Aug 21 -
-- Irish Bank Resolution Corporation Limited (IBRC) has reduced its outstanding senior unsecured unguaranteed debt obligations to less than EUR150 million.
-- We believe that the likelihood of the Irish government introducing burden sharing on senior unguaranteed and unsecured bondholders has passed.
-- We are therefore raising our long-term counterparty credit rating on IBRC to 'B-' from 'CCC+', and affirming our short-term counterparty credit rating at 'C'.
-- The stable outlook reflects our expectation that any further deterioration in IBRC's capitalization will remain manageable.
On Aug. 21, 2012, Standard & Poor's Ratings Services raised its long-term counterparty credit rating on Irish Bank Resolution Corporation Limited (IBRC) to 'B-' from 'CCC+'. At the same time we affirmed our short-term counterparty credit rating at 'C'. The outlook is stable.
IBRC has been steadily reducing the outstanding amount of its senior unsecured unguaranteed debt obligations as it progresses with the work-out of its loan book, including the repayment of its largest two remaining obligations in late June 2012. We estimate that outstanding unguaranteed obligations are now less than EUR150 million. As a result, we believe that the likelihood of the Irish government (BBB+/Negative/A-2) introducing burden sharing on IBRC senior unguaranteed and unsecured bondholders has passed. Together with the fact that IBRC has also repaid most of its term government guaranteed notes, the vast majority of IBRC's remaining liabilities now relate to borrowings from monetary authorities. Consequently, we have revised our assessment of IBRC's "link" to the Irish government to "strong" from "limited" under our government-related entities (GREs) methodology.
We primarily compare the ratings on IBRC with those of the other rated Irish banks and also with other rated work-out entities. We consider that IBRC still has a way to go to demonstrate that its run-off will be completed in a predictable manner: IBRC's stated primary focus is the orderly work-out of its loan book over a planned period of up to 10 years. We believe, however, that IBRC has become a more stable institution following the plethora of compulsory changes it underwent after its nationalization in 2009.
IBRC reported a loss before tax of EUR885 million in 2011, mainly caused by elevated provision charges of EUR1,644 million. As a result of interest income (EUR1,447 million in 2011) on its large balance of promissory notes from the government--which are in turn pledged as collateral with the Central Bank of Ireland--IBRC was able to report a pre-provision profit for 2011, unlike most Irish peers. At Dec. 31, 2011, IBRC reported a tier 1 ratio of 15.1%. We calculate that IBRC's capital ratio, as measured under Standard & Poor's risk-adjusted (RAC) framework, was 7.6% at this date. The main difference reflects the more conservative risk weightings that we apply. Reflecting our assumption of further losses, offset by the continued reduction in the balance sheet, we assume that this ratio will be in the 6.0% to 7.0% range by end-2013.
Standard & Poor's bases the ratings on IBRC on its 'bb' anchor, "moderate" business position, "moderate" capital and earnings, "weak" risk position, "below average" funding, and "weak" liquidity position, as our criteria define these terms. We define IBRC as a GRE, based on our view that the entity will remain government owned through its run-off, with a "strong" link to the government and "limited" role according to our criteria. As a result, we uplift the long-term rating on IBRC by one notch from its 'ccc+' stand-alone credit profile because we believe that the likelihood of extraordinary support is "moderate".
The stable outlook reflects our expectation that IBRC's net interest income will continue to benefit from the significant interest income that it receives from its sizable balance of promissory notes. On this basis we assume that IBRC will continue to generate adequate pre-provision operating income and that, while loan impairment charges and related nonrecurring expenses may remain elevated, the impact on its capital position will remain manageable.
We could raise the ratings if IBRC's successful deleveraging and operating performance give us confidence that the wind-down of its operations will progress in a predictable manner. We would most likely reflect this in a revision of our assessment of its business position to "adequate" from "moderate".
We could lower the ratings if IBRC's link to the government were to weaken.
Ratings Score Snapshot
Issuer Credit Rating B-/Stable/C
Business Position Moderate (-1)
Capital and Earnings Moderate (0)*
Risk Position Weak (-2)
Funding and Liquidity Below Average and Weak (-2)
GRE Support 1
Group Support 0
Sovereign Support 0
Additional Factors 0
*When a bank's anchor, derived from the BICRA methodology, is in the 'bb' category and its common equity regulatory Tier 1 ratio is greater than the local regulatory requirements, a "moderate" assessment of capital and earnings is neutral for the SACP (see paragraph 88 of bank criteria).
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
-- Bank Capital Methodology And Assumptions, Dec. 6, 2010
-- Ireland Ratings Affirmed At 'BBB+/A-2'; Outlook Remains Negative, Aug. 2, 2012
-- Banking Industry Country Risk Assessment: Ireland, July 25, 2012
Upgraded; CreditWatch/Outlook Action; Ratings Affirmed
Irish Bank Resolution Corporation Limited
Counterparty Credit Rating B-/Stable/C CCC+/Developing/C
Certificate Of Deposit B-/C CCC+/C
Senior Unsecured B- CCC+
Irish Bank Resolution Corporation Limited
Preferred Stock D
Commercial Paper C