Government guaranteed debt placed on review for possible downgrade; subordinated debt downgraded
London, 06 October 2010 -- Moody's Investors Service has today announced rating actions on several
Irish banks and building societies, further to the rating agency's
decision to place the Irish government's Aa2 bond rating on review
for possible downgrade and the Irish authorities' announcement on
30 September 2010 that they are working on a resolution and reorganisation
legislation to allow burden-sharing by subordinated bondholders.
The rating actions are as follows:
• Moody's has placed on review for possible downgrade the ratings
of all government-guaranteed long-term debt issued by Irish
banks that are covered by the Eligible Liabilities Guarantee scheme (ELG).
This refers to the backed-Aa2 rated senior debt of five institutions:
Allied Irish Banks ("AIB"), Anglo Irish Bank Corporation
(Anglo Irish), Bank of Ireland ("BoI"), EBS Building
Society ("EBS"), and Irish Life & Permanent ("IL&P")
• Moody's has placed on review for possible downgrade the long-term
bank deposit and debt ratings of: AIB (rated A1), BoI (A1),
EBS (A3), ICS (A2) and IL&P (A3).
• Moody's has also placed on review for possible downgrade
the Prime-1 short-term ratings of AIB and ICS.
• The direction of the review on the Baa3/Prime-3 bank deposit
and senior debt ratings of Irish Nationwide Building Society (INBS) has
been changed to review for downgrade from the previous review with direction
uncertain.
• Moody's has downgraded the dated subordinated debt (Lower
Tier 2) of Anglo Irish to C from Caa1, and that of INBS from Ba1
to C.
• Moody's has downgraded the dated subordinated debt of the
other banks as follows: AIB downgraded to Ba3 from A2; BoI
downgraded to Ba1 from A2; EBS downgraded to Ba3 from Baa2;
IL&P downgraded to Ba3 from Baa1; Ulster Bank Ireland Limited
("UBIL") downgraded to Baa3 from A3; and KBC Bank (Ireland)
("KBCI") downgraded to Ba1 from Baa3.
• Moody's has downgraded the junior subordinated debt of AIB
and IL&P to B1 from Ba3.
• Moody's has changed to stable from positive the outlooks
on the D Bank Financial Strength Ratings (BFSRs) of AIB and EBS.
• Moody's has withdrawn the 'Backed' Prime-1
short-term Issuer Rating of INBS.
RATINGS RATIONALE
"The review for possible downgrade of most Irish banks' senior
debt ratings follows Moody's earlier action on the Irish government
debt rating as these bank ratings incorporate a high level of credit enhancement
associated with government support," explains Ross Abercromby,
Vice President - Senior Analyst in Moody's Financial Institutions
Group and the lead analyst for Irish Banks.
Moody's notes the very clear determination by the Irish government
to contain support to senior creditors and to ask subordinated debt investors
to share the burden of the current restructuring and recapitalisation
of the banks. "While only the subordinated debt of Anglo
Irish and INBS is currently directly affected by the government's
actions, Moody's has removed any expectation of systemic support
from this debt class in Ireland based on the rating agency's view
that the likelihood of future government support for this debt class is
at best speculative," says Mr. Abercromby.
Please refer to the sections below for a more detailed rationale for each
individual rating action.
GOVERNMENT GUARANTEED DEBT
Moody's has placed the backed-Aa2 rated senior debt of the
five institutions -- AIB, Anglo Irish, BoI, EBS
and IL&P -- that have issued public debt under the Eligible Liabilities
Guarantee scheme (ELG) on review for possible downgrade. This action
follows the placing of the Aa2 Irish Government Bond rating on review
for possible downgrade (See "Moody's places Ireland's
Aa2 rating on review for possible downgrade" published on 5 October
2010). The backed-Aa2 ratings assigned are based on the
unconditional and irrevocable guarantee from the Irish government (See
"Moody's to assign backed-Aa1/Prime-1 ratings to debt
securities covered by the Irish government's new guarantee" published
on 7 January 2010.)
SENIOR DEBT AND DEPOSIT RATINGS
As a result of the review for possible downgrade of the Irish government
bond rating, the long-term bank deposit and debt ratings
of AIB (A1), BoI (A1), EBS (A3), ICS (A2) and IL&P
(A3), and the Prime-1 short-term bank deposit and
debt ratings of AIB and ICS have been placed on review for possible downgrade.
These institutions all currently benefit from an extremely high level
of support (ranging from five to seven notches of uplift from the banks'
stand-alone ratings). Therefore, the review of the
banks' deposit and debt ratings will take into account the government's
ability and willingness to support its banking system following the outcome
of the review of the government bond rating.
The review of the Baa3/Prime-3 bank deposit and senior debt ratings
of INBS has been changed to "review for possible downgrade"
from "review with direction uncertain". The review
with direction uncertain had focused primarily on the planned sale of
the institution, which could result in either an upgrade or a downgrade
depending on the details of the transaction and the credit quality of
the potential purchaser. However, the change in the direction
of the review to "possible downgrade" reflects (i) the slow
process of the planned sale. This may be further delayed by uncertainties
created by the reorganisation and resolution legislation to allow burden
sharing with subordinated creditors; (ii) a potential lower degree
of systemic support following the expiry last week of the blanket guarantee
on senior and dated subordinated debt, which had underpinned the
Baa3 ratings.
