DBRS Comments on proposed NAMA and ELG, Anglo Irish Bank Ratings Unaffected - Senior remains at A (high), Trend Stable

DBRS has commented that the ratings of Anglo Irish Bank Corporation Limited (Anglo Irish or the Bank) are unaffected by the Irish Government’s announcement of the details of the National Asset Management Agency Act of 2009 (NAMA) and the proposed Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 (ELG Scheme). The ratings of Anglo Irish Bank, including its unguaranteed debt, remain at A (high), which is the level of the floor for critically important banks (CIBs) operating in Ireland.

Today’s comment follows the 16 September, release by the Irish Department of Finance which indicated that NAMA is expected to purchase loans with a book value of approximately EUR 28.0 billion from Anglo Irish Bank. The NAMA draft legislation provides the Irish banks the mechanism by which they can de-risk their balance sheets by removing certain and often distressed assets, primarily land and development loans and related loans, from their balance sheets. The Government anticipates that by mid-2010, the Irish banks, including Anglo Irish will have transferred loans with a book value of approximately EUR 77.0 billion to NAMA. The loans will be acquired at a discount from book value, which, on average is estimated to be circa 30%. DBRS notes that this 30% “haircut” is only an industry-wide estimate and the discount will vary from loan to loan and could be significantly different from institution to institution.

DBRS views the proposed legislation as necessary steps towards the return to health of the Irish banking sector, which will in turn help foster the recovery of the Irish economy. DBRS sees a certain level of short-term pressure for Anglo Irish; which will be realised through sizeable losses associated with the proposed transfer of these assets to NAMA. However given the public ownership, and the various statements made by the Finance Minister’s office, DBRS expects that any resulting capital shortfall caused by the NAMA transfer will be replenished by the shareholder.

Liquidity will benefit from the proposed NAMA. By removing the larger, less liquid, and often distressed assets from the bank’s balance sheets, NAMA is expected to provide a level of liquidity relief to the banks. Moreover, the senior bonds which are received by the Banks, in consideration of the proposed transfer, are expected to be “pledgeable” collateral for central bank funding facilities, which could provide a low cost means to additional liquidity. Further, the improved liquidity position of the banks may drive a level of stabilisation for deposit margins owed to reduced competition for deposits, thereby potentially lowering the costs of deposits for the Irish banks.

Moreover, DBRS sees the Bank’s liquidity position benefiting from the Irish Government’s proposed ELG legislation. The proposed ELG Scheme provides covered institutions, which includes Anglo Irish Bank, the option to issue government guaranteed securities with maturities beyond 29 September 2010, the expiry for the current government guaranteed debt scheme (the CIFS Scheme). The proposed ELG Scheme allows guarantees for deposits, commercial paper, certificates of deposit and senior unsecured debt with maturities of up to five years incurred by participating banks from the Commencement Date until 29 September 2010. The lengthened guarantee period of the ELG Scheme enhances the Bank’s ability to improve the duration of the Bank’s funding profile and ladder its maturity schedule to reduce refinancing risk.

DBRS continues to monitor Anglo Irish’s progress in restructuring its business model and funding profile; as well as, monitor the impact of NAMA on the Bank.

The Negative trend on the long-term guaranteed debt reflects DBRS’s internal assessment of the sovereign and DBRS’s view that, although Ireland’s most recent plans to stabilise public finances, contain the economic downturn, and restructure distressed bank loans might succeed, the downside risks remain. Should significant financial sector or fiscal deterioration occur, DBRS could take negative rating action on the internal sovereign assessment. Conversely, if Ireland’s policy measures help to stabilise the bank balance sheets and restore investor confidence, DBRS would likely return the trend to Stable.

Notes:
All figures are in EUR unless otherwise noted.

The applicable methodologies are, Analytical Background and Methodology for European Bank Ratings, Second Edition and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.