Avondale Securities SA., Luxembourg domiciled issuer of life insurance-linked notes issued on behalf of the Bank of Ireland, has been receiving a lot of attention from ratings agencies over the past year. The economic and sovereign debt troubles of the Irish economy and the links to the deal via the Bank of Ireland have seen the deals senior tranche of notes downgraded and now the junior tranche of notes is getting attention.
The insurance-linked notes were issued to transfer, or securitize, a block of life insurance risk to the capital markets in a deal designed to allow Bank of Ireland to monetize the expected value in force of a block of life insurance policies they were holding.
The senior tranche of notes were downgraded last December by Moody’s and in December 2010 and both tranches were downgraded by Standard & Poor’s in February. Now Moody’s has downgraded the €20m junior Class A-2 tranche of notes to Ba1 from Baa3 and affirmed the previously downgraded senior Class A-1 tranche at Baa2. Both tranches have a negative outlook according to Moody’s rating action report.
The reason for today’s downgraded is the recent rating action on Irish government bonds by Moody’s, they downgraded their rating to Ba1 from Baa3 earlier this month. Moody’s says the rating action on Avondale Securities junior tranche “Reflects the linkage between the factors that drive the sovereign credit profile — economic strength, institutional strength, government financial strength and susceptibility to event risk — and the notes’ credit profile”. Further economic woes on the Irish financial market and economy could eventually put pressure on the value in force of the securitized book of life business which could in turn result in a negative impact on the expected loss to noteholders.
While the sovereign financial crisis across Europe still causes concern and Ireland is one of the countries most at risk of further problems these notes will likely remain on negative outlook and could be downgraded further. This should serve as a warning that while insurance-linked securities are one of the less correlated assets to the wider economy, some are less so than others and no investment is ever 100% safe due to the tangled web of interconnections in the financial community.
Read our previous coverage of Avondale Securities.