Anglo 'more vulnerable' to default in its new guise
Fitch marks down rating, saying 'less state support' will affect Asset Recovery Bank
Published 16/09/2010 | 05:00
RATINGS agency Fitch has warned that the new Anglo Irish Bank may benefit from "less" state support than the current incarnation, making its debt instruments more vulnerable to default.
The grave warning comes just days after fellow ratings agency Moody's said the embattled bank's bonds could be demoted to junk status unless they were explicitly guaranteed by the Government.
Fitch yesterday went the additional step of pre-emptively marking down Anglo's main credit rating from A- to BBB+ and revising its outlook on the bank to "negative", suggesting further downgrades may follow.
In a detailed note, Fitch said the ratings downgrade stemmed from concerns about how much government support would be given to Anglo's new Asset Recovery Bank (ARB), the asset wind-down vehicle that will emerge from the old Anglo.
"Despite being government-owned, the ARB, as a wind-down institution not engaging in new lending and decoupled from Anglo's deposit book, will be less systemically important than the current Anglo," Fitch said.
"The scope of the long-term support for this entity [the ARB] may be less than what would otherwise be available to Anglo as a fully functioning, deposit-taking bank."
Fitch's analysts yesterday declined to reveal what supports were at risk of being removed from the ARB, which will manage Anglo's €38bn portfolio of loans not destined for the National Asset Management Agency (Nama).
Fitch also downgraded Anglo's senior unsecured debt from A- to BBB+ despite last week's comments from Finance Minister Brian Lenihan on the Government's intent to honour all senior debt-holders.
The instruments have been put on Fitch's "Risk Watch Evolving", meaning they will be closely monitored with a view to future upgrades or downgrades.
"While significant downside risks may emerge for this class of creditors under the proposed structure, there is also a possibility that an orderly wind-down of Anglo's assets. . . may require the Government to give explicit guarantees to senior unsecured debt," the ratings agency said.
"If senior unsecured creditors benefit from explicit government guarantees, the rating of senior unsecured debt will be upgraded to that of a sovereign."
Anglo's senior debt remained among the most expensive debt instruments in the world to ensure yesterday, with markets demanding a fee of €660,000 for every €10m insured.
Fitch also noted "significant further downside risk to unsecured unguaranteed creditors", in a reference to the €6m of sub-ordinated debt on Anglo's balance sheet.
The cost of insuring those instruments rose 15 basis points to €1.6m per €10m yesterday, making them the fifth-most expensive instruments to insure anywhere in the world.
On a more general note, Fitch said the new ARB would have a "very weak loss absorption capacity absent a recapitalisation as the transfer of assets to Nama in H2 [the second half of the year] will absorb most of Anglo's equity".
The Government has promised to unveil the ARB's recapitalisation "by October" after detailed work from the Financial Regulator.