Anglo Irish Tier 2 Debt Downgraded By S&P To CCC On Restructuring Concerns, As Bank Prepares To Receive Bail Out
The EURUSD was last seen well north of 1.36. The reason for this strength certainly was not based on news flow out of Ireland, where Anglo Irish just saw its Tier 2 debt downgraded to CCC, on what the rater called a "clear and present risk" of a restructuring of this debt. Yet this is likely irrelevant in the grand scheme of moral hazard things: after all, as the FT reports, Ireland is about to unveil an "additional capital injection expected to be about €5bn (£4.3bn). That would bring the bail-out costs for Anglo Irish to €30bn, shy of the €35bn forecast by credit rating agency Standard & Poor’s." Nonetheless, Ireland’s cost of borrowing on Tuesday hit record levels with yields on 10-year government bonds jumping 25 basis points to 6.72 per cent. And to make things delightfully surreal, the Irish unemployment rate was reported to jump from 13.0% to 13.7% in one month.
- It has been reported that Anglo Irish Bank Corp. Ltd. would like to carry out a liability management exercise in respect of its lower tier 2 regulatory capital instruments, subject to regulatory and European Commission approval.
- As a result, we are lowering our rating on Anglo's lower Tier 2 instruments to 'CCC' from 'B' to reflect our view that there is a "clear and present risk" of a restructuring of this debt.
- Our 'BBB/A-2' counterparty ratings on Anglo remain on CreditWatch negative pending our assessment of the further planned capital injection into the bank, the restructuring plan approved by the European Commission, and our view of the bank's medium-term importance to its owner, the Irish government, once Anglo has been restructured.
- Upon resolution of the CreditWatch, the counterparty ratings may be affirmed, or lowered by one or more notches.
On Sept. 28, 2010, Standard & Poor's Ratings Services lowered its rating on Anglo Irish Bank Corp. Ltd.'s nondeferrable dated subordinated debt (lower Tier 2) securities to 'CCC' from 'B'. The 'BBB/A-2' counterparty credit ratings on Anglo Irish Bank Corp. Ltd. (Anglo) remain on CreditWatch with negative implications, where they were placed on Jan. 26, 2010. Issuance guaranteed by the Republic of Ireland (AA-/Negative/A-1+) is not affected by today's rating action.
The downgrade reflects our opinion that the likelihood of a liability management exercise in respect of Anglo's lower tier 2 instruments has increased.
It has been reported that Anglo would like to carry out a liability management exercise, subject to regulatory and European Commission (EC) approval, in respect of its lower tier 2 instruments, which totaled €1.72 billion on June 30, 2010. We also note that while Ireland's minister of finance has made a number of forthright public statements strongly supporting Anglo's senior obligations, he has not done so in respect of these subordinated obligations.
In our view, there is a "clear and present risk" of a restructuring and we have therefore lowered this issue rating to 'CCC' from 'B', in accordance with our criteria (see "Methodology For Rating Bank Nondeferrable Subordinated Debt (Lower Tier 2 Regulatory Capital), published on Aug. 4, 2009). If the bank announces an exchange offer, we would expect to characterize it as a "distressed exchange" and lower the rating to 'D', in accordance with our criteria. This action would have no impact on the counterparty credit ratings unless there was a default on nonregulatory capital issues.
Our 'BBB/A-2' counterparty credit ratings on Anglo reflect our expectations of ongoing support from the Irish government, which includes the minister of finance's public statements on the senior obligations. Anglo was nationalized in January 2009 by the government of Ireland and the bank has received very substantial capital injections and funding support since then. Further, Anglo is participating in the arrangements made available by Ireland's National Asset Management Agency (NAMA) into which participating Irish banks are transferring property development lending and associated assets at a significant discount to help cleanse their balance sheets.
The government has announced that it wishes the bank to be split into two and wound down over time, and that it will not be allowed to engage in any new lending. Anglo's customer deposit franchise, which we consider to be weak and in decline, will be separated from Anglo as part of the split.
The government has stated that it wishes, subject to EC approval, to split Anglo into an asset recovery bank (ARB) and a funding bank (FB). We expect that the ARB will be the renamed existing Anglo legal entity.
The government has announced that it intends the split to be effective early 2011. Both the ARB and the FB will be regulated banks but neither will engage in any lending. We understand that the ARB will focus on working out Anglo's non-NAMA loans over a period of time. These loans (net of provisions) totaled about €29 billion on June 30, 2010.
It has been reported that the FB will contain Anglo's declining customer deposit book. It will be a stand-alone bank, completely separate from Anglo's loan assets. Anglo receives significant levels of special funding lines from the Central Bank of Ireland, and participates in open-market operations with the European Central Bank. We regard Anglo's funding and liquidity position as highly stressed.