S&P downgrades rating on bank's subordinated debt

STANDARD & POOR’S has downgraded its rating on AIB’s lower Tier 2 debt and warned that further cuts may be made.

The agency’s decision came only days after Moody’s cut the deposit ratings of five Irish financial institutions to junk status.

That followed the High Court’s approval last week of the Minister for Finance’s request to change the terms and conditions on AIB’s dated and perpetual subordinated debt, an order that is subject to legal challenge.

“We note that the Minister has stated that if the buyback programme is not successful the Government intends to take whatever action is necessary to ensure appropriate burden sharing by the remaining subordinated bondholders,” S&P said.

Under the court order several changes were imposed, including changes to interest payments, extensions of maturities on some loans and the removal of restrictions on dividend payments or buybacks on some debt issues.

“The lowering of the ratings on AIB’s lower Tier 2 debt reflects our opinion that the decision of the Irish High Court indicates an increasing risk of default, but that it has not yet taken effect,” said S&P’s credit analyst Sean Cotten.

“Assuming that the order takes effect, we consider that the intended changes to the terms and conditions will be tantamount to an immediate default on the affected notes. As a result, we would expect to lower the ratings on the notes to D.”

The downgrade does not affect State guaranteed debt or unguaranteed senior instruments.

This morning S&P said its BB/B counterparty credit ratings on AIB were unaffected, remaining on CreditWatch negative. It is waiting for a review of AIB’s restructuring plan and details on capital injections from the State.