Fitch Ratings has assigned NN Group N.V.'s (NN) proposed issue of dated fixed-to floating-rate subordinated Tier 2 green notes a 'BBB+' rating.

The notes are rated three notches below NN's Long-Term Issuer Default Rating (IDR) of 'A+', to reflect their 'poor' recovery assumptions (two notches) and 'moderate' non-performance risk (one notch).

The net proceeds from the issue of the notes will be applied for financing or re-financing of specified green projects or activities in accordance with certain prescribed eligibility criteria as further described in NN Group N.V.'s Sustainability Bond Framework and for the repayment of some of the group's existing indebtedness.

Key Rating Drivers

The proposed notes will have a final maturity date in November 2043 and a first call date in May 2033. They will be issued with a fixed coupon payable annually in arrears, and will reset to floating on the first reset date in November 2033. The floating rate will include a step-up of 100bp.

We have applied a baseline recovery assumption of 'poor' to the notes, reflecting the level of subordination as well as the fact that NN is the non-operating holding company of the group. The notes will rank pari passu with NN's other dated subordinated Tier 2 notes, junior to any senior indebtedness and senior to all classes of share capital and to any junior subordinated indebtedness. The level of subordination results in the notes being notched down twice from the IDR.

The notes include a mandatory interest deferral that will be triggered if NN is unable to meet its applicable solvency capital requirement, minimum capital requirement or any other capital requirement enforced by the relevant supervisory authority with respect to NN. Fitch regards the mandatory interest deferral as leading to 'moderate' non-performance risk, so it has further notched down once from the IDR. The notes also include an optional interest deferral feature, which does not affect our rating notching over and above as described above.

The proposed notes are expected to qualify as Tier 2 regulatory capital under Solvency II (S2). Consequently, they would receive 100% equity credit in Fitch's Prism Factor-Based Model due to the application of the agency's regulatory override. However, given that the notes are a dated instrument, they would be treated as 100% debt in Fitch's financial-debt leverage ratio (FLR) calculation.

Fitch views the issue as broadly neutral for NN's capitalisation as NN has also announced a liability management transaction with the aim to partially repurchase outstanding Tier 2 and Restricted Tier 1 (RT1) bonds of the same notional amount as the notional amount of the new Tier 2 notes. We expect both the FLR and fixed-charge coverage to remain very strong and commensurate with the group's ratings.

RATING SENSITIVITIES

Factors That Could, Individually Or Collectively, Lead To Positive Rating Action/Upgrade

An upgrade of NN's Long-Term IDR would be reflected on the notes' rating

Factors That Could, Individually Or Collectively, Lead To Negative Rating Action/Downgrade

A downgrade of NN's Long-Term IDR would be reflected on the notes' rating

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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