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Fitch Upgrades Deutsche Bank's and Aareal Bank's "Preferred" Senior Unsecured Notes
June 16, 2017 / 11:38 AM / 6 months ago

Fitch Upgrades Deutsche Bank's and Aareal Bank's "Preferred" Senior Unsecured Notes

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Fitch Upgrades Deutsche Bank’s and Aareal Bank’s “Preferred” Senior Unsecured Notes - Rating Action Report here FRANKFURT/LONDON, June 16 (Fitch) Fitch Ratings has upgraded 31 structured senior unsecured bonds issued by Deutsche Bank AG (DB, A-/Negative) to 'A' from 'A-' and five by Aareal Bank AG (BBB+/Stable) to 'A-' from 'BBB+'. A full list of rating actions is in the Rating Action Report available at or by clicking the link above. All other ratings of the issuers in this Rating Action Commentary and in the accompanying Rating Action Report are unaffected by the rating actions. The rating action follows Fitch's review of the expected ranking of these notes in a resolution scenario given their structural features. The upgrade to one notch above the banks' respective Long-Term Issuer Default Ratings (IDRs) reflects Fitch's view that the terms of these notes are commensurate with "preferred" treatment under Germany's revised resolution regime in force since 1 January 2017. DB's and Aareal's statutorily preferred senior unsecured debt would be protected from default in a resolution scenario by large buffers of junior and statutorily non-preferred senior debt. The rating action extends the considerations previously applied only to notes classified as market-linked by Fitch, ie structured notes with embedded market risk, identified with an 'emr' suffix. KEY RATING DRIVERS "PREFERRED" SENIOR DEBT The one-notch upgrade reflects the "preferred" liabilities' lower vulnerability to default compared with vanilla senior debt. This reflects our understanding that the affected instruments contain features that allow them to rank senior to vanilla senior unsecured debt in resolution and in insolvency. In addition, in Fitch's opinion the issuing banks have sufficient outstanding qualifying junior and non-preferred senior debt that could be used to recapitalise them, restore viability and prevent default on preferred senior liabilities upon resolution. Our assessment of the amount needed to recapitalise the banks is based on the assumptions that the authorities will trigger a bail-in once the Common Equity Tier 1 (CET1) ratio has depleted to 6%-7% and the banks will need to meet total pillar 1 and 2 requirements plus combined buffers after being recapitalised. The identification of preferred senior securities relies on the guidance for interpreting the classification of liabilities under the revised insolvency law in Germany, provided by the relevant authorities, the German banking supervisors, Deutsche Bundesbank and BaFin, and the acting resolution authority, the Federal Agency for Financial Market Stabilisation (FMSA) on 5 August 2016, further amended on 7 November 2016. The authorities have clarified products that are deemed complex or a potential source of contagion during resolution proceedings (notably those whose principal or interest payment depends on an event that is uncertain at the time of the issuance) rank senior to other senior unsecured debt. Examples of instruments that would be treated as preferred to other senior debt in resolution and in insolvency include, among others, bonds with embedded derivatives, index-linked bonds, obligations settled in a different currency, floating-rate notes that include interest rate floors, ceilings, or interest rate spreads, and floating-rate notes referencing non-conventional interest rate benchmarks. RATING SENSITIVITIES "PREFERRED" SENIOR DEBT Both banks' "preferred" senior debt ratings are primarily sensitive to (1) changes in the respective banks' IDRs, (2) our assessment of the volume of subordinated and non-preferred senior debt buffers relative to the recapitalisation amount likely to be needed to restore viability and prevent default on preferred obligations, (3) subsequent changes to the resolution regime or Fitch's expectation of how resolution would be implemented in practice, (4) subsequent changes to the resolution regime altering the hierarchy of the various instruments, and (5) reinterpretation by the resolution authorities of the preferential treatment of individual notes triggering a subsequent reclassification of the notes as non-preferred. The required amount of subordinated and senior vanilla debt buffers is sensitive to increases in the banks' capital requirements, in particular of the individual pillar 2 regulatory requirements, as we assume that these determine the level to which the banks would have to be recapitalised upon resolution. Furthermore, the ratings are sensitive to Fitch's assumptions regarding the individual points of non-viability at which the regulator is likely to require a recapitalisation by way of bail-in of junior and standard senior instruments. The guidance provided by the relevant authorities is not an integral part of the resolution legislation. Nevertheless, we expect that the resolution authorities would follow the guidance. Diverging evidence could lead to a re-assessment of the ratings of these securities. We expect the European Commission's (EC) proposal to amend Directive 2014/59/EU by introducing a new class of non-preferred senior debt, if and when implemented in German law, to leave the subordination of outstanding non-preferred senior debt intact. However, the EC's proposal could trigger a downgrade of the securities upgraded today if its transposition into German law reduces the buffer of junior and non-preferred senior debt or modifies the ranking of senior instruments. Contact: Primary Analysts Bridget Gandy (Deutsche Bank AG) Managing Director +44 20 3530 1095 Fitch Ratings Limited 30 North Colonnade London E14 5GN Patrick Rioual (Aareal Bank AG) Senior Director +49 69 768 076 123 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 60311 Frankfurt am Main Secondary Analysts Ioana Sima (Deutsche Bank AG) Associate Director +44 20 3530 1736 Sebastian Schrimpf, CFA (Aareal Bank AG) Associate Director +49 69 76 80 76 136 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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