More bad news for Anglo Irish creditors on Monday — Moody’s slashed its ratings of the bank’s senior unsecured and subordinated debt; the latter by six notches, no less, although Moody’s actions on the bank’s senior unsecured debt may be of more concern.
From the rating agency’s release:
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…
Anglo Irish’s deposit rating and the bits of its debt that are guaranteed by the government aren’t affected by the downgrade.
Here’s Moody’s rationale for downgrading Anglo Irish’s senior unsecured debt — based upon the government’s current plan to split the bank into a deposits-only Funding Bank and an Asset Recovery Bank:
“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.
While we’ll just note that this ‘risk scenario’ has already prompted panic within Ireland’s debt market, given that the Irish government has been keen to forswear default on this debt.
And as for Anglo Irish’s controversial subordinated debt — according to Moody’s:
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.
And the Anglo Irish beat goes on. Although one wonders for how much longer.
Related links:
When Anglo Irish bonds are liability managing – FT Alphaville
Ireland’s subordinated bond ATTACK! – FT Alphaville