Friday 24 November 2017

NTMA hoping for a break on fund-strangling junk rating

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Dara Doyle

John Corrigan, head of Ireland's debt office, joked this week that his people were using their best chat-up lines to persuade Moody's Investors Service to lift our credit rating out of junk.

Analysts are split on whether the charm offensive will succeed when the ratings company delivers its latest verdict on Ireland next Friday, January 17.

While the nation last month became the first to leave the euro region's emergency loans programme, concerns persist that the Government will have to add to the €64bn it has pledged to help ailing banks.

"On one hand, it seems to be a matter of when, not if, Moody's raises Ireland's rating," said Eoin Fahy, an economist at Kleinwort Benson Investors in Dublin.

"On the other hand, it seems Moody's still has some worries about the banks, and to an extent that tempers expectations that they'll move right now."

Ireland and fellow bailed-out nation Portugal both re- entered international bond markets last week, adding to the sense that the worst of the European debt crisis is over. Ireland sold new 10-year securities through a group of banks at the lowest cost of borrowing for more than 13 years.

While the sale has no direct relationship to Ireland's rating, the transaction was "credit positive", Moody's said.

"The Irish Government has been gradually restoring its creditworthiness through fiscal consolidation and structural reform," Moody's analyst Kristin Lindow said in emailed response to questions.

"The bond issue confirmed broad investor appetite for the Government's debt at quite low yields."

Corrigan's National Treasury Management Agency raised €3.75bn selling the bonds at a yield of 3.543 per cent -- the lowest since at least 2000, the year after Ireland adopted the euro, according to data compiled by Bloomberg.

The bond sale may heap pressure on Moody's to join Standard & Poor's and Fitch Ratings in restoring Ireland's investment grade, the last piece of the jigsaw for Taoiseach Enda Kenny's Government in regaining investor credibility.

A junk rating shuts off Ireland from the pool of investors, who are only allowed to buy investment-grade debt.

"More likely than not, they'll upgrade," said Owen Callan, an analyst at Danske Bank A/S in Dublin, which is a primary dealer in Irish debt.

"But given that it's Moody's, you have to keep a 30 per cent chance that they won't."

It is set to announce possible credit-rating actions on Portugal, which sold €3.25bn of five-year notes last week. The nation requested a bailout in May 2011, about five months after Ireland, and is classed as junk at all three ratings companies.

Moody's cut the rating of Ireland's three biggest banks just last month, citing "the continued rise and high level of non-performing loans" in the case of Bank of Ireland, still the biggest lender in the country.

One in four mortgages by value is in arrears or has been restructured, according to the Central Bank. Even with recent increases, home prices are still 47 per cent below their 2007 peak, based on figures from the CSO.

"The downgrade of the Irish banks increases the risks to our long-standing base case scenario, where we were expecting a full sovereign rating upgrade in the first quarter," said Ryan McGrath, an analyst at Cantor FitzGerald in Dublin. "It is difficult to see a scenario where Moody's can downgrade Irish banks but upgrade the Irish sovereign in the space of a month."

The FF-led government was forced to save its banks after a lending spree stoked a decade-long property boom that collapsed in 2008. Five of the country's six main domestic banks were taken over by the State.

One scenario is that Moody's compromises by raising the outlook for Ireland and leaving the country's rating unchanged.

In September, Moody's upgraded its outlook on Irish sovereign debt from negative to stable.

For some investors, the rating doesn't make a difference to their view, while for others it still matters.

In almost half the instances, yields on government bonds fall when a rating action by S&P and Moody's suggests they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s. When S&P downgraded the US government in August 2011, bonds rose and pushed Treasury yields down to records.

A junk ranking cuts out some money managers, whose investment criteria prevent buying low-rated securities.

"It's a geographical thing," said Fahy at Kleinwort Benson. "In Europe and the US, it may not be such a big deal.

"But it can be hard to get an investment in a junk credit past a credit committee or asset allocation committee in Asia, for example, where a lot of the money is. You would expect maybe a 10 basis-point shift if the junk rating is dropped."

Against that backdrop, Ireland has been lobbying Moody's to restore the investment grade it lost in July 12, 2011.

"We just hold our breath at this stage, I've given up trying to second-guess them," Corrigan told reporters in Dublin last week. "They seem to have softened their view on the eurozone, but we'll just have to wait and see."

Debt agency officials can point to the fact that Ireland has regained access to the market. In the past year, it raised about €11.3bn from sales of new bonds and by adding to existing credit. It also restarted Treasury bill auctions.

The Irish economy, too, is showing signs of life, expanding 1.5 per cent in the third quarter, the fastest pace since 2011.

Home prices are increasing, and unemployment has dropped for six months in a row, to 12.4 per cent.

"All signs point to the fact that Ireland deserves to get the upgrade," said Chris Chapman, a Boston-based trader at Manulife Asset Management, which owns more than $200m of Irish bonds.

"They've done everything that they've needed to do along the way."

© Bloomberg

Irish Independent

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