Bradford and Bingley Precedent for Anglo Debt?

With Anglo about to report its results, last Sunday’s newspapers contained stories that the government was considering not honouring coupon payments on Anglo’s Tier 1 perpetual bonds. In light of that, it is interesting to note the following story (from Wednesday’s FT):

Bradford & Bingley, the nationalised mortgage bank, quietly issued three statements after the market had closed on Tuesday, informing holders of three classes of notes that they would not now be getting their next due interest payment.

The FT notes that the market value of these bonds collapsed on this news. Anglo’s perpetual bonds have been trading at about 15% of par value lately.

Update: Anglo results released here along with a statement from the Minister of Finance.  The loss of €4.1 billion essentially equates to all of its equity capital (see page 23 of the report’s PDF file.)   And from the Minister’s statement:

the Government has decided, subject to EU approval, to provide up to €4 billion of capital to Anglo. The bank is also in a position to generate further capital of its own by buying back certain outstanding subordinated loans from bondholders at a significant discount to par value. This exercise will generate profit and additional capital for the bank.

See page 50 of the report’s PDF file for details on Anglo’s subordinated debt, which has a book value of €4.9 billion.  About €2.1 billion of these bonds are dated, and thus covered by the guarantee up to September of next year (though the earliest maturity is 2014).  The remaining €2.8 billion are undated and are not covered by the guarantee.

10 replies on “Bradford and Bingley Precedent for Anglo Debt?”

@Karl Whelan, at least the British government had the good manners to give the market notice of the possibility of such actions back in February when rule changes came into effect that allowed B&B to defer payments on its outstanding subordinated bonds.

@ karl

yes, there’s ‘precedent’ in this, but it would involve the government first passing new legislation to enable them to not pay the coupon. The UK govt slipped it into the mammoth Banking Act in February.

There’s something similar in some German subordinated debt issues. Think they’re referred to as ‘silent participation notes’ where the bank can actually mark down the nominal capital value of them in situations where the banks capital position is severely impaired. Not sure on the exact details of it, but know that a subsidiary of HSH Nordbank enacted some of the provisions on their debt and are no longer paying coupons.

Very bondholder-friendly comments from Lenihan on Anglo. Said they may buy back some of the subordinated debt (currently trades between 15-35 cents, depending on maturity/coupon steps etc).


The actual losses (which, like IMF aggregate banking loss predictions tend to increase, there are upwards only adjustments on bank loss estimates) are contained in an IT breaking news piece just now

“ “The bank now has total impairment provisions on its balance sheet of €4.9 billion and said its losses for the three year period to the end of September 2011 “are likely to reach €7.5 billion”.”

7.5 billion puts them already way into negative equity territory (to use a property term)

The fundamental question is whether even this 7.5 billion is based on the “economic value over time” innovative methodology for NAMA which you referenced from the PAC minutes yesterday. If it is, it might not be too outlandish to suggest that a market value DCF analysis could take a reasonable bash at doubling the 7.5.

Perhaps the methodolgy will be clarified enabling one to determine whether the loan loss estimates are based on market values (including downside risks based on the 6 factors you outlined yesterday) or “economic value”.

Indeed, Joe. You are correct that that is the estimated underlying loss — they just booked as much of it now as they could.

As for the likely scale of losses, the report says “Since September, land values, particularly in Ireland, have fallen by up to 40% bringing the total estimated fall in values to between 50% and 70% from peak levels, and this has been taken into account in assessing the impairment charge for the period.”

The report then says “The Bank’s recent asset quality review concluded that impairment losses were likely to reach €7.5 billion. As at 31 March 2009, total provisions on the balance sheet, prepared in accordance with accounting standards, amounted to €4.9 billion. The review also estimated that in a range of further stress scenarios, additional impairment of between €1.5 billion and €3.5 billion could arise.”

I couldn’t find a description of these further stress scenarios but the IT reported that Donal O’Conner “warned that if there was a further 10 per cent fall in the value of land and development assets there could be a further impairment charge of €1.5 billion.” So, the further €1.5 billion scenario seems positively optimistic.

He says that the legislation was added when Northern Rock was nationalised and was in place for last September when he says B&B was taken over by the UK state.

Arguably, the only reason that Allied and Bank have positive market caps is because of hoped for government/EC support (involving some kind of subsidy/gift).
Similarly, the non-guaranteed loan notes may derive their value from hope rather than anything else.
In this context, it is a serious mistake for the two main banks to be purchasing their own loan notes at the reported rates of 50% in the euro. (Not sure of the exact amount)
Since we may not be able to bail out all of the Irish banks it seems to me that we should not be allowing them to bail out their own creditors with our money at what may well be very attractive prices-for the creditors.

[…] One interesting wrinkle to all this relates to everybody’s favourite financial instrument, Credit Default Swaps.  It is possible that some of the bondholders who didn’t take the offer up may have hedged with CDS and are waiting for something like a delayed coupon payment which might be judged a credit event, which would then allow them to recover par value.  This stuff is decided on by a body called the International Swaps and Derivatives Association (see here for examples of the decisions they have to make – they have, for instance, “deferred” a decision on Bradford and Bingley’s bonds, which I wrote about here.) […]

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