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ISEQ higher-Ireland's rating examined

Tuesday, February 12 09:20:58

The ISEQ is higher this morning at 3,601 up 22 points as European markets are steady and responding to Corporate results.

NCB looks at Irelands credit rating situation following last weeks Promissory note deal:

Yesterday evening, S and P upgraded Ireland's sovereign outlook to Stable from Negative.

The upgrade was driven by last week's Promissory Note deal which, according to S and P, "increased the likelihood of a full return by Ireland to private financing and of Ireland successfully exiting the EU/IMF bailout program at the end of 2013". The agency also reaffirmed Ireland's BBB+ rating.

The outlook revision is reflective of what S and P sees as the key benefits of last week's deal, namely: reduced debt-servicing costs (c.E1bn p.a.), lower refinancing risk and an improved debt maturity profile (the Promissory Notes had a weighted average maturity of 7-8 years, versus 34-35 years for the replacement bonds). In terms of the fiscal impact, the agency projects that interest savings will reduce Ireland's fiscal deficit by at least 0.6pc of GDP in each of 2014 and 2015, in line with government estimates released last week.

On Ireland's current rating (BBB+), S and P says there is possible upside to its stance if the Sovereign can sell its equity positions in the domestic banking system to nonresident investors. On the other hand, potential downside risks highlighted by S and P include failure to comply with the EU/IMF program and failure to raise 2013 funding needs on the capital markets. Ireland has made welcome progress on both fronts recently, successfully completing its ninth quarterly review last week and raising 25pc of its 2013 funding requirement in a well supported syndicated tap in early January. S and P also raised NAMA's outlook to Stable on the back of the Sovereign upgrade. We would expect a similar improvement to the agency's outlook for the Irish banks in the near future.

Last week we argued that the Prom Note deal was a key positive that would open the door to upgrades and further new issuance (research report here). So, yesterday's move by S and P, while welcome, doesn't come as a surprise to us. The improvement in sentiment towards Ireland over the past year shows no sign of letting up.

We anticipate further positive developments on the ratings agency front over the coming months, with Moody's looking increasingly behind the curve as the only one of the big three agencies that rates Ireland sub-investment grade and with a negative outlook.

As we have outlined previously, we are of the view that Ireland has made substantial progress in addressing each of the concerns behind Moody's downgrade of the Sovereign in July 2011 and would anticipate an amelioration of Moody's outlook in coming months, perhaps on the back of a new long-dated issuance from Ireland according to NCB Stockbrokers.