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06 Aug 2009
Action follows announcement of exchange offer on senior and subordinated debt
London, 06 August 2009 -- Moody's Investors Service has today placed on review for possible downgrade
the Baa3/Prime-3 bank deposit and senior debt ratings and the Ba1
subordinated debt rating of Irish Nationwide Building Society (INBS).
The E+ bank financial strength rating (BFSR) (mapping to a baseline
credit assessment - "BCA" - of B3) and the backed-Aa1
rated senior debt, maturing prior to September 29 2010, and
the backed short-term issuer rating of Prime-1, covered
by the Irish government guarantee, are unaffected by this action.
Ross Abercromby, Vice President and lead analyst for Irish banks
at Moody's, commented on the rating action: "INBS'
debt ratings fully depend on ongoing government support to the society's
creditors and depositors. The decision by INBS to offer an exchange
on two senior unsecured debt issues and one subordinated debt issue that
mature after the expiry of the state's blanket guarantee at a price
significantly below par (as well as the below-par exchange on subordinated
debt) raises the question how much comfort investors can take from government
support to shield them against further losses, particularly once
the blanket guarantee expires in September 2010."
Due to the society's large exposure to commercial real estate in
Ireland, the quality of which is rapidly declining, Moody's
believes that INBS will require additional capital to remain a going concern
(as indicated by the E+/B3 BFSR/BCA). In the absence of its
mutual owners -- mostly small retail depositors -- as a source
of further capital, and in view of the likely losses in 2009,
the government appears to be the only source of such capital. As
indicated by the investment grade Baa3 debt and deposit ratings (six notches
above the standalone BCA of B3), we are so far of the view that
the government will protect wholesale depositors and the pari-passu
ranking senior unsecured creditors (as a mutual building society,
retail depositors technically rank behind wholesale depositors and senior
unsecured creditors) against any credit losses, for example by compensating
any potential shortfall of capital .
The building society's offer to exchange senior and junior debt
at a discount -- which boosts earnings and has a positive capital
impact (please see below for details) - however raises the question
as to how actively the government is willing to shield investors against
losses and to what extent the government is implicitly accepting that
investors are among those contributing capital in the form of realised
losses on their claims. The implicit concern which this deeply
discounted exchange offer is benefiting from is that those debt issues
that are not covered by the guarantee may also not benefit from state
support and therefore could face a significant risk of non-payment
at maturity. Should this interpretation prevail at the end of the
review, then we would most likely classify this exchange offer as
a distressed exchange and place debt and deposit ratings several notches
lower than the current Baa3, indicating a significantly lower likelihood
of government support.
A factor that underpins the current Baa3 ratings lies in the potential
consequences also for depositors -- and therefore potentially for
the wider banking system - of the above described scenario:
Moody's understands the current legal framework does not allow for
depositor preference. Therefore, any losses on senior unsecured
instruments would require the government to be willing to also impose
losses on depositors (outside of the existing deposit guarantee scheme).
At present, the scenario that the government would continue protecting
depositors but would be willing to allow losses for senior creditors does
not seem feasible without a change in the legal framework, similar
to the changes introduced in the UK under the 2009 Banking Act.
While such a change is clearly the government's prerogative,
thus far we have no indications of this. The other option is that
this is merely an opportunistic exchange based on market prices,
but that the government will continue to fully protect both creditors
and depositors -- in which case the ratings are likely to be confirmed
at their current level.
Overall, beyond the technicalities of this exchange offer at INBS,
our general concern is the following: We believe that the government
has a high interest in protecting the banking system and to undertake
any necessary measures required to maintain the confidence in this banking
system. However, to the extent that the overall confidence
is deemed sufficiently robust, the government may be able to withdraw
its blanket support for individual Irish banks and increasingly ask investors
to share a part of the burden of recapitalising its weak banks.
The structure of the exchange offer on the senior debt is that the two
senior bonds maturing after the expiry of the Irish government guarantee
in September 2010 can be exchanged at a 22% discount to par for
senior debt with a shorter maturity that falls within the guaranteed period
and therefore benefit from the Aa1 (negative outlook) rating of the guarantor.
The exchange offer on the subordinated debt (maturing in 2018) is at 55%
of par value and involves exchanging for another subordinated issue,
albeit with a shorter maturity (2016) and a higher coupon (13%
instead of 5.5%).
The society's E+ (BCA: B3) BFSR is unaffected by this
rating action. This rating already incorporates Moody's view that
losses on commercial real estate and development finance will continue
to increase and in the current environment, we believe it will be
difficult for the society to generate enough capital to cover the expected
increased loan losses. Therefore the establishment of the "National
Asset Management Agency" (NAMA) that will lead to the society's
development loans and some commercial lending being removed from the balance
sheet remains vital. The E+ BFSR however reflects that the
transfer of loans to NAMA may lead to a further requirement for capital
depending on the value of the loans transferred, but also takes
into consideration the building society's continuing strong deposit
base. The outlook remains negative on the BFSR.
The last rating action on INBS was on July 7, 2009 when the backed
senior debt guaranteed by the Irish government was downgraded to Aa1 (negative
outlook) from Aaa (on review for possible downgrade.)
Irish Nationwide Building Society, headquartered in Dublin,
Ireland, had total assets of EUR14.4 billion at year-end
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's reviews Irish Nationwide ratings
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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