Senior Debt and Subordinated Debt Issuance by Irish Credit Institutions

The Central Bank has published up-to-date information on senior and subordinated bonds outstanding at the six Irish credit institutions covered by the ELG.   The release is available here.   The numbers are broadly consistent with those reported in the widely cited February 11th report from Goodbody Stockbrokers.

52 thoughts on “Senior Debt and Subordinated Debt Issuance by Irish Credit Institutions”

  1. Mickey Hickey referred to Franz Kafka and some others in another thread and the Czech writer could certainly be invoked in terms of the dance of the seven veils on the multi-year evolution of this banking crisis.

    There is not much new that can be said but what is striking about the populist commentators and some here is that consequential proposals are being made as if there are no downsides, by people who may never had made serious consequential decisions in their professional lives.

    It’s so easy for the well-off to call for immediate default, leaving the euro and so on. Some of them may never have been past a factory gate in their lives!

    In the short-term, what is the gain and the loss compared with alternatives?

    The data here shows that the debt is well below the total overseas deposits in the banks.

  2. @John F.

    I assume that secured bonds are against mortgage pools (essentially collateralized mortgage obligations) created within the relevant bank but not distributed to the market otherwise. So defaulting on them creates limited value since the bondholders have direct claim on those specific underlying assets.

  3. @Gregory Connor
    Except in circumstances where the value of the collateral is worth less than the liability on the bond.

    @Michael Hennigan
    I think you will find very few who think default is an easy option and that they aren’t very serious negative consequences.
    However, default may be the only viable option long-term because at some point I believe Ireland will get to the point where it is a “can’t pay” rather than “won’t pay” scenario

  4. @ Gregory Connor

    Thanks for that. Though if a default and/or leave the euro and/or NAMA melt-down and/or other horrible scenario occured, then wouldn’t the money to be gained get larger and larger i.e. wouldn’t the mortgage book become even more distressed by the a further rise in negative equity and interest rates?

    There seems to be so much potential for super horrible negative feedback loops.

  5. Is there not a term in contracts for senior bonds and/or deposits that impose restrictions on the extent to which a bank cannot offer security over its assets so as to in effect create a class of debt that is super senior?

  6. One place there is a significant discrepency between the CBI and Goodbody numbers is on the distribution of senior secured bonds across the banks. Any explanations?

  7. What sort of outstanding durations do these bonds have and how long before the CB/ECB are on hook for all of the non deposit funding of the banks ? ILPM are already up to 32% ECB and 33% other debt.

  8. Whats the deal covered bonds? why in god’s name do we allow banks to fund themselves by issuing debt that is in effect senior to deposits or am i missing something?

  9. @ Dreaded_Estate

    I don’t rule out the likelihood of having to agree a restructuring scheme at some point but I do believe unilateral default now would be stupid, and and dangerous for vulnerable firms in the private sector.

    Just 3 months into the EU-IMF bailout program, such a move would likely leave us without 1 ally in Europe – – not a clever place for a small bankrupt country.

  10. @ Michael Finnegan

    Hopefully the ‘potential for default’ now or in the future will allow us to avoid default. The old mugging someone with a hand grenade trick. If you have the right people holding the grenade all should survive with limbs intact.

  11. I suppose the “default” strategy could be

    1 Reduce the primary budget deficit to zero

    2 De leverage the banks so that they are funded domestically

    3 Don’t worry how much debt you rack up while doing the above because

    4 “Restructure” loads of the debt accumulated while doing the above.

    The issue of dealing with the banks is important because it is is the crucial difference between the “no default” and default strategy. If we are going to default anyway the extra cost of the banks is not that big a deal. But if we are genuinely trying to not default then every billion is important.

  12. … what is striking about the populist commentators and some here ….

    I’m a regular reader of blog comment threads. I’ve never seen an instance where a comment, which vaguely referenced some unnamed commentators only to disparage them, led to a worthwhile discussion. A better idea is to cite a specific contribution which is relevant to the thread topic.

    Also, what Christy said.

  13. @Michael Hennigan
    I have said never said we should default now on sovereign debt and we should probably avoid it in the future if at all possible.

    However, unguaranteed bank debt is another matter IMO.
    We need to press the matter with the other stakeholders. Because the choice may be between a default on bank debt now or default on sovereign debt in the future.

    And again this does not mean that I feel there are no negative consequences to this course of action, there will be. But IMO it the best of the bad options we have left.

  14. @ John McHale

    re secured/covered bonds

    self held issuance is not included in the CBI stats: “currently in issue by the six Irish credit institutions and held by third parties”. This now makes me wonder if the Goodbodys figures made certain assumptions on the same score, their figures don’t add up vs Bloomberg outstandings.

