THE EBS building society has had some of its bonds downgraded by ratings agency Moody’s after the lender was stopped from paying interest on the debt following the Government’s commitment to provide €875 million in capital.
Moody’s expects the dividend stopper on €250 million in tier one capital bonds and a lesser amount in subordinated debt to be in place for the life of the Government’s promissory note, which allows the building society to draw down capital over a number of years.
The downgrade was made as Moody’s assumed that EBS “would likely omit coupons for at least a two-year period, in line with other European banks that have benefited from substantial state aid”.
The agency highlighted that the Irish Government had not imposed losses on the investors in the financial institutions’ subordinated debt – a riskier form of debt that carries a higher premium for investors – and that as a result Moody’s had incorporated “a very high level of systemic support into this class of debt” placing it on a similar level to senior debt and deposits at the institutions.
The agency acknowledged that the State had taken control of EBS and had “more flexibility” to impose losses in a going concern scenario. EBS has said that it plans to buy back about €250 million in tier one bonds at a discount to generate capital for the institution.
The Government has been criticised by the Opposition and by economic commentators for not forcing the State-guaranteed financial institutions to share some of the losses with investors in high-risk subordinated bonds.
Many of these investors have incurred losses through the voluntary debt swaps and buybacks undertaken by the banks to raise capital where they swap or buy back the debt at a discount to the level it is trading at in the markets.
