Anglo: Please, No More Sub-Debt Buybacks

Anglo Chairman-designate Alan Dukes appeared on This Week on RTE Radio 1 yesterday. One aspect of the interview that worried me was Mr. Dukes’s comments on subordinated debt.

Anglo’s plan is to split into a good bank and an asset management agency which will gradually be wound down. It seems very likely that the subordinated bonds will end up as liabilities of the asset management agency as this is what occurred in the case of Northern Rock, which Matthew Elderfield has said is the model that is being followed.

The asset management agency will not be a bank and will not have to be capitalised as such. None of the subordinated debt is due until 2014, by which time one would hope that the policy of the Irish government should be to tell these bondholders that the state would not be ploughing further funds into the bank to see them paid off.

Given that none of Anglo’s subordinated debt after nationalisation matured until 2014, and given that a plan for restructuring the bank was still being formulated and discussed with the EU Commission, last year’s decision to repurchase €2.5 billion of its subordinated debt last year for a price of €750 million represented a terrible and pointless waste of taxpayer money. What was particularly unfortunate about it is that most of what was bought back was undated subordinated debt that didn’t even manage to make it into the September 2008 liability guarantee. (See page 105 of Anglo’s annual report.)

On two different occasions in the interview, Mr. Dukes discussed last year’s subordinated debt buybacks. Here’s the first:

Alan Dukes: We, and the other banks, during the course of 2009 bought back a substantial amount of debt from subordinated bond holders and it worked to the benefit of our balance sheets. We have a certain amount of subordinated debt still out there.

Richard Crowley: How much?

Alan Dukes: Just over two billion. There is a policy issue about how you treat it. It’s not as uncomplicated and straightforward as some people say because you have to have regard to the effect that that has, if you’ll forgive the technical term, on your lower tier 2 capital.

And here’s the second:

What we did in 2009 was that we offered to buy it back at a price that was a little bit above the then-market level which way way below par. It was judged by the market, in the circumcstances, to be an attractive offer. And we got pretty much what we exected to get out of it and the net benefit to the balance sheet was €1.8 billion.

These comments worry me because they put a very positive spin on last year’s subdebt buybacks, so much so that they give grounds for worry that the bank may do this again. I really don’t think these transactions should be viewed from the prism of “strengthening Anglo’s balance sheet by €1.8 billion”, they really should be thought of as “wasting €750 million of the state’s money.”

The comments about Tier 2 capital are also a bit worrying. This comment may sound very technical but what Dukes is saying with this comment is that Tier 2 capital is there to absorb losses so we should worry about defaulting on subordinated debt because it will reduce the bank’s ability to absorb losses.

Well even if the bank wasn’t being split into two, there are plenty of losses to absorb, so the idea of Tier 2 capital is that these guys are there to absorb losses under this scenario. However, one would surely have to presume that the subordinated bond liabilities would end up in the asset management company. And since the asset management company doesn’t have to comply with capital standards, it won’t need to worry about its capital ratios.

I think it might be a good idea for Mr. Dukes to make a clear statement on this matter: Can he promise the public that Anglo will not again use state funds to buy back subordinated debt?

Mr. Dukes was very positive about the possibilities for “good Anglo” to play a positive role in the economy in the future, citing the potential contribution it could make to funding the SME sector, infrastructure, green economy and innovation. Since the bank has no experience in these areas and no branch network either, this seems somewhat optimistic. To be fair, Dukes did also say he saw the bank getting involved in property projects that will come out of NAMA but one has to wonder whether we really want that.

31 replies on “Anglo: Please, No More Sub-Debt Buybacks”

“The comments about Tier 2 capital are also a bit worrying. This comment may sound very technical but what Dukes is saying with this comment is that Tier 2 capital is there to absorb losses so we should worry about defaulting on subordinated debt because it will reduce the bank’s ability to absorb losses. ”

In the alternative, might Dukes be saying that this was a relatively cost effective way of allowing the bank to maintain sufficient capital to allow it to continue to hold a banking licence while investigations as to its real position continued and NAMA was finalised?

