DBRS Downgrades Irish Life & Permanent plc, Senior at BB (low)

DBRS Inc. (DBRS) today has downgraded the Non-Guaranteed ratings, including the Non-Guaranteed Long-Term Deposits and Non-Guaranteed Long-Term Debt ratings of Irish Life & Permanent plc (IL&P or the Group) to BB (low) from BBB (high). Concurrently, the Non-Guaranteed Short-Term Deposits and Non-Guaranteed Short-Term Debt ratings have been downgraded to R-4 from R-2 (high). All non-Guaranteed ratings have been placed Under Review with Negative Implications. To reflect DBRS’s downgrade of the long-term ratings of the Irish Government, guaranteed instruments issued by IL&P are downgraded to “A” from A (high). Concurrently, DBRS has downgraded the ratings of Short-Term Deposits and Short-Term Debt Guaranteed by the Irish Government to R-1 (low) from R-1 (middle). The trend on the long-term guaranteed ratings is Negative, while the trend on the short-term guaranteed ratings is Stable. This rating action follows DBRS’s downgrade of the Republic of Ireland to “A” with a Negative trend. For a full list of the rating actions, please see table below.

On 31 March 2011 the Irish Finance Minister announced that, as a result of the Central Bank of Ireland’s PCAR and PLAR exercise, IL&P will be required to raise a total of EUR 4.0 billion of capital, which includes EUR 3.3 billion equity capital and EUR 0.7 billion of contingent capital. This is significantly higher than the EUR 245 million that was required under the previous PCAR and capital review. This new capital requirement reflects the level of capital, as determined by the stress tests, necessary to absorb EUR 1.1 billion of potential credit losses and an additional EUR 2.2 billion of potential losses related to required deleveraging of the loan books.

Furthermore, the rating action reflects the statements by the Minister for Finance, which proposed that the pension and insurance arm of IL&P will be sold. In DBRS’s view, given that the pension and life assurance business has been responsible for the majority of the profits over the most recent few years, DBRS views such a sale as seriously constraining the remaining Bank’s earnings generation ability. Moreover, in DBRS’s view, it places in doubt the long-term viability of the Banking arm of IL&P as a stand-along entity. DBRS’s concern is exacerbated by the significant ownership that the Government will likely have in IL&P, as the proceeds from any such sale are unlikely to generate sufficient capital.

This significant rating drop reflects a change from DBRS’s former view that considered IL&P as ongoing entity benefitting from the diversity offered by both businesses. Moreover, the ratings reflected IL&P’s success in navigating through most of this cycle by avoiding higher risk construction lending. IL&P had not taken any government capital up to this point. However, the severity of the stress tests has changed the future of IL&P as an independent entity. DBRS had viewed IL&P as a potential consolidator within the Irish Banking sector; this role is likely no longer the case. DBRS sees the potential sizable government ownership of the Group as significantly hindering the Group’s flexibility to pursue an independent future.

The rating action on the Non-Guaranteed deposit and debt ratings of IL&P reflect the downgrade of the sovereign and its reduced ability to support the Irish banking system. The increased cost of recapitalising the banking sector and weak economic growth continue to pressure the fiscal condition of the Republic of Ireland. Nonetheless, DBRS maintains the SA-2 Support Assessment for IL&P. The SA-2 designation reflects DBRS’s expectation that some form of timely systemic support would be provided to the Group. IL&P’s SA-2 status as reflects the likelihood of forthcoming capital support as reflected in recent statements made by the Government.

While DBRS has already factored in the increased risk of loss to subordinated bondholders in the former ratings, given DBRS’s view of lower systematic support across the entire Irish banking sector and increased potential for negative actions impacting senior bond holders, DBRS sees additional risk to the subordinated debt holders. Accordingly, DBRS has lowered the ratings on subordinated debt by a similar number of notches.

The ratings review reflects the uncertainly to the long term viability of the Group. DBRS will conclude the review once more clarity as to the sale of the non-banking business and the restructuring plans are announced.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the issuer, Minister for Finance and Central Bank of Ireland. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Steve Picarillo
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 27 October 2009
Most Recent Rating Update: 15 December 2010

For additional information on this rating, please refer to the linking document below.