Market approval sees bond yields fall

IRISH BOND yields continued to fall yesterday as the market responded with cautious optimism to Thursday’s announcement of the total cost of the bank recapitalisation programme, and that AIB would become majority State-owned.

The cost of Irish debt improved by almost a quarter of 1 per cent as the Minister for Finance and senior officials from the NTMA told Anglo Irish Bank’s senior bondholders in a scheduled conference call that their repayments would be honoured.

However, Allied Irish Banks had its dated subordinated debt – risk funding provided by investors for a premium – downgraded to sub-investment grade or “junk” status by credit rating agency, Fitch, last night.

The agency took the action on the basis of the banks increased dependency on the Government after the Minister for Finance Brian Lenihan said on Thursday that the Government would take a majority stake in the bank, effectively nationalising the lender.

AIBs subordinated debt was also downgraded because of the Governments intentions that Anglo Irish Bank and Irish Nationwide subordinated debt holders would be asked to share the burden of the losses at those institutions, Fitch said.

In light of this increased dependency and the stance adopted by Government to the dated subordinated debt of Anglo and INBS, Fitch believes that should AIB require further capital, this class of debt is at greater risk than previously of being involved in a restructuring.

“Fitch considers the risk to be remote, but still sufficiently tangible for the rating to be placed at sub-investment grade,” it said

AIB had €4.1 billion of dated subordinated debt at the end of June. The debt was downgraded to `BB from `BBB+.

The agency also downgraded Anglo as well as the banks subordinated debt and that of Irish Nationwide given the Governments intention to share the losses with these debt investors.

Yesterday some 150 international bond market investors were briefed by Mr Lenihan and NTMA officials in an hour-long conference call, which had been planned earlier this week as a follow-up to Thursday’s announcement.

The NTMA’s John Corrigan, Oliver Whelan, Michael Torpey and the agency’s newly appointed chief economist Rossa White participated in the lunchtime call, during which the Minister for Finance strongly reiterated that all obligations to senior debtholders would be met, and underlined the parity of Anglo Irish Bank’s senior debt with depositors under Irish law. Senior debt accounts for some €16.5 billion of Anglo’s debt.

On the markets, yields on Irish bonds declined for the second straight session and the spread over German bonds contracted, despite some negative domestic economic data yesterday which shed doubt on the pace of Ireland’s economic recovery. Having reached an all-time high of almost 7 per cent this week, the yield on Irish 10-year bonds retreated 24 basis points to 6.33 per cent. The spread over German bonds also fell back to 4.047 per cent.