Hopefully your comments will be picked up by the press Karl, I won’t hold my breath though.

Now Zhou, that is just plain silly. Wasting 750 million of the taxpayers money to maintain an accounting fiction. BTW, you are going back to your old statist ways after a few months of logic and reason.

The question one might ask is who exactly held then and holds now the sub debt and why is the Government and their dup-, erm, nominee Mr. Dukes so anxious that they not be sent away penniless?

Dukes worries me full stop – but not as much as the awful dream I had about the Large Hadron Collider when I dozed off earlier. It all ended in tears.

I wonder if it’s capable of detecting good bank particles and bad bank particles?

Karl: You are right to be worried. I have followed the sayings of Dukes since he was appointed and with each pronouncement he sounds more like those he replaced. Let’s suppose we could get rid of him: Who should we put in his place?

Makes you wonder what the others have been up to in rebalancing bond maturities within the Sept 2010 window. INBS has an interesting series of adjustments yielding “profit” of €287m. See page 57 of it’s annual accounts.

It was my understanding that the bank can’t say that they intend buy it back at a discount, or that they intend burning the subbies, because that would trigger the guarantee. Until the guarantee expires, the gov/banks have to keep insisting that everyone will get paid. What they do after the expiration is another matter…

[I know some changes/extensions were made to the guarantee, not entirely sure what those are in this context]

@ Karl

well there’s two issues here – were the previous buybacks a good idea, and would more be a good idea? I’ll deal with the second part first – quite clearly if we’re going good/bad bank on this (a decent assumption, though not a definite outcome), then buying back more debt now would serve absolutely no useful purpose. Lets be very very clear about that. Bad idea.

However, as Zhou suggested, the previous buybacks may have bought time via capital accountancy tricks to avoid the upfront costs of an earlier wind-up/split. Remember that much of the governments treatment of the banks has been on the basis of buying time for the ultimate adjustment, in order to (a) get a better handle on just how big that adjustment will end up being and (b) to get the fiscal situation under control before taking that hit. We can argue over whether we should have actually kicked some of the problems down the road a few years, but the buybacks make a lot of sense if that is the actual policy goal.

@ Sarah

No, you can offer a deal to buy back guaranteed subdebt. The holders just don’t have to take up the offer. An offer they aren’t allowed refuse, e.g. insisting on a debt for equity swap, would trigger the guarantee.

@ Eoin

Just because someone comes up with a formulation of words that sounds like it might justify something doesn’t mean it makes any sense. Zhou’s stuff about “keeping it well capitalised enough to hold a banking license” is pretty silly. I’m not even going to engage with the idea that we needed to burn €750 million to somehow keep the Anglo show on the road.

@ Mark “who exactly held then and holds now the sub debt” Well Mr Dukes went to some pains to explain why no one knows. Some people though will have a certain idea, not least from placing the bonds some time ago, from buying some of the bonds back and from regulatory reporting requirements etc. Probably a fairly diverse range of risk takers by this stage.

@ Ciaran
Not knowing who myself, I would speculate that the level of theatrics of ignorance preformed might make the whole tale interesting.
This being Ireland…

@Karl Whelan
“I really don’t think these transactions should be viewed from the prism of “strengthening Anglo’s balance sheet by €1.8 billion”, they really should be thought of as “wasting €750 million of the state’s money.””
It’s not nearly enough to offset our minus €750 million but +1 anyway.

It seems to me that justifications from intelligent people of the banking policy in general tend to boil down to an argument that goes like this

– it might be a waste of money to do …., but the alternative, of a disorderly or hurried wind down, would be costly and bring upon us the scorn of the international markets.

This was never a very convincing argument to me. I have always found that the best way to achieve anything is to get stuck into the substance of it at an early stage.

But as the months and years tick by, and there is no sign of a meaningful (orderly) resolution to the banking crisis, this argument looks more and more tenuous.

Why wasn’t Anglo ‘resolved’ 18 months ago?

Why weren’t the other banks nationalised preemptively, instead of by stealth?

