DBRS Comments on Recapitalisation of Allied Irish Bank

DBRS has today commented that the ratings of Allied Irish Bank p.l.c. (AIB or the Bank), including its Long-Term Deposits and Debt rating of AA, are unaffected by the Irish Government’s commitment to recapitalise the Bank. The trend on all ratings remains Stable.

Over the past weekend, the Minister of Finance (the Minister) announced, subject to shareholder and regulatory approval, an initial investment of EUR2.0 billion of core Tier 1 capital to assist in the restructuring of AIB’s capital position. This action was part of a plan to recapitalise the larger Irish banks. The investment will be in the form of perpetual preference shares with a fixed annual dividend of 8%. These shares will have voting rights in respect of change of control and any future changes in the capital structure. Additionally, the new shares will also have voting rights in respect of appointments of directors and 25% of the directors on the board. The voting rights include any appointment of directors in connection with the Government’s Guarantee Scheme. In addition, the measures announced over the weekend have been designed to ensure compliance with the recent European Commission Recapitalisation Communication and are subject to State aid approval.

The preference shares are non-convertible and will be treated as core Tier 1 capital by the Financial Regulator and are replaceable only with other core/equity Tier 1 capital. However, the Bank may redeem the shares within five years at the issue price or after five years at 125% of the issue price. The capital injection for AIB will likely occur by the end of the first quarter of 2009.

DBRS views the recapitalisation scheme put in place by the Irish Government as further evidence of the level of explicit government support for AIB and the Irish banking sector. This is further evidenced by the Government’s statement that it is prepared to underwrite further issuance of core tier 1 capital. In DBRS’s opinion, the recapitalisation scheme, along with the Credit Guarantee Scheme put in place in October 2008, are designed to restore the banking sector’s stability and encourage the sector to continue lend and function properly. Moreover, DBRS believes that the schemes will continue to foster confidence in AIB and the Irish banking system. That said, DBRS will continue to monitor the impact of the schemes on AIB’s franchise, which remains as a key factor underpinning the rating. DBRS continues to monitor the Bank’s ability to manage through the difficult operating environment.

The trend on all ratings remains Stable reflecting the high level of support afforded to AIB and the Irish banking system. It is noted, however, that the Bank’s intrinsic assessment, which is an integral part of DBRS’s final rating, may be lowered if the franchise is deemed weakened. Importantly, a reduction in the Bank’s intrinsic assessment may not necessarily lead to a negative rating action on the Bank’s final rating for non-guaranteed debt.

Note:
All figures are in euros unless otherwise noted.

The applicable methodology is Analytical Background and Methodology for European Bank Ratings, which can be found on the DBRS website under Methodologies.

This is a Corporate (Financial Institutions) Rating.