  15. Could someone explain to me how there is 145,000,000 worth of risk capital still in Anglo? Lets start there…

  16. @ Prof Lucey

    I guess that is the 0.145bn of subbies that rejected the 80% discounts or whatever it was and are bluffing it out that the MoF won’t exercise his great powers and incinerate them. It’s quite small beer compared to the 10,000,000,000 that subbies have already lost and I personally would not chose it as the place to start from.

  17. @ Brian lucey
    Is there not a widely reported on court case going though the US courts at the moment with respect to certain Anglo debt?

  18. Anyone been keeping track of all the subordinate gains at the 5 institutions since December?

  19. Seems to me to be realy useful, each of these needs to be split by redemption date for, erm, tactical reasons.

  20. yes, 145,000,000 is small beer indeed. Why, hardly worthwhile. Sure, what could the state possibly want with that? Build schools? Heaven forfend! Every single cent of every single element of risk capital (and yes, i include seniors here) should be burned through in succession. Then come to the state. But, I have said that before. And no, I dont give a damn what guarantees Brian^2 gave. Let them pay it.

  21. @ Prof Lucey

    What do you think the consequences of such an action would be?
    Do you give any credence to Prof. Honnan ‘Starting from here, this is not an option for……’ remark?
    Didn’t you write a paper back in the day, what was it…..

    “Average house prices in Ireland will grow by around 7% per annum over the medium and long term, leading to a virtual doubling of prices over the next 12 years, according to the analysis of Dr Brian Lucey, Lecturer in Finance at Trinity College , Dublin .”

    What would do say today to the people who bought property on the back of your expertise?

  22. @ Prof Lucey

    Well at least we know where you stand. Incinerate the lot. We do that and tomorrow we just revert to the Stone Age when we got along just fine without any help from foreigners.

  23. Excellent post on Namawinelake about Patrick Honahan’s new best friends here:

    http://namawinelake.wordpress.com/2011/03/02/a-stress-test-for-blackrock-%c2%ae/#comments

    Suggest Patrick gets round to reading it too.

    I would merely add to it that Blackrock are such a big asset manager because they bought ishares (ETFs ETNs etc) from the capital strapped Barclays a couple of years ago. That very significant part of the business is passive management – managing futures rolls and stuff rather than having a view on things like economics.

  24. Could I suggest that the Irisheconomy.ie St. Patricks Day parade cage fighting float be restricted to people called Brian this year? Politicians, economics wonks – doesn’t matter.

  25. @ Kevin Donoghue

    I have never had a problem in challenging people directly. I value my independence and I’m not hankering for positions or baubles from anyone.

    When the bubble cheerleaders far outnumbered the sceptics, I challenged the likes of Dan McLaughlin directly even though his firm was an advertising customer.

    So there’s no need to make too much of my first post, which was made close to midnight in my time zone, while having some other things to do.

    In Wednesday’s Irish Independent, McWilliams wrote: “Proper negotiation is needed, and if that fails, unilateral action will be required. To make that unilateral action more palatable and more democratic, it would be a good move for the new government to call a referendum on the banking stitch-up. This would ease their position and make it more difficult for the EU to actively crush Ireland.”

    So unilateral action could be more ‘palatable’ after a referendum and there’s no need to be concerned about the potential for serious collateral damage.

    During the bubble the likes of Dan McLaughlin could take to the national airwaves and present their sunny scenarios without serious challenge and it’s the same today whether it’s letting the banks collapse, default or exiting the euro.

    We have well-off middle class individuals like David McWilliams, Fintan O’Toole and Vincent Browne, proposing very serious action while being sheltered from the week-to-week struggles of indigenous firms and their worried employees across the country.

    Apart from the impact on overseas depositors, a serious confrontation with Europe now, would trigger speculation across the world that Ireland would be forced out of the EMU; The Daily Telegraph’s Ambrose Evans-Pritchard would be on the first plane to Dublin to lead a gloatfest and fragile export business would be in peril.

    When Iceland crashed, it had a choice of its Nordic neighbours and the IMF to help or Putin’s Russia.

    Argentina had Hugo Chávez.

    Who would support Ireland?

    Then all the eejits hankering for simple panaceas, would conclude: “Shur we all knew that f_er Kenny wasn’t up to the job…can you pass the smoked salmon?”

  26. @Michael Hennigan

    What do you think are negative consequence of unilateral default on bank debt?

  27. @ Michael Hennigan

    “Apart from the impact on overseas depositors, a serious confrontation with Europe now, would trigger speculation across the world that Ireland would be forced out of the EMU; The Daily Telegraph’s Ambrose Evans-Pritchard would be on the first plane to Dublin to lead a gloatfest and fragile export business would be in peril.”

    Given that your statement implies that you are gifted with perfect foresight, perhaps you