Anglo Irish Bank's tier one capital debt downgraded by Fitch

ANGLO IRISH Bank’s tier one capital debt was downgraded by Fitch and placed on review for a possible downgrade by Moody’s after the bank said last week that it will defer interest payments to investors holding these bonds.

The actions by the two ratings agencies follows the requirement set by the European Commission that the bank defer coup payments on all of its tier one debt – the lowest ranking of debt above pure equity – as a condition of the State’s recapitalisation of Anglo.

Fitch cut Anglo Irish’s tier one debt to C from B-, while Moody’s said it may downgrade the securities it has rated Caa1 and Caa3.

It has emerged that Anglo Irish may be contractually obliged to pay coupons to investors in the bank’s £200 million sterling and £250 million sterling tier one bonds under the terms of the securities.

The bond agreements state that if the bank cannot meet a coupon payment it must issue ordinary stock. But given that the stock is worthless following the bank’s nationalisation, Anglo may ultimately have to pay the loans in full in the event of coupon deferral.

This means it may not be at the bank’s discretion to defer coupon payments on these two bonds.

The bank is expected to offer investors in these securities either cash or more secure debt in return for redeeming these bonds at a discount to their face value in a planned move to boost the bank’s reserves of loss-absorbing capital.

In a separate development, a report from ratings agency Standard Poor’s (SP) showed that arrears on Irish residential mortgages which have been packaged into bonds and sold to investors have risen to 3.9 per cent from 2.1 per cent in March 2008.

SP said that non-payments of 90 days or more on mortgages more than doubled to 1.5 per cent.

Transactions on Irish residential mortgage-backed securities (RMBS) are “experiencing the most testing economic environment since the inception of that market”, the agency said.

Higher unemployment and further house price declines will likely put further pressure on the mortgages in the near term, according to the ratings agency.

Credit analyst Kate Livesey at SP said the Irish legal system was generally considered “borrower-friendly” which explained why the number of house repossessions reported to date has been “relatively low”.

She said the introduction of a code of conduct on mortgage arrears, governing the launching of court proceedings, “could also be lengthening the time from first arrears to repossession”.

The agency’s report shows that of €37 billion in securitised mortgages, some €1.4 billion were determined to be “delinquent”, meaning they are more than 30 days behind repayment schedules.