Moody's says Anglo liquidation unlikely

THE LIKELIHOOD of Anglo Irish Bank being wound down over the short or even medium term is “very low”, the credit rating agency Moody’s has said, after downgrading about €1.7 billion of the bank’s debt to “junk” status.

Liquidating Anglo was unlikely due to its potential impact on Government debt and the domestic banking system, the agency said.

The bank’s dated subordinated debt (sub-debt), which totals €1.7 billion, was downgraded by three notches to Ba1, the highest rating in speculative or “junk” grades, from Baa1, an investment grade.

This debt, which is covered under the Government bank guarantee, remains on review for possible further downgrade. The rating on Anglo’s senior debt of €12.3 billion and deposits of about €30 billion was maintained at A3, the seventh highest rating, but is also on review for possible downgrade.

Holding the rating on senior debt and deposits is positive for the bank as any downgrading on this debt would have affected the bank’s funding and covered bonds.

The rating cut on the dated subdebt reflects higher uncertainty facing these investors given the bank’s proposal to split itself into good and bad operations after the transfer of €30 billion to €35 billion in loans to the National Asset Management Agency (Nama).

The complexities in splitting the bank were large and carried “considerable risks and uncertainties”, Moody’s said. In such a split, junior debt, including dated sub-debt, is expected to be left in the bad bank to absorb losses, it said.

“In the event, albeit highly unlikely, of the bank being wound up, these securities would have to suffer substantial losses.”

It was likely “the deflationary impact” of selling Anglo’s assets in a wind-down would have “severe consequences” for Nama and the other Irish banks, which would still have commercial property loans after Nama, Moody’s said.

The bank plans to wind down the bad part over a period of time.

The bank’s proposals were contained in the restructuring plan, which was submitted to the European Commission last November.

Brussels must approve the plan under state aid rules following the bank’s receipt of €4 billion from the Government. The EU will rule on the plan in the coming months.

Moody’s said the degree of future State support may be affected by “the final form of the bank and the nature of any guarantees” created after restructuring.

The bank’s sub-debt is “at significantly greater risk” than previously, though due to the possibility of “greater burden sharing, and the magnitude of the challenges that the financial system faces”.

Moody’s said it would examine further developments to assess whether “such burden sharing” may affect other banks and that it may review how it rates this debt at other banks, if they are affected.

Fine Gael has said the Government should negotiate with sub-debt holders in Anglo so that they bear some of the bank’s losses.

Some holders of sub-debt in Anglo have already taken losses on their investment. The bank made a profit of €1.67 billion last year buying back some sub-debt.