Fitch Ratings has assigned NN Group N.V.'s (NN) EUR500 million issue of dated fixed-to floating-rate subordinated Tier 2 green notes (ISIN: XS2526486159) 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 notes have a final maturity date in March 2043 and a first call date in August 2032. They have been issued with a fixed coupon of 5.25%, payable annually in arrears, while the fixed coupon will reset to floating on the first reset date in March 2033. The floating rate has been set at three-month EURIBOR +420bp, which includes a step-up of 100bp and is payable quarterly in arrears.

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 would 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 are expected to qualify as Tier 2 regulatory capital under Solvency II (S2). Consequently, they will 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 will be treated as 100% debt in Fitch's financial-debt leverage ratio (FLR) calculation.

Fitch views the issue as neutral for NN's capitalisation and FLR as the company has announced it is calling the EUR500 million subordinated notes issued by Nationale-Nederlanden Levensverzekeringen Maatschappij N.V. on 29 August 2022. Fitch expects fixed-charge coverage (FCC) to improve as the fixed coupon of the new issue is lower than that of the instrument being called. We expect both the FLR and FCC 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:

FLR falls below 15% while operating earnings remain strong, as reflected by a return on assets (ROA) of 1.3% or higher, and the group's S2 ratio remains above 200%

Factors that could, individually or collectively, lead to negative rating action/downgrade:

FLR increases above 30%

The group's S2 ratio falls to below 170%

Operating earnings weaken as reflected by ROA of 1% or below

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

Date of Relevant Committee

04 November 2021

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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