Anglo Subdebt, Again

It is now pretty clear that the government and Anglo management are shaping up to do a buyback deal on Anglo’s outstanding €2.5 billion in subordinated debt after the original CIFS guarantee expires at the end of the month.

Here’s my question. Given that

(a) The terms of these securities allow for the possibility of them not being paid back if the bank is insolvent (this is why banks get to count these securities as part of their regulatory capital).

(b) None of this debt matures until 2014 at the earliest (see page 56 of Anglo’s interim report).

(c) These bonds will no longer be covered by a state guarantee.

why would we do this? Why not let the bonds sit as an obligation of the Asset Recovery Bank, let it go about its business of recovering value from assets, and then let the next government make a decision in 2014 as to whether we want to put in taxpayer funds to pay off these bonds?

Those of you who want to comment that you think a bond buyback is a good idea might help clarify things a bit by explaining what type of deal you would offer (i.e. how much of our money you’d give the hedge funds and other distressed debt outfits that now own these bonds.)

22 replies on “Anglo Subdebt, Again”

10:59 23Sep10-IRISH Q2 GDP -1.2 PCT QTR/QTR VS ECONOMISTS’ FORECAST OF +0.5 PCT
10:59 23Sep10-IRISH Q2 GNP -0.3 PCT QTR/QTR VS ECONOMISTS’ FORECASTS OF +0.3 PCT
11:00 23Sep10-IRELAND REVISES Q1 GDP GROWTH TO +2.2 PCT VS +2.7 PCT PREVIOUSLY
11:01 23Sep10 -IRISH Q2 GDP -1.8 PCT YR/YR VS ECONOMISTS’ FORECASTS OF -0.4 PCT
11:02 23Sep10 -IRISH Q2 GNP -4.1 PCT YR/YR VS ECONOMISTS’ FORECAST OF -2.7PCT
11:12 23Sep10 -Irish Q2 GDP drops vs Q1; more pressure on budget

@ Karl

Anglo LT2’s are still paying coupons, and will do until maturity. Buyback now vs paying coupons until maturity maths is actually relatively tight.

LT2’s not bought back at callable dates start to degrade in terms of capital every year (you have to make a capital loss/deduction in your accounts)

Buyback creates capital – this would reduce down the nominal level of the promissory note, which is now being frontloaded onto Irish deficit and making sentiment worse for Irish sovereign yields/spread

@Karl

I would guess is that you objection is not to buybacks per se, but to overypaying. If it is certain that 100 percent losses would be imposed in 2014, then the price should be the PDV of the coupon payments to that date. But how credible is it that 100 percent losses get imposed? I still think that the more important issue relates to the threatpoint. The issue of whether there is direct loss imposition or hard-headed negotiations based on that threatpoint strikes me as secondary. But I don’t think there is enough attention being given to improving the threatpoint.

One thing to watch for is that DoF has apparently made a selective rediscovery of Northern Rock, which is popping up again in the talking points to support their Anglo decisions. As of quite recently, Northern Rock is a very different case.

@ John/Karl

btw, a cash buyback is not the only suggestion out there, could be a sub for senior debt exchange for example.

On the threatpoint, the Examiner had a story today saying, basically, “subs may not be made whole”, quoting Lenihan yday, which is obviously an incredibly old news story, but which has once again spooked sovereign markets today. Some food for thought who think that inflicting losses on bondholders will automatically be good for the sovereign (eventually it might be good, but short term it seems to ellicit panic).

@Eoin

Why do you think it is the sub debt story rather than the Q2 contration that spooked the markets? Timing?

@ John

Spreads were already way higher before the GDP data came out. Was starting to stabilise but the GDP data saw it weaken again (though the worst price level on the day is still pre-GDP data release).

@Eoin
“On the threatpoint, the Examiner had a story today saying, basically, “subs may not be made whole”, quoting Lenihan yday, which is obviously an incredibly old news story, but which has once again spooked sovereign markets today. Some food for thought who think that inflicting losses on bondholders will automatically be good for the sovereign (eventually it might be good, but short term it seems to ellicit panic)”

Or maybe it is the fact that Lenihan has said that senior bondholders will NOT be touched that has spooked the sovereign debt markets.

@ DE

(a) is that news either?
(b) all the chatter/mails i’ve heard this morning were on the subs – had to point out to everyone that this is already well factored in.

@Eoin
Well the split of Anglo it wasn’t 100% clear how senior bondholders would be treated. The Minister has confirmed they will be repaid in full, negative news for the sovereign IMO.

Not saying that is why the spreads have ballooned again today but I think it is probably more of a factor than a sub debt buy back.

@ DE/NB

just saying, literally no one i spoke to this morning queried the senior part of it, all the questions and headlines were about the sub. Thats my basis for why the spreads moved out.

@Eoin: In the binary markets that we live in, today is risk-aversion day. The Euro is down, stock markets are down. That’s why yields were up from the start. Not because of seniors or subs.

@ DE/NB

wow, didnt realise how bad this got. Story going round (note: only really among the gossip-loving FX community, but its a quiet day…) earlier was that Anglo was about to default overnight on seniors. Used the Examiner story as a semi backdrop to it. Shows you how sensitive the markets are.

@DE

You have it the wrong way around. Market chatter is that Anglo will default on subbies and that given it is nationalised it equals a sovereign default. This is why the sovereign is widening.

Now you and I both would dispute this logic but there you go.

I am in London today and I heard both versions this morning! Nothing has changed from what I can see but am open to correction as I haven’t seen the Irish media stories

@Eoin

Do your last 2 comments not contradict each other?
2:34pm
“Story going round (note: only really among the gossip-loving FX community, but its a quiet day…) earlier was that Anglo was about to default overnight on seniors”
2:20pm
“literally no one i spoke to this morning queried the senior part of it, all the questions and headlines were about the sub. Thats my basis for why the spreads moved out.”

@KW

“The terms of these securities allow for the possibility of them not being paid back if the bank is insolvent (this is why banks get to count these securities as part of their regulatory capital).”

What do the terms of the securites say in this respect?

@ Eamon

re contradiction

yep! Chinese whispers – rumours start with the sub debt story and using the Examiner article. Its fact-based, but not really anything new – as Tull said, people try to make it out to be a sovereign default on the basis of nationalisation. Second wave of rumour spreading decides to throw in seniors for good measure. The third, really stupid phase, suggested imminent overnight default.

The “story” tonight across the wires and international media is that the rise in our bond rates today was due to fears that all the Anglo sub debt would not be repaid — plus the GNP/GDP figures. I am very sceptical of the reasons given in reports for such market moves and how they spread across the media. But there it is. The kind of commentary quoted on reputable wire services is that Anglo not repaying all sub debt raised fears across the Euro banking sector. Doesn’t add up to me …but that’s the spin.

Strikes me though that whatever the government is going to do it needs to get on quickly and give us the Anglo figure and whatever plans it has. Pretty much all the reports are quoting the S and P 35 billion figure because they know the government is revising its figure, but they don’t have the government figure yet. So, in the absence of an official figure, S and P is endlessly recycled. This information vacuum is really doing us damage. Why is it taking so long for the regulator and government to agree a figure. It can only be a best guess anyway so what’s the delay…..?

I agree Cliff. Everyone I speak to are factoring in a €35-45 billion bill for Anglo into their analysis when it comes to Ireland. We have no hope for recovery until we get some finality. The GNP/GDP figures made headlines but I don’t think they caused anyone to lose sleep after looking deeper into the figures.

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