ANGLO:MINISTER FOR Finance Brian Lenihan yesterday reiterated that Anglo Irish Bank senior bondholders – those with the highest ranking debt in the bank – will suffer no losses. However he opened the door to cutting a deal with the bank's creditors, particularly with subordinated bondholders – investors whose debt is paid only after senior bondholders have been paid – who will be expected to share in the "burden" of bailing out the bank.
Given that senior debt obligations rank equally with deposits and other creditors under Irish law, Mr Lenihan said he had “no plans to change this position”.
As for calls to default on this debt, which is of the order of € 4 billion, he said it would create “a significant risk of jeopardising the banking system’s and indeed the State’s access to international debt markets and cannot be countenanced on that basis”.
However, Mr Lenihan did not rule out the possibility of negotiating some sort of deal with the bondholders. “It is always open to senior bondholders and bank managements to discuss arrangements – arrangements of mutual advantage,” he told the Dáil.
Sebastian Orsi, an analyst with Merrion Capital, said the Minister’s intention to honour senior debt “makes sense”, as it would have had a knock-on effect on overall funding costs. However, subordinated debt holders can expect to lose their money, given that they are first in line to take a hit when a company runs into trouble. As such, Mr Lenihan said he expects them to make a “significant contribution” towards meeting the costs of Anglo. “It is right that the holders of Anglo’s subordinated debt should share the costs which have arisen.”
The decision to do so came as “no surprise” to Padhraic Garvey, a fixed-income strategist at ING Group in Amsterdam. It was welcomed by European competition commissioner Joaquín Almunia.
“This is in line with the commission’s principles on burden sharing since it both addresses moral hazard and limits the amount of aid, with benefits to the taxpayers,” he said. Tthe bondholders’ “contribution” could run to about € 1.7 billion, Mr Orsi said.
There is about € 2.4 billion outstanding in Anglo subordinated bonds and any deal that the Government may make with bondholders is likely to take one of two forms – either the Government will offer to buy debt back at a substantial discount, or it will look to exchange the debt for a lower par value.
Given that Anglo’s subordinated bonds are trading at about 20-30 cent on the euro, Mr Orsi expects the discount to be applied will be of the order of about 70 per cent to par, leading to a saving of about € 1.7 billion for the Government.
–(Additional reporting Bloomberg)
