Last week the ESB discovered what a lot of Irish firms have been experiencing in the harsh world of the capital markets: there is a steep price to be paid for being Irish.
The ESB secured ratings from all three major agencies in the lower investment grade bracket - strong enough to attract mainstream funding for its €6.5bn capital expenditure programme, but closer to junk status than to prime. Perhaps more significantly, Moody's and Standard & Poor's, the agencies with the most market influence, put the ratings on negative outlook.
The ESB is a state-backed quasi-monopoly in a heavily regulated and protected infrastructure market, so why are the ratings agencies concerned that its creditworthiness will get worse? The difference is, it's Irish. As the ESB press release said: "The ratings outlook by the agencies reflects their respective positions on the Irish sovereign rating."
While the state and the banks have been locked in a deadly embrace since the guarantee was introduced in September 2008, more recently the contagion has spread to non-financial corporates and SMEs as global markets look askance at the troubled Irish economy. The ESB is just one example of how Ireland Inc has changed from a mark of quality to a warning sign.
Experts say worries about Ireland's risk are having a negative impact on all Irish companies, driving up the cost of credit and suppressing investment as corporates traded in line with the troubled sovereign.
Citigroup's director of credit strategy, Matt King, who was in Ireland earlier this month on a client roadshow, said fear of sovereign defaults in the peripheral European countries was causing investors to shun peripheral corporate debt, despite ECB support and bailouts for Greece and Ireland.
"The growing tension in the sovereign markets again will dominate and get worse before it gets better, at least in the near term," said King. "We're recommending to be long on stuff further away from the sovereign. Investors go through their portfolios and say, 'What is my exposure to Spain? What is my exposure to Ireland?' and they cut it from that perspective."
King said the austerity required by the EU/IMF bailout could plunge Ireland into a double-dip recession this year, affecting weak and strong companies alike. He said being associated with Ireland was a risk to be avoided.
"We know from emerging markets that when a sovereign goes through a crisis, the corporates tend to go through one as well," said King. "It's a country premium and the only way to escape it is to try to diversify your revenues away from Ireland and try not to be branded as an Irish corporate."
John Finn, managing director of consultancy Treasury Solutions, told the Sunday Tribune that creditors are so wary of anything that says "Ireland" that they are pulling in funding lines or charging "Paddy premiums" to Irish companies. He said that even before the bond crisis came to a head last November, banks in London were retreating from Irish business. Finn said one major bank refused even to consider any of his clients as it wanted no Irish exposure at all.
"They want no exposure to Irish companies, not even exporters who have no Irish economic exposure from a business perspective," said Finn. "I would say that in one or two cases no premium will entice them."
This is a big problem for Irish firms because, with so little financing available domestically, they are forced to look to foreign banks and capital markets for funding. Foreign lenders are in turn scrutinising credit requests more closely and charging bigger risk premiums.
Some Irish companies are reporting that up to 1% extra is commonly applied to their refinancing from foreign banks. With bigger arrangement fees being charged up front, Irish firms are competing internationally at a significant cost disadvantage.
Irish banks are reportedly catching on to the new pricing environment and increasing their fees for the deals they are still willing to do. One company's arrangement fees on a line of credit more than doubled last year with interest margins at 3%, according to sources familiar with a recent deal.
Ireland's equity markets haven't escaped the problems of the debt markets, either.
Last week, as New York's Dow Jones Industrial Average topped 12,000 for the first time since 2008, the Iseq remained mired below 3,000 - 70% off its 2007 peak. The Iseq has been especially hampered by the destruction of equity in the banks - last week AIB left the main exchange to list on the smaller Enterprise Securities Market - but even non-financial stocks with revenue streams outside the country have struggled to recover value. The Iseq index is up by nearly 50% from its recession lows, but the FTSE has seen better than triple that recovery, suggesting the rest of the world is pulling away while we struggle with domestic problems.
Financial advisory firm IFG is an example of an Irish firm getting tarred with the sovereign brush despite doing comparatively little business at home. IFG books 90% of its profits in sterling and closed a major UK acquisition last year. Yet the stock has traded in line with the likes of Bank of Ireland and Irish Life & Permanent throughout the crisis, as if it shared the same local exposures.
Chief executive Mark Bourke said last year that the company, based in Blackrock, Co Dublin, was seriously considering moving its main listing to London to better reflect its business mix and improve capital access.
If more companies begin think along those lines, the implications for the local investment market are "pretty horrible", said Citi's King.
"I fear you're only just entering a new recession that will probably be deeper than the one you've just been through," he said. "I'm a little surprised at how slowly some of this is happening, but I'm still convinced it's happening."
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