DBRS Comments on Recapitalisation of Anglo Irish Bank

DBRS has today commented that the ratings of Anglo Irish Bank Corporation plc’s (Anglo Irish or the Bank), including its Long-Term Debt rating of A (high), 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 an initial investment of EUR1.5 billion of core Tier 1 capital to assist in the restructuring of Anglo Irish’s capital position. This action was part of a larger plan to recapitalise the larger Irish banks. The Government also stated that it will continue to reinforce the position of Anglo Irish and will make further capital available, if required, so that the Bank remains a sound and viable institution. The initial investment will be in the form of EUR1.5 billion of perpetual preference shares with a fixed annual dividend of 10%. The preference shares include 75% of the voting rights of Anglo Irish. The investment is subject to the approval of the ordinary shareholders at a general meeting which will be convened as soon as possible. In addition, the measures announced today 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, Anglo Irish may redeem the preference shares within five years at the issue price or after five years at 125% of the issue price. It is likely that the capital injection for Anglo Irish will be completed following an Extraordinary General Meeting in mid-January 2009.

DBRS views the recapitalisation scheme put in place by the Irish Government as further evidence of the level of explicit government support for Anglo Irish and the Irish banking sector in general. In DBRS’s opinion, the recapitalisation scheme, along with the Credit Guarantee Scheme put in place in October 2008, are designed to restore the Irish banking sector’s stability and encourage the sector to continue to lend and function properly. Moreover, DBRS believes that the schemes will continue to foster confidence in Anglo Irish and the Irish banking system.

The Minister’s actions follows Anglo Irish’s announcement of the resignation of its chief executive, Mr. David Drumm, which, in turn, followed the resignation of the chairman of the board and of an additional non-executive board member. On 18 December 2008, Anglo Irish announced chairman of the board Mr. Sean FitzPatrick’s decision to resign, based on the fact that, over a period of eight years to 2007, he temporarily transferred loans from Anglo Irish to another bank prior to the Bank’s year end audit. Anglo Irish has noted in a statement that this transfer of loans did not breach banking or legal regulations. However, the Bank further noted the transfer was inappropriate from a transparency point of view. At 30 September 2008, the loans to Mr. FitzPatrick totalled EUR87 million. The total for directors’ loans at that date was EUR150 million.

Given the current challenges facing Anglo Irish, which include managing the impact of a weakening economic environment, DBRS is concerned that the announcements made by Anglo Irish last week may further erode investor confidence and could lead to a weakening of the Bank’s franchise. The Bank’s franchise remains a key factor underpinning the ratings of the non-guaranteed debt and Anglo Irish’s intrinsic rating. Moreover, DBRS is concerned that the aforementioned disclosure may suggest a weakness in governance and a lapse in management oversight.

DBRS will continue to monitor Anglo Irish’s ability to manage through the difficult operating environment, and will look for evidence that Anglo Irish’s franchise has weakened. DBRS continues to maintain the Bank’s Stable trend, which is attributed to the high level of Government support, however it is noted 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.