Moody's warns of downgrade risk

The €24 billion bank recapitalisation plan is positive for Ireland's financial system but negative for its creditworthiness, credit rating agency Moody's said today, highlighting the possibility of another downgrade.

Moody's warning comes on the heels of Standard & Poor's one-notch downgrade of Irish debt and Fitch's flagging of another rating cut amid concerns about Ireland's ability to deal with one of the world's costliest bank bailouts.

The State is hoping it can avoid tapping any European Union or IMF loans for the capital infusion by using €17.5 billion in existing state funds, raising around €5 billion through discounted buybacks or swaps of subordinated bank bonds, and selling assets.

"The capital increase is a clear credit positive for the banks," Moody's said in a note. "However, the additional recapitalisation costs that arise to the government in connection with the PCAR (capital stress tests) are credit negative for Ireland's sovereign creditworthiness."

Moody's currently rates Ireland Baa1 with a negative outlook, meaning that a downgrade is possible in the future. It expects Ireland's gross debt to increase by €2 billion as a result of the recapitalisation, the fifth in two years.

Ratings agency Fitch today downgraded Irish banks' ratings, cutting the rating on the subordinated debt of AIB, Bank of Ireland and EBS Building Society to C.

Fitch said it was downgrading Irish Life & Permanent because it was likely the Government would have to take a majority stake in the bank, following the results of the stress tests.

It has placed Government-guaranteed notes in AIB, Anglo Irish Bank, Bank of Ireland, EBS and Irish Nationwide Building Society on rating watch negative.

"The downgrade of AIB's, BoI's and EBS's subordinated debt securities reflects the Irish government's plans to seek direct contributions to solving the capital issues of the banking system by looking for further significant contributions from subordinated debtholders," the company said.

"Fitch believes that any future tender offers by AIB, BoI and EBS for their subordinated debt securities are likely to include an element of coercion, a feature notably absent from the previous tender offers recently undertaken by these institutions."

Irish Life and Permanent's individual rating has been cut to E, while Bank of Ireland's D/E individual rating has been placed on negative watch.

Despite putting Bank of Ireland's rating on negative watch, Fitch said it believed the bank enjoyed a higher level of flexibility in meeting a significant share of the additional capital requirement from private sources compared to other Irish domestic banks, although this was limited.

Bank of Ireland confirmed today it will put Burdale Finance Ltd, an asset-based lender headquartered in the UK which it acquired in 2005, officially up for sale in mid- April.

Last week, the Government agreed to a €24 billion recapitalisation of the main Irish banks, bringing the total State support to €70 billion.

The tests found AIB required €13.3 billion, while Bank of Ireland required €5.2 billion, Irish Life and Permanent €4 billion and EBS €1.5 billion. It was also decided to merge EBS into AIB, while Irish Life and Permanent will be broken up.

Additional reporting: Reuters