The only thing that did our sovereign borrowing credibility good was an austere budget. This was a good measure and needed to happen. But by all reckoning, cutting open the carcass of our banking system would only have made us more credible in the eyes of investors weary of Greek trickery and the like.


@Karl Whelan

I understand why it is a waste of money to buy back subordinated debt if you can eventually pin the debt holders with the full amount. I also understand that Anglo and the Government have said they were playing for time to avoid the Government having to put a huge amount of money into Anglo immediately. Eoin has expressed it better than me.

I don’t profess to know whether buying subordinated debt at a large discount was an effective measure in this regard. I was merely suggesting that such an interpretation of Alan Dukes’ comments might be more consistent with previous comments.

If the suggestion that buying buying subordinated debt at a large discount was an effective measure to avoid the Government having to put a huge amount of money into Anglo immediately is “just silly” then perhaps you would explain to us why it is just silly as it seems to be at the core of the policy pursued so far.

@anyone else

Were there any criteria for the type of subordinated debt which was repurchased in terms of maturity dates or otherwise?

These are bonds that paid coupons to the holders in the past before the Commissions coupon stoppers. Anglo did not pay these by cheques in the post.
As Dukes indicated, they are dematerialised i.e, held in electronic format in Euroclear/Clearstream. Saying they don’t know who the holders are may be technically true, my question is why havent they asked the paying agent.
Anglo were paying coupons until the commission ruling, how do you suppose bond holders got their coupons paid? The paying agents are the people you get your money from if you are bond holder. You produce your receipt for the bond, and you get your coupon. Google the relevant prospectus for Anglo, then search for ‘paying agent’.

Depending on their position in the capital structure, deferring coupons on sub debt has differing implications. A deferral on Lower Tier II sub-debt is a default.The tier 1 and Upper Tier2 bonds contain legalese that permits coupon deferrals. Buying back this sub-debt might make ‘sense’ to Anglo if they think they have a future.
No one else does which is why their existing bond holders took a bath on that tender.


The only context in which it is worthwhile to buy back sub debt at a discount is when you have a bank with a reasonable chance of survival.

BoI and AIB always had a good chance of survival and their debt repurchase operations make some sense.

Buying back Anglo or INBS sub debt is an act of unparalleled stupidity.
It was clear 18 months ago to everyone that both institutions were doomed.

If I as an ordinary engineer could see that this piece of financial engineering was pure waste, how come intelligent people like Alan Dukes and Brian Lenihan with full access to all information persist in throwing our money at bondholders.

We have every reason to be worried as more and more promissory notes are signed. Lenihan reminds me of the scion of a 19th century aristocratic family straight from the pages of Trollope who signed promissory notes to fund their profligacy.

@ Zhou

To be clear, I have not heard Alan Dukes or anyone else explain that the reason to repurchase the subdebt was to avoid the government having to put in more money at the end of 2009. However, as it is the government has written a promissory note for €8.3 billion, pretty clearly they could also have written one for €10 billion — this money is not being borrowed in the sovereign debt market.

If the rationale for burning €750 million of our money was to make the size of the cheque that had to be written at end year 2009 look a bit smaller to the public even though this policy would make us worse off in the end, then that’s a depressing thought. And yes, it would be a silly way to think about how to use public funds. Silly being a nice way of putting it.

According to a recent source this government spent about €140 million on Enterprise Ireland last year, a large portion of which was spent on administration leaving about €80 million to support SMEs and Universities “Smart” Economy.

Alan Dukes I am sure is a very nice honest man but is he a good banker, what qualifications end or experience does he have. I now find out that he have blown another €750 million of our money.

In the Guardian yesterday it clear that Ireland entered recession earlier, suffered a stepper decline and continues to struggle after a number of economies have exited from recession.

We really need to get real. We can spend the next decade gesticulating in front of the sub bond holders and the international bond holders, getting out a range of commentators from the rating agencies, the ECB, The EU and Germany to congratulate our elected representatives in their twin strategies of publicizing private debt and cutting back on Services.

Unless the government is willing to pay more than lip service to the smart economy and credit-ilnes for SMEs this country is going nowhere fast. Without doubt waste in public sector needs to be addressed and the pension time bomb defused but cutting back on all government expenditure without a coherant and real strategy to produce jobs and income is dumb.

