Scope Ratings today assigned a rating of A with Stable Outlook to UBS Group AG’s 2.95% USD 1.5bn Senior Notes due September 2020, 4.125% USD 2.5bn Senior Notes due September 2025, and the USD 0.3bn Floating Rates Senior Notes due 2020. These senior unsecured notes, issued by UBS’s non-Swiss funding vehicle, UBS Group Funding (Jersey) Limited, are unconditionally and irrevocably guaranteed by UBS Group AG.

Scope points that the notes, issued at the level of UBS Group AG, the Holding Company (HC) of UBS Group, have loss-absorbing features.

By assigning to the notes the rating of A with Stable outlook, which is also the Issuer Credit-Strength Rating (ICSR) of UBS Group AG and of UBS AG -- the operating company of UBS Group -- Scope points at the following factors (all detailed in Scope’s latest Bank Rating Methodology dated May 2015):

• Scope considers that as long as there are no grounds to estimate that the HC’s creditors ceteris paribus would be treated any differently from creditors of the operating bank(s) in the event of financial stress, the ICSR of a HC in Europe should be the same as the ICSR of the operating bank. In the case of UBS, Scope points to the deep integration of the different components of the UBS Group, making a HC/OpCo rating distinction less relevant.

• Based on its bank rating methodology (figure 3A page 9), Scope currently does not notch down from the ICSR the loss absorbing senior debt (which we call “MREL (or TLAC) Senior Debt”) for highly-rated (AAA/AA/A) banks. As UBS Group is in this category, no further notching applies to the rating of the notes.

• However, as underlined on several occasions in its Bank Rating Methodology, Scope also notes that this current approach is likely to evolve considering the state of flux of resolution-driven regulation, including on TLAC. Depending on the outcome of these various regulatory outcomes, Scope could refine further its rating approach for TLAC-eligible senior debt. Clause 17 of the Terms and Conditions (T&C) of the Notes reminds holders that they consent to “the exercise of any Swiss Resolution Power that results in the write-down and cancellation and/or conversion into equity of UBS Group AG of parts or all of the principal amount and/or accrued interest on the Notes”. Each holder also consents to “the ordering of any Restructuring Protective Measures that results in the deferment of payment of principal and/or interest on the Notes”.

The risk section of the prospectus spends considerable time detailing and assessing the risks of Clause 17 for the potential holders of the note, i.e. the possibility of the Swiss Resolution Authority opening Bank (or Guarantor) Restructuring Proceedings “if it concludes that there is justified concern that the relevant entity is over-indebted, has serious liquidity problems or no longer fulfils the applicable capital adequacy requirements”. Such proceedings may take the form of restructuring proceedings rather than liquidation proceedings only if the recovery or continued provision of at least some banking services by the relevant entity appears likely and if the creditors of the relevant entity are better off in restructuring than in liquidation.

Once the Swiss Resolution Authority has opened Bank (or Guarantor) Restructuring Proceedings, then it may consider factors such as results, financial condition, liquidity profile and regulatory capital adequacy of UBS Group AG or UBS AG when determining whether or not exercising any Swiss resolution power. The prospectus repeatedly stresses that the Swiss Resolution Authority has considerable discretion in opening Restructuring Proceedings and exercising Swiss Resolution Power.

Scope also points out that the T&C of the Notes includes an “Events of Default clause” (Clause 11) that is broadly similar to any events of default clause to be found in a senior unsecured note prospectus (failure to timely pay interest and/or principal, failure to observe covenants specified in the T&C, court order for the dissolution or winding-up of the Issuer or the Guarantor, etc..) except that neither a Guarantor Restructuring Event nor the exercise of any Swiss Resolution Power nor the ordering of any Restructuring Protective Measure, all leading to deferment/cancellation of interest, write-down, cancellation and/or conversion into Equity of the notes would constitute a Default or an Event of Default. In this respect, the T&C of the notes are fully consistent with the clauses that can be found in the prospectus of other loss-absorbing instruments issued by UBS, such as additional Tier 1.