DBRS Downgrades Subordinated Debt of Allied Irish Banks plc to ‘B’, UR - Negative

DBRS has today downgraded the Dated Subordinated Debt and Undated Subordinated Debt ratings of Allied Irish Banks p.l.c. (AIB or the Group) to ‘B’ from ‘A’ to reflect the elevated risk of adverse action by the government. Today’s action does not impact AIB’s other ratings, including the senior non-guaranteed debt, which remains at A (high), Stable trend, and the government guaranteed debt, which remains at AA, Under Review with Negative Implications. All ratings of non-senior debt instruments remain Under Review with Negative Implications, where they were placed on 1 October 2010.

This rating action reflects DBRS’s view that the risk of loss for holders of subordinated debt instruments of Irish banks has increased significantly given recent actions and various statements by the Irish Government. Specifically, the Irish Government has indicated its expectations to force loss sharing amongst junior bondholders, in certain financial institutions, where appropriate, as a result of the recapitalisation and restructuring of the banking sector. In DBRS’s view, this risk of burden sharing increases as government ownership in the institution increases. To this end, with this rating action, DBRS has lowered the subordinated debt ratings to reflect the heightened risk as a result of the potential of a sizeable government ownership stake in AIB following forthcoming recapitalisation measures. Furthermore, as discussed in our 1 October 2010 press release, DBRS is concerned that the Minister for Finance may extend the scope of its proposed resolution and restructuring legislation addressing the issue of burden-sharing by subordinated debt holders to the entire Irish banking sector. This concern is elevated by the discussion on the treatment of subordinated debt that is detailed in the EU/IMF Programme of Financial Support for Ireland, published on 1 December 2010. As such, in DBRS’s view, subordinated bondholders, who may be invited to participate in future exchange offers, may consider this potential of adverse action as compelling them to accept an offer.

Furthermore, given the quantum of additional capital required by the Irish Regulator to meet the newly announced 12% Core Tier 1 capital structural benchmark by 28 February 2011, DBRS anticipates that AIB will need to raise an additional EUR 5.3 billion of capital. This capital is in addition to the circa EUR 6.0 billion of capital, the Group is still required to raise as part of the previously announced Prudential Capital Assessment Review (PCAR). Given the current environment and the significant amount of capital needed, DBRS believes that AIB will be challenged to raise such capital at competitive terms in the private market. As such, the Group may need to rely on the Irish Government to provide some or all of the required capital, thereby potentially significantly increasing Government ownership.

DBRS notes that this rating action is an exception to the standard and customary notching as discussed in our published methodologies. DBRS has widened the notching on these instruments due to the increased uncertainty of systematic support of subordinated debt.

The ratings remain under review, reflecting the uncertainty to the specific form and terms of any liability management exercise and potential legislation.

Notes:
All figures are in EUR unless otherwise noted.

This rating did not include issuer participation and is based solely on publicly available information.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations, Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, and Rating Bank Subordinated Debt and Hybrid Capital Instruments with Discretionary Payments, which can be found on our website under Methodologies.