Of course when you go to the sub-bond holders and turn some of the paper they had written off into cash you will get a pat on the back. According to Spiegal German banks are €175 bn in the hock Ireland. Of course most of this is “private”, probably mainly bonds to our banking sector. When you have a finance minister who is busy via NAMA, cash and bonds to Zombie banks and sub-bond holders and other mechanisms transfering most of this liability to the future tax-payers you will be congratulated by the markets. The naivety of the Irish media on this matter astounds me, every “bad” announcement is accompanied by some minion in the EU congratulating the minister for “action”.

The problem for Ireland is next year and the year after. Any “savings” made on the national budget are dwarfed by the Anglo and Irish Nationwide bonfire. As there is no realistic strategy to boost national incomes and support SMES the income will never grow by enough to bridge the fiscal deficit. Next year the interest (tax) on the NAMA bonds and the interest (tax) on the Anglo Irish bonfire will kick in earnest.


If you are right then there was absolutely no logic or benefit to buying back the subordinated bonds when they did. It is hard to understand how Anglo and the DoF could be so stupid.


The answer is normally found through using the questions “Who benefits?” and “Who is most supportive?”.

Hint: I think you would be hard put to find a spokeman for a stockbroker who shared our views on the criminal stupidity of Anglo/INBS subordinated bond buybacks.

@ Karl & Zhou

without getting into the rights and wrongs of the subordinated buy backs, Anglo being split good bank vs bad bank, and so enabling subordinated debt to be split-and-loss-enforced, is a relatively new reality. Only a few months ago they were preparing a business plan for the EU which envisaged it being kept whole and as a going concern. The subordinated buybacks were, rightly or wrongly, enacted under that assumption. Saying “we told them to do that 18 months ago” is different to saying “we knew this would happen 18 months ago”. I remember genuine posts of surprise when Lenny & Co seemed to change tac a few months back. There may even be an entire thread devoted to it?

This is insane. Ridiculous, pointless, populist and just plain stupid. There’s no mass shorting of German financial stocks, there’s already been a massive short squeeze on EZ govvies as a result of the ECB buying, and they’ve already admitted that shorting (sic) of EZ govvies via CDS hasn’t been in overly massive size. US stocks are lower on the news.


The Federal Financial Supervisory Authority has on Tuesday temporarily banned naked short sales of debt securities issued by eurozone countries for trading on domestic stock exchanges in the regulated market. It has also temporarily banned so-called credit default swaps (CDS) where the reference bond and liability are from a eurozone country, and which does not serve to hedge against default risk (naked CDS).

In addition, BaFin has banned naked short sales in the following financial sector companies:

These bans apply from 19 May 2010, 00:00, until 31 March 2011, 24:00, and will be reviewed.

BaFin justifies these steps given extraordinary volatility in debt securities issued by eurozone countries. Furthermore, credit default swaps on the credit default risk of several countries in the eurozone has increased significantly. Against this background, massive short sales of the affected debt securities and the conclusion of naked credit default risk on eurozone countries had led to excessive price shifts, which could have led to significant disadvantages for financial markets and have threatened the stability of the entire financial system.

Faced with these circumstances, BaFin has also banned naked short sales within the selected financial institutions.

@ All

folks, the story above is a big deal. Still trying to work through the results of it. It honestly seems like some crazies took over the German govt this afternoon. Repo market is gonna go crazy, Bund futures are gonna go ballistic, swaps will go through the floor, EUR/USD has already sold off heavily again. Law of unintended consequences? More like Law of Trying to Fix Something and Actually End up F*cking It All Up.

A few months ago on Prime Time Alan Dukes described the debt buy back as making a ‘book profit’. At the time he was wearing a shirt and tie with a leather jacket. I still haven’t decided which was more ridiculous.

good article Karl
Eureka – I agree – lets start a coamparing for REAL (and smart) public interest directors

sorry – that should read “let’s start a campaign for REAL (and smart) public interest directors

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