THE RATING on Anglo Irish Bank’s covered bonds – IOUs supported by loans – was cut by Moody’s yesterday on concerns over the liquidity of the commercial property loans backing the debt.
The credit-rating agency lowered Anglo’s covered bonds by two notches to Aa2 from Aaa, saying timely interest payments were “unlikely” if the bank defaulted.
The bonds remain on negative watch, meaning they are on review for further rating cuts.
“Given the difficult environment for the refinancing of commercial assets, Moody’s believes that the probability of timely payments on the covered bonds is unlikely,” said the agency.
Following the downgrade of the Irish Government, Moody’s has lowered its assumptions on the likelihood that the Government and other financial institutions would support the covered bonds following a default of Anglo.
In another ratings move, covered bonds issued by AIB’s mortgage bank face a possible ratings cut as debt-rating agency Fitch placed them on negative watch.
The agency said it was taking a more conservative view of the liquidity of Irish buy-to-let mortgages, which make up 26 per cent of the residential mortgages included in the bank’s “cover pool” of assets supporting the bonds.
AIB Mortgage Bank has covered bonds of €14.7 billion and €19.4 billion in a pool of assets backing them, according to Fitch.
Shares in AIB dropped 8.2 per cent to 64 cent, as the bank was removed from the Stoxx Europe 600 Index after close of trading.
The bank added to earlier falls due to the reweighting of the FTSE 250 index in London.
Meanwhile, one European Central Bank (ECB) policymaker said governments must do more to pull banks off state support, while another warned that emergency funding would not last forever.
ECB governing council member Ewald Nowotny said government action was needed to wean banks off the cheap cash the ECB has provided since late 2008.
That added to an impression that the fate of some euro zone banks – particularly in Ireland and Portugal – is back at the forefront of investor and policymaker concerns, even after agreement on stricter capital rules last week.
Axel Weber, head of Germany’s Bundesbank and another ECB council member, said there was still work needed to ensure no banks were so big they could not be allowed to fail in future. Rules would have to reviewed regularly, he said. – (Additional reporting, Bloomberg)
