Anglo Stops Payments on Bonds, CDS Implications?

Thanks to Karl D. for the tip-off on this story.  Anglo Irish has announced that it will not be paying coupons on its Tier 1 subordinated bonds and that this decision was required by “The European Commission, as a condition of its approval of the Government’s capitalisation of the Bank of up to €4bn.”  In a related story, the International Swaps and Derivatives Association has decided that a similar non-payment by Bradford and Bingley represents a “credit event” which will trigger CDS insurance.  (Bloomberg story here, official announcement here.)

Presumably, Anglo’s actions will at some point trigger the same decision from the ISDA.  This will mean that those Anglo bondholders holding CDS insurance will receive full payment.  Anglo’s announcement also discusses its “liability management” exercise, in which it is planning to buy back outstanding debt at below par.  Presumably, however, those insured by CDS will no longer be interested in a deal of this sort.  It also makes it likely that much of the debt that Anglo is planning to buy back at a discount will be owned by CDS issuers.

Update: My presumablys were perhaps a bit presumptious.  Commenter Eoin notes below that this is not (yet) a credit event.  I have checked this elsewhere and am informed that the “reference” obligation that defines a credit event for Anglo is indeed a failure to meet Tier 2 obligations.

15 thoughts on “Anglo Stops Payments on Bonds, CDS Implications?”

  1. If my sums are correct, that is €2450m worth of bonds. If a ‘credit event’ is triggered (and, as you say, the B&B lesson seems to make this likely) this seems to be a good way of refinancing the bonds. Lets the insurers pay!

    Bit like setting fire to your house so you don’t have to worry about paying the mortgage any more..

  2. Is this a purely good news story or are there downsides for the taxpayer?

    My initial reaction is that this is exactly the kind of EU/ECB level intervention we have been looking for in that it allows us to put the queeze on bondholders while maintaining our credibility.

  3. @ Karl et al

    its NOT a credit event. They’re only stopping payment on Tier 1’s, where coupons are always optional. Commerzbank and Depfa have done something similar. Brad & Bing were Lower Tier 2 debt payments.

  4. @ Eamonn

    every major bank in Europe was quoting CDS at one stage. Its all been scaled back now, but the big investment banks and insurers (Goldmans, JP Morgan, M Stanley, Deutsche, Soc Gen) would still be heavily involved.

    By the by, Santander just announced a tender exchange for their entire Tier 1 outstanding, around 10bio or so. Its the big trend at the moment for the banks. Interestingly, assuming the Anglo one is not quite so investor friendly as AIB and BOI’s offering, and it should not be, some recent buyers may lose out – apparently a lot of people started buying into Anglo debt after the AIB/BOI tenders and pushed the price up. These Johnny come latelys may take a fairly decent hit as a result.

  5. Presumably,as a consequence of the government guarantee the bonds will still be redeemed at face value when they mature regardless of whether the coupons are paid or not.

    Why would nt all such bondholders hang tight until the maturity dates?
    I dont see insurance paying out for the par value of the bonds and their missed coupon payments.
    Is it possible they may be only liable for the coupon payments?

    A secondary issue is whether a run on credit default swaps will trigger an even bigger credit event somewhere else.I would have though the EU would be more wary of this than worrying about Irish bank bonds.
    There would be negative consequences in CDS markets if the same actions are taken especially in Swedish , Austrian and German banking .
    After all this is the territory the USA marched into when Bear Sterns and especially Lehmans went wallop.

  6. @ Sean

    most (if not all) of the debt they’re tendering for will expire outside of the current government guarantee, and indeed probably outside any extension of it (lets assume its doesn’t stretch to infinity!). All the subordinated debt is deliberately long dated (or undated perpetual) in nature, meaning while its currently guaranteed in the event of bankruptcy or liquidation, its not going to be redeemed anytime soon. Hence the tender offer will be very appealing for many holders.

  7. @ Eoin
    I think the main problem the opposition (mainly joan burton) had with the extension is that it is indefinite.

    I would say the inversment banks are delighted with the European commision.

  8. @ Eamonn

    its indefinite, but its not out to infinity, so it will be scaled back, or at least have boundaries placed on it, at some stage when things settle down. If nothing else, if FG get into power i imagine it’ll be rescinded pretty quick sharp.

  9. There are different classes of CDS quoted on Anglo: Subordinated and Senior. This may well be a credit event for the Subordinated CDS but will not be a credit event for the Senior. It is worth noting that the Irish CDS is slighthly tighter today despite the news on Anglo, suggesting that, in this instance, the market is differentiating between Irish Bank and Sovereign risk.

  10. @ Daniel

    its not a credit event on either. Tier 1 is an optional coupon payments security. Its akin to dividends in that way, but with a ‘promise’ to pay rather than a contractural obligation. However, a default on LT2 or better would constitute a default on everything up to Senior, and would be a much, much bigger issue.

  11. http://www.bloomberg.com/apps/news?pid=20601087&sid=aWNsoaZov9Dw

    Credit-default swaps on Anglo Irish’s subordinated debt rose 7.6 percentage points since the start of July to 34.2 percent upfront and 5 percent a year, according to CMA DataVision prices at 1 p.m. in London. That means it cost 3.42 million euros in advance and 500,000 euros a year to protect 10 million euros of Anglo Irish junior debt from default for five years.

    Eh Pardon?
    6 million to Protect 10million against default over 5 years?

    They shoulda stuck it on a horse!

  12. @ Eamon

    an awful lot of the CDS market is purely speculative, you don’t have to own the bonds to participate. From that point of view, betting 6mio potentially earns 10mio (ie 4mio or 66% profit) if you reckon Anglo defaults, or even just stops paying coupons high enough up the chain, on its debt.

  13. Eoin – There are two separate tenders. One for LT2 (such as the 2014 floating rate notes) and one for tier one. So looks like the subordinated cds will be triggered.

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