Ireland wakes up to some very ugly news this morning:
Dated subordinated debt downgraded to Caa1 from Ba1; bank deposits affirmed at A3/Prime-1 (on review for possible downgrade)
London, 27 September 2010 -- Moody's Investors Service has today downgraded the senior debt rating of Anglo Irish Bank Corporation Limited ("Anglo Irish") by three notches to Baa3/Prime-3 from A3/Prime-1, and is maintaining it on review for possible downgrade. At the same time, Moody's has downgraded the dated subordinated debt held by Anglo Irish by six notches to Caa1 from Ba1 and has assigned a negative outlook. The rating action on this class of debt concludes the review that Moody's originally initiated on 8 December 2009, and maintained on 1 March 2010 following the downgrade to Ba1.
The following ratings are unaffected by today's rating actions:
- the A3/Prime-1 ratings on the bank's long- and short-term bank deposits, which remain on review for possible downgrade;
- the backed-Aa2 rating (stable outlook) and the backed-Prime-1 rating on instruments and programmes guaranteed by the Irish government;
- the C rating on the bank's junior subordinated debt and Tier 1 securities; and
- the E bank financial strength rating (BFSR), which maps to a Caa1 rating on the long-term scale.
RATIONALE FOR THE DOWNGRADE OF THE SENIOR DEBT TO Baa3/Prime-3
On 8 September 2010, the Irish government proposed a new plan for Anglo Irish that stipulates splitting the bank into (1) a "Funding Bank" (FB) to which all deposits will be transferred; and (2) an "Asset Recovery Bank" (ARB), which will retain the assets that are not transferred to NAMA, together with the remaining liabilities, including all rated debt.
"Moody's expects a continued asset quality deterioration in the loan book of Anglo Irish that will require further government support for the bank's liabilities," says Ross Abercromby, Vice President and lead analyst for Anglo Irish at Moody's. The rating agency believes that the novation of the deposits into the FB could increase the government's options to share the burden of such support with other creditors that remain in the ARB. Without an explicit government guarantee for senior unsecured note holders, Moody's believes that the ratings for these instruments need to incorporate this greater marginal risk. While Moody's considers the likelihood of the government not supporting this debt to be very small, this risk has been reflected in the three-notch downgrade to Baa3 and will continue to be a focus of the review for possible downgrade. Moody's expects to receive further clarity from (a) the Irish government's upcoming announcement of further details of its plans for Anglo Irish over the coming weeks, and (b) the European Commission's verdict on the proposed restructuring. Until such clarification is forthcoming, Moody's review for possible downgrade will continue. "In the absence of explicit government guarantees, the senior unsecured debt ratings could be further downgraded into sub-investment grade," says Mr. Abercromby.
Moody's expects the Irish government's most likely strategy to be the pursuit of an orderly wind-down of the ARB over a longer-term horizon; this would follow a likely further capital injection in coordination with the Central Bank's requirements. In this scenario, Moody's would expect senior debt to be supported. However, the Baa3/P-3 ratings also incorporate a risk scenario that could see senior note holders of the approximately EUR4.2 billion outstanding that is not covered by the Eligible Liabilities Guarantee (ELG) to be asked to share some of that burden -- for example, via a buyback at a value that is substantially below par. Moody's notes that such a buyback could be seen as a distressed exchange.
"However, there is the potential for the senior debt ratings to be upgraded if, following the reorganisation, effective guarantees are put in place by the Irish government" says Mr. Abercromby.
REVIEW MAINTAINED ON THE A3/Prime-1 DEPOSIT RATINGS
Moody's is maintaining the review for possible downgrade on the A3/Prime-1 bank deposit ratings of Anglo Irish. The proposed split of the bank will result in the deposits being novated to the FB. In Moody's view, it is highly likely that guarantee arrangements will remain in place for these deposits. The current A3 rating reflects the 100% state ownership and Moody's view that the deposit base of the bank continues to benefit from a very high probability of systemic support. The review process will therefore continue to focus primarily on the potential support from the Irish government and the final form of the bank.
DOWNGRADE OF THE DATED SUBORDINATED DEBT
Moody's notes that, in Ireland, as in most countries, the authorities have so far not imposed losses on dated subordinated debt outside of a liquidation scenario. However, Moody's believes that the possibility of greater burden-sharing at Anglo Irish has significantly increased the risk of impairments to these securities. This is because of the following factors: (i) the continuing need for further capital injections as the non-NAMA loan book deteriorates; and (ii) as the ARB will be wound down, the capitalisation of the entity is, in Moody's view, likely to be relatively thin -- thereby increasing the likelihood that the dated subordinated debt may be required to absorb losses. In addition, the maturity structure of the dated subordinated debt is such that a large proportion does not mature until 2017 when the vast bulk of the senior debt will already have matured. In Moody's opinion, this increases the likelihood that this class of debt may be required to absorb losses. The negative outlook reflects that, if any losses were to be imposed on the debt, then the rating could be adjusted downwards in line with the projected loss.
Moody's aims to complete its review of the bank's deposit and senior debt ratings following the clarification of any support mechanisms for ARB's liabilities, even if some final uncertainty remains until the European Commission has approved the bank's restructuring plan.