There are no changes to the senior ratings of Anglo Irish Bank and the
review for possible downgrade on the bank's Baa3/P-3 debt
and the A3/P-1 bank deposit ratings will continue.
DOWNGRADE OF DATED AND JUNIOR SUBORDINATED DEBT
On 30 September 2010, the Irish authorities announced that they
are working on a resolution and reorganisation legislation to allow burden-sharing
by subordinated bondholders. As a result of this, the dated
subordinated debt rating of Anglo Irish and INBS has been downgraded to
C, indicating the likelihood of a substantial loss. This
action concludes the review with direction uncertain on the dated subordinated
debt of INBS, originally initiated by Moody's on 9 December
2009 and maintained on 21 July 2010.
In addition, the dated subordinated debt ratings of the other Irish
domiciled banks, and the junior subordinated debt ratings of AIB
and IL&P, have been downgraded. In the case of IL&P,
the ratings have been downgraded from Baa1 to Ba3, and in one instance
from A3 to Ba3; due to a clerical error, the single debt issue
had been rated A3 as opposed to Baa1. These actions have been prompted
by the rating agency's concern that support may not be extended to these
instruments in the case of financial distress following the government's
recent statements.
Previously, Moody's ratings on Irish banks' dated subordinated
debt had generally reflected an expectation of systemic support for these
instruments in a going-concern scenario. This was primarily
based on the legal framework in Ireland preventing a different treatment
of dated subordinated and senior unsecured debt outside of a liquidation
of the issuer. The announcement by the Irish government to introduce
resolution and reorganisation legislation will, in Moody's
understanding, enable a different treatment of dated subordinated
debt outside of a liquidation. While this legislation is being
introduced to share the cost of supporting Anglo Irish and INBS with subordinated
creditors, this establishes in Moody's view a precedent for
the treatment of subordinated debt of other banks in case that government
support is required in the future.
As a consequence, Moody's has removed any systemic support
from the ratings of these instruments, which are now more closely
aligned to the banks' standalone financial strength ratings (the BFSRs).With
the exception of Anglo Irish and INBS, where the expected loss warrants
a much lower rating (now C), the dated subordinated debt of the
other banks is now rated one notch below their standalone rating (including
any potential parental support). Due to its more junior position
in the capital structure, junior subordinated debt is subsequently
rated two notches below the banks' standalone rating.
CHANGE IN OUTLOOK ON THE BFSRs OF AIB AND EBS
The outlooks on the D BFSRs of AIB and EBS have been changed to stable
from positive. In the case of AIB, this reflects several
factors which, in Moody's opinion, limit the positive
pressure on the bank's standalone creditworthiness. These
include (i) the likely high level of losses that will be taken on the
EUR4.4 billion of land and property assets that were previously
to move to NAMA, but will now stay on the balance sheet of the bank;
(ii) the ongoing sovereign difficulties that restrict the ability of the
bank to issue medium term funding ; (iii) the likelihood of further
austerity measures that could further impact a return to economic growth
in Ireland; (iv) the need for new senior management (Chairman and
Chief Executive) to be recruited; and (v) the overhaul of both the
overall strategy and of the bank's underwriting and risk culture
that is required. However, Moody's notes that further
downward pressure on the BFSR is limited as a result of the EUR10 billion
of capital that the bank is expected to raise in 2010 (of which EUR2.5
billion will be raised through the sale of the bank's Polish subsidiary),
and that the bank's domestic franchise is likely to remain extremely
strong.
The outlook on the D BFSR of EBS has also been changed to stable from
positive. This reflects the ongoing economic issues in Ireland
and the likelihood of further austerity measures that could further impact
a return to economic growth in Ireland. The society is currently
undertaking a process that will likely result in the sale of the society,
and Moody's notes that this could lead to further rating actions
depending on the acquirer and the structure of any acquisition.
As a result of the change of outlook on the BFSR of AIB and EBS,
the outlook on the subordinated debt ratings has been changed to stable.
WITHDRAWAL OF THE PRIME-1 BACKED SHORT-TERM ISSUER RATING
OF INBS
The original blanket guarantee established by the Irish government in
September 2008 covered a wide range of liabilities. As a result,
Moody's assigned a backed short-term issuer rating of Prime-1
to INBS reflecting that the institution's short-term debt and deposit
obligations, maturing within the guarantee period, were guaranteed
by Prime-1 rated Ireland. This guarantee expired on 29 September
2010 and, as a result, the backed short-term issuer
rating assigned to INBS has been withdrawn.
The principal methodologies used in rating Irish banks were Bank Financial
Strength Ratings: Global Methodology published in February 2007,
and Incorporation of Joint-Default Analysis into Moody's Bank Ratings:
A Refined Methodology published in March 2007. Other methodologies
and factors that may have been considered in the process of rating this
issuer can also be found on Moody's website.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service's information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
MOODY'S adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
MOODY'S considers to be reliable including, when appropriate,
independent third-party sources. However, MOODY'S
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
London
Ross Abercromby
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Johannes Wassenberg
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
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Moody's takes action on rated Irish Banks further to sovereign rating review
