Moody's Investors Service has assigned a (P)A3 rating to the amended subordinated notes component of Australia and New Zealand Banking Group Limited's (ANZ, Aa2 stable, B-/a1 stable) existing USD25 billion medium-term note programme. The provisional rating is positioned two notches below the a1 baseline credit assessment of ANZ. Moody's expects the terms and conditions of ANZ's subordinated debt programme to allow it to qualify as Tier 2 capital under Basel III. Going forward, Moody's expects only Basel III-compliant subordinated debt securities to be issued under the programme. There is no impact on the A2 ratings of outstanding Basel II-compliant subordinated notes issued under the programme prior to the amendment. RATINGS RATIONALE The medium-term note programme's terms and conditions have been revised to incorporate Basel III-compliant non-viability language, allowing future subordinated debt drawdowns to be considered as Tier 2 capital, in accordance with the standards of the Australian Prudential Regulation Authority (APRA) as they will apply at the time of any future issuance. Under the programme's terms, the principal on these notes would be converted into ordinary equity or written off, partially or in full, in the event that APRA notifies ANZ that without such conversion or write-off the bank would become non-viable, or a public sector injection of capital is made, without which the bank would become non-viable. The (P)A3 rating is positioned two notches below ANZ's baseline credit assessment, in line with Moody's standard notching guidance for subordinated debt with loss triggered at the point of non-viability on a contractual basis. The extra notch relative to Basel II-compliant subordinated debt reflects the potential uncertainty associated with the timing of loss absorption given that the APRA has not defined the point at which it would deem the bank to be non-viable. The (P)A3 rating on ANZ's subordinated notes is provisional. Ratings assigned to future drawdowns will be contingent on their specific terms and conditions, which are expected to be the same as those under the programme. Technically, the (P)A3 rating is a downgrade from the (P)A2 assigned to the previous version of the Basel II-compliant subordinated debt component of the program.
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