ANGLO IRISH Bank’s subordinated bonds were downgraded to a default credit rating due to the bank’s 20 cent in the euro offer to exchange the debt.

Ratings agency Standard & Poor’s downgraded Anglo’s dated subordinated bonds to the rating of ‘D’ from ‘CCC’ on its view that the bank’s offer was “a distressed exchange and tantamount to default” by the nationalised bank.

Anglo has offered subordinated bondholders the opportunity to exchange their debt at a discount of 80 per cent into new one-year Government-guaranteed bonds.

Bondholders will get a fraction of what is on offer if they decline the proposal – they will receive just 1 cent for every €1,000 face value of Anglo debt that they hold.

“We consider this to be a ‘distressed exchange’ because bondholders will receive significantly less than the original promise,” said the agency.

The €1.6 billion worth of bonds were also downgraded because the agency said Minister for Finance Brian Lenihan had said he was prepared to legislate “to ensure that subordinated bondholders share appropriately in the financial burden of rescuing the bank”.

The Government said last month that Anglo would cost the State €29.3 billion and up to €34.3 billion in a worst-case scenario where the property market failed to recover for a period of 10 years.

Mr Lenihan has said he expects the bank’s subordinated bondholders to make a significant contribution to the cost of Anglo.

The bank has offered a small cash payout amounting to five cents in the euro to the holders of junior subordinated bondholders.