Anglo Irish Downgraded – No Surprise

The rating action was another blow for the beleaguered bank. But its spreads were little moved as the market had already priced in the downgrade. In fact, Anglo Irish senior CDS trades with an implied rating of B, according to Markit Implied Ratings.

“A report in a Sunday newspaper suggested that some of Anglo Irish’s debt will be tendered at a discount to par or swapped for equity in the ARB.”

Gavan Nolan


Spreads were lacking direction in a relatively uneventful day, Monday. “Perhaps the most notable occurrence of the day was Moody’s downgrade of Anglo Irish Bank,” vice president Gavan Nolan at Markit Credit Research writes in his daily market alert.

The agency cuts its rating on Anglo Irish’s senior debt by three notches to Baa3, citing the likelihood of further asset quality deterioration and the lack of an explicit government guarantee.

Moody’s warned that if the latter issue isn’t rectified then additional downgrades into sub-investment grade are possible.

But it was the agency’s action on the subordinated debt that was more significant, Nolan points out.

Moody’s cut its rating on the bonds by six notches to Caa1 from Ba1, citing the increasing risk that subordinated bondholders will be forced to share some of the burden of the bailout.

Specifically, the agency highlighted three factors that have led to the risk rising:

(i) the need for further capital injections as the non-NAMA loan book deteriorates;

(ii) the thin capitalization of the Asset Recovery Bank (ARB), which is likely to be wound down; and

(iii) the longer maturities of the subordinated debt in comparison to the senior debt.

The rating action was another blow for the beleaguered bank. But its spreads were little moved as the market had already priced in the downgrade.

In fact, Anglo Irish senior CDS trades with an implied rating of B, according to Markit Implied Ratings.

“It should be noted that it is not the most liquid of credits, having a Markit Liquidity Score of between 2 and 3 in the past few months. The government is expected to provide clarification this week on its plans for Anglo Irish and the overall cost of the bailout. A report in a Sunday newspaper suggested that some of Anglo Irish’s debt will be tendered at a discount to par or swapped for equity in the ARB,” Gavan Nolan points out.

  • Markit iTraxx Europe 113.25bp (+0.5), Markit iTraxx Crossover 516bp (-0.5)
  • Markit iTraxx SovX Western Europe 157.5bp (+2.5)
  • Markit iTraxx Senior Financials 144bp (+1.5)
  • Sovereigns – Greece 785bp (-10), Spain 226bp (+3), Portugal 405bp (+12), Italy 195bp (+5), Ireland 470bp (+8), Belgium 137bp (-3)
  • BP 187bp (-2)
  • AIB  – Snr 625bp (+5), Sub 1000bp (+28), Bank of Ireland – Snr 520bp (+11), Sub 815bp (+19), Anglo Irish Bank – Snr 985bp (+25), Sub 47 points upfront

Something wrong with this picture?

CDS curve for Southwest Airline.

* Southwest Airlines (LUV) will buy Airtran in a $1.4 billion cash and stock deal in a consolidation of low cost air carriers.

* CDS curve today is seeing a roughly 5 bps parallel shift in response to the transaction in early trading.

* Stocks on both LUV and Airtran were higher. Stocks on other air carriers (JetBlue, US Airways and Delta) were higher as well on merger speculation.

Markit Research & News

Related by The Swapper:

Irish Sovereign CDS Spread Exceeds 500 Basis Points

Ireland And Portugal Close To Collapse

Irish CDS Spreads Back To Record High After Bond Sale

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