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London, 02 December 2009 -- Moody's Investors Service has today downgraded the non-cumulative Tier 1 instruments issued directly and indirectly by Allied Irish Banks plc (Allied Irish) an additional notch to Caa1 (stable outlook) from B3 (negative outlook). This further alignment of the ratings follows the bank's announcement of December 1 that it will not pay the upcoming distribution on a non-cumulative perpetual preferred security (see below for further details).

The bank's cumulative Tier 1 securities and junior subordinated debt were affirmed at B1 (negative outlook) and Ba3 (negative outlook) respectively. The other ratings of the bank including the D BFSR, the A1 long-term bank deposit and senior debt rating, the A2 dated subordinated debt rating, the Ba3 junior subordinated debt rating, and the Aa1-rated government guaranteed debt were all unaffected.

Allied Irish announced on December 1, 2009, that following the submission of the bank's restructuring plan to the Commission the European Commission has requested that the bank should not make payments on its Tier 1 and Tier 2 capital instruments unless it has a legal obligation to do so. Allied Irish is required to submit a restructuring plan due to the substantial State Aid that it has received over the past year, in the form of the EUR3.5 billion preference share injection into the bank by the Irish government. In addition the bank will also be a major participant in the National Asset Management Agency (NAMA), an asset management company that will acquire land and development loans, as well as related lending, from five Irish institutions.

As a result of this the bank will not pay the distribution on the GBP350 million non-cumulative perpetual preference shares issued by AIB UK 3 LP. The non-payment of this distribution will trigger the "dividend stopper" and therefore the bank will also be unable to declare or pay distributions on its ordinary equity, the EUR3.5 billion of preference shares issued to the Irish government, and on parity securities which includes the Tier securities issued out of AIB UK 1 LP and AIB UK 2 LP as well as the Reserve Capital Instruments (RCIs) issued out of the bank itself.

The downgrade earlier this year to B3, was based on an expected-loss approach and reflected Moody's assumption that the bank would likely omit coupons for at least a two-year period, in line with other European bank's that have benefited from substantial State Aid. The further downgrade by one notch to Caa1 incorporates i) the greater certainty about the coupon deferrals as well as ii) the remaining uncertainty about the bank's financial strength beyond the 2-year time horizon, which also adds uncertainty about future coupon payments . The outlook for the securities is stable reflecting Moody's conservative expected loss assumptions in terms of the likelihood and time horizon of missed coupons, as well as the low sensitivity of these instruments to the bank's intrinsic financial strength.

The rating of the Reserve Capital Instruments (with cumulative deferral and non-cash settlement through ACSM) remains B1. These securities have largely the same features as junior subordinated debt on a going concern basis, but have a preferred claim in liquidation. Under a going concern assumption, the expected loss for investors in these cumulative instruments should therefore be clearly lower than for the non-cumulative preference shares.

Moody's notes that Allied Irish and the Irish government are in discussions with the Commission to enable the bank to continue to declare and pay dividends and distributions as normal. This is to avoid the Irish government from receiving, in the future, payment in ordinary shares rather than cash, and thereby increasing its stake in the bank, against its stated objective of not taking majority stakes in Irish banks. Although the European Commission has said that it will give full consideration to this approach, Moody's would expect that the bank will still be required to omit payments for a two year period. If however this is not the case then the rating agency will comment again when further information is available.

In this context, Moody's also noted that were Bank of Ireland (which is waiting for the Commission's approval of its restructuring plan) and EBS Building Society (who we expect will need to lodge a plan in the near future) to also defer or omit coupons then this would likely require a further review of these institution's B3-rated preference shares and parity securities.

RATINGS AFFECTED:

The following securities were downgraded to Caa1 (stable outlook) from B3 (negative outlook)

- AIB UK 1 LP preferred securities EUR1 billion (ISIN: XS0208105055)
- AIB UK 2 LP preferred securities EUR500 million (ISIN: XS0257734037)
- AIB UK 3 LP preferred securities GBP350 million (ISIN: XS0257571066)