Fitch Rates Mizuho’s USD Basel III Subordinated Notes Final ‘BBB’
October 14 (Fitch) Fitch Ratings has assigned a final rating of ‘BBB’ to the USD 750m Basel III-compliant Tier 2 10-year subordinated notes issued by Mizuho Financial Group, Inc.(Mizuho; A-/Stable).
The notes will constitute unsecured and subordinated obligations of Mizuho and rank pari passu among themselves, and equally with all other present and future unsecured, unconditional and dated subordinated obligations.
The notes are scheduled to mature on 20 October 2025. They carry a fixed coupon of 4.353% annually. The notes include a non-viability clause and will qualify as Tier 2 capital for Mizuho.
The proceeds will be used as a subordinated loan to its core banking subsidiary, Mizuho Bank, Ltd. (MHBK; A-/Stable). For MHBK, the subordinated loan from Mizuho will qualify as Tier 2 capital. KEY RATING DRIVERS Fitch rates the notes two notches below Mizuho’s Long-Term Issuer Default Rating (IDR).
This reflects their poor recovery prospects relative to senior unsecured instruments given their subordination and the prospect of full and permanent write-down of the securities upon Mizuho reaching the point of non-viability (PONV). The PONV trigger is fully contractual and explicitly refers to a particular event; when the Japanese Prime Minister confirms that the Specified Item 2 Measures set forth in Article 126-2, Paragraph 1, Item 2 of the Deposit Insurance Law needs to be applied to Mizuho.
The notes have been notched from the bank’s IDR (the anchor rating) based on the agency’s view that Mizuho is a systemically important financial institution (FI) in Japan.
Fitch believes that support can be factored into such instruments issued by systemically important and complex FIs because Japan’s DIL enables the government to pre-emptively provide financial assistance to such FIs when necessary under Specified Item 1 Measures of Article 126-2, Paragraph 1, Item 1 or Item 1 Measures of Article 102, Paragraph 1, Item 1. No further notching for non-performance risk applies for the Tier 2 notes in the absence of any more easily hit triggers that would result in coupon deferral. Under Fitch’s methodology, the instrument would not qualify for any equity credit.
RATING SENSITIVITIES Any changes to Mizuho’s IDR would impact the issue’s rating. The IDR is sensitive to any change in assumptions around the probability of the Japanese government to provide timely support to Mizuho as the rating is at the Support Rating Floor (SRF) of ‘A-‘. Changes in the resolution framework that increases the risk of the PONV being triggered or changes in assessment of Mizuho’s systemic importance that reduce the likelihood of pre-emptive support would lead to a downgrade of Mizuho’s SRF – and potentially the Tier 2 bonds.
Japan’s sovereign rating (A/Stable) being downgraded to ‘A-‘ would also result in a lower SRF. The prospect for an upgrade of the IDR is limited as it requires an unlikely upgrade of the Viability Rating (VR) by two notches or more. Currently, the VR of Mizuho (bbb+) is one notch below its ‘A-‘ IDRs.