Anglo Irish Bank has announced losses that bring its measured shareholders’ funds down to about 0.1 per cent of total assets — effectively zero. It has also announced a further €3.4 billion in expected loan losses, little of which would be offset by operating income over the next year or so.
From a strict contractual point of view, the next in line for absorbing these losses are the subordinated debt holders. There has already been some discussion on this site of the issues involved here.
Now we are at a crunch point because a recapitalization of Anglo cannot be long-delayed. Indeed, to continue trading, the bank presumably needed the assurance that was provided by the Government today that needed capital would be forthcoming.
There is €2.8 billion of unguaranteed sub-debt on Anglo’s books. I am assuming that part of the Strategic Plan promised by the bank this morning will have to involve risk-sharing by sub-debt holders. This could take the form of of a deeply-discounted buy-back (as indeed is already suggested in the Government’s statement). It could also take the form of a debt-equity swap. (This would parallel current discussions in the US around debt-equity swaps to recapitalize some of the larger US banks following their stress-tests).
Obviously none of this is easy, and these bondholders may want to play chicken. In a liquidation they would be wiped out, but — absent modern bank insolvency legislation here — a messy liquidation could also inflict severe taxpayer and economic costs.
I admit that I am not sure of the most effective way of accomplishing it. There are some obvious options. Perhaps readers will have some further ideas. I am sure that officials are pondering these issues.
But difficult does not mean impossible. The stakes here are evidently high.
Urgent work to modernize bank insolvency procedures (as recently enacted in the UK post Northern Rock) could strengthen the Government’s hand.
It might be argued that losses incurred even by sub-debt holders of a bank could damage the credit of the Irish government. I disagree.
First, it is really immaterial that the bank is Government-owned: eveyone knows that situation has only arisen as a result of the disastrous performance of the bank. No new subordinated debt has been issued since the nationalization. Besides, in his statement in the Dail on January 20, during the debate on the nationalization bill, the Minister removed any doubt about whether nationalization entailed an expansion of the guarantee.
More generally, even though there might be an immediate knee-jerk reaction in market prices of debt, mature reflection by the financial markets would recognize that a country honouring its debts and guarantees to the letter–and not beyond–was more creditworthy than one which handed over money lightly to unguaranteed risk investors.
15 replies on “Anglo Irish bank: dealing with risk investors”
the comments from Lenihan today have definitely been considered ‘bondholder friendly’ in that there appears to be a decent chance that all the subordinated debt holders get taken out via a tender to buy back at levels somewhat above current pricing.
Current pricing is (or rather was before the announcement) between 10-35 cents depending on the T&C’s of each issue, so lets put an average of 23 cents. Buy them all back in at 35 cents. Current holders get a kick of 50% of current marked-to-market, sub-debt itself is wiped out by 65%, and profit in between gets booked as profit and so capital.
This is an open and transperent market operation, avoids the liquidation route, and sees sub-debt take a fairly significant loss, but at the same time still gives the debt holders an exit route in terms of price and also liquidity. It seems the best and most market friendly route to take if thats one of the chief concerns of the govt.
Well said Patrick (on the radio also).
mature reflection by the financial markets would recognize that a country that, while honouring its debts and guarantees to the letter–and not beyond–was more creditworthy than one which handed over money lightly to unguaranteed risk investors.
Very well articulated!
well made points especially on the radio at 1.00 where it is very hard to discuss this without listeners eyes glazing over – or shoud that be ears waxing over?
In addition to urgently modernising bank insolvency procedures as you suggest, the government should also take the opportunity to enact special administration procedures for non-bank network utilities. These would help ensure continuity of service in the event of a default (or impending default) affecting key infrastructure (e.g. the power grid, fixed line telecoms network, gas network etc.). For a discussion of the UK arrangement in this regard, see http://www.dieterhelm.co.uk/publications/Commentary_Oct08.pdf
What is the total amount of guaranteed Anglo debt?
Given the clear and obvious force of Patrick’s arguments, and the agreement of many if not most contributors, why does the FF gang insist on paying more than is good for the country?
They are deliberately putting the interests of someone else ahead of the state.
What is the quid pro quo? Who is benefitting at the expense not only of taxayers for a generation, but at the expense of those who should be paid out under the AIB and BOI bailouts, as we will not be able to pay all of those when the FG gang get in. Other creditors should be alarmed as they will not get this generous treatment.
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Brian Cowen states that the cost of winding up Anglo immediately would be 60 billion euros.
Karl Whelan points out that continuing the bank as a going concern is not necessarily much different from a winding up.
Apart from profits (presumably small) that can be expected to accrue to the continuing bank and the avoidance of some administrative costs in relation to an immediate wind up I can’t see why it won’t cost the same amount to keep the bank going. The fact that the costs will be deferred into future periods won’t have a significant impact on the NPV (or NPC?).
The deposits are irrelevant; they are guaranteed and will only stay if the guarantee is extended. Either way (wind up or wind on) they have to be paid. The value of the loans advanced by the bank may fetch less if sold in a hurry today but they are not going to realise anything like their nominal value at any stage.
If Cowen is right then how will we fund the 60 billion, either this year or any year?
Unfortunately if ‘wound up’ nothing will realise it’s nominal value. This simply isn’t an option
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