it protects the bank's external creditors in case of failure and qualifies for internal minimum requirement for own funds and eligible liabilities (MREL). Once sufficient internally down-streamed qualifying junior debt (QJD) and senior debt is in place, we expect to upgrade San UK and ANTS' IDRs by one notch to 'A+'. KEY RATING DRIVERS IDRS, DCRS AND SENIOR DEBT San UK is the main operating bank of SGH. The RWP on San UK and ANTS' Long-Term IDRs and senior debt ratings reflects the large volumes of debt, which SGH has issued so far and which includes additional Tier 1 (AT1) instruments, Tier 2 debt and senior debt. SGH will be subject to MREL requirements of 25.9% of risk-weighted assets (RWAs) by 2022 as communicated by the Bank of England. As a subsidiary of the Santander Group (Banco Santander; A-/Stable), San UK is required to comply with interim MREL requirements from 1 January 2019. Debt and capital issued by the holding company are currently down-streamed on a like-for-like basis to San UK plc. However, we expect that the terms of the down-streamed senior debt will be changed so that it becomes subordinated to the senior obligations issued externally and to become eligible for inclusion in MREL. At that point, we expect San UK's and ANTS' IDR to be rated one notch above the bank's respective VR, reflecting our view that San UK's buffer of QJD combined with holdco senior debt will be sufficient to protect their senior obligations from default in case of failure, either under a resolution or as part of a private sector solution (such as a distressed debt exchange) to avoid a resolution action. Fitch therefore views the risk of default on San UK's senior obligations, as measured by the Long-Term IDR, is lower than the risk of the banks failing, as measured by the VRs. Fitch's assumption is that absent a private sector solution, a resolution action would be taken on the group if its breaches its pillar 1 and pillar 2A common equity Tier 1 (CET1) capital requirements. On a risk-weighted basis, these are currently 7.3% of RWAs. Fitch believes that the group would need to meet its pillar 1 and pillar 2A total capital requirements immediately after a resolution action. On a risk-weighted basis, these are currently 13% of RWAs. Given its systemic importance, in Fitch's opinion the group would likely also need to maintain most, if not all, of its combined buffer requirement. This would mean a post resolution action total capital requirement of around or above 17.5% of (post recapitalisation) RWAs is plausible under a bail-in scenario, assuming end-state requirements, dependent on final combined buffer requirements. This figure could be lower under a private sector (ie distressed debt exchange) scenario as part of a broader rehabilitation plan that averts a resolution action. Fitch's view of the regulatory intervention point and post-resolution capital needs taken together suggest a QJD and holding company senior debt buffer of around 10% of RWAs could be required to restore viability without hitting senior creditors at San UK level. At end-1H17, San UK's QJD and holding company senior debt buffer was GBP11.1 billion, equal to 12.7% of RWAs. In Fitch's opinion, this should be sufficient to recapitalise the group in a resolution scenario to meet its expected post resolution total capital requirement without hitting opco senior debt. ANTS' IDRs are based on support and are equalised with those of SGH and San UK. ANTS' obligations are guaranteed by San UK and all proceeds are up-streamed to the parent. San UK's and ANTS' DCRs have been placed on RWP and are rated at the same level as the Long-Term IDR because under UK legislation, derivative counterparties have no preferential status over other senior obligations in a resolution scenario. RATING SENSITIVITIES IDRS, DCRS AND SENIOR DEBT Fitch expects to upgrade San UK's and ANTS' IDRs by one notch above the VR when the debt received from SGH becomes subordinated to San UK's other senior creditors, and provided that the amount together with its external qualifying junior debt remains sufficient and sustainable. The resolution of the RWP could take longer than the typical six months as the bank is still awaiting clarification from the Bank of England on how to downstream this debt in an appropriate manner. The DCRs are primarily sensitive to changes in San UK's and ANT's Long-Term IDR. We expect to upgrade the DCRs if San UK's and ANTS' Long-Term IDRs are upgraded. The rating actions are as follows: Santander UK Long-Term IDR: 'A' placed on RWP Short-Term IDR: 'F1' unaffected Viability Rating: 'a' unaffected Support Rating: '2' unaffected Derivative Counterparty Rating: 'A(dcr)' placed on RWP Senior unsecured debt long-term rating, including programme rating: 'A' placed on RWP Senior unsecured debt short-term rating, including programme rating and commercial paper: 'F1' unaffected Subordinated debt: 'A-' unaffected Upper Tier 2 subordinated debt: 'BBB' unaffected GBP300 million non-cumulative, callable preference shares, XS0502105454: 'BB+' unaffected Other preferred stock: 'BBB-' unaffected Abbey National Treasury Services plc Long-Term IDR: 'A' placed on RWP Short-Term IDR: 'F1' unaffected Support Rating: '1' unaffected Derivative Counterparty Rating: 'A' placed on RWP Senior unsecured debt long-term rating, including programme ratings: 'A' placed on RWP Senior unsecured debt short-term rating: 'F1' unaffected Contact: Primary Analyst Marc Ellsmore Associate Director +44 203 530 1438 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Krista Davies Director +44 203 530 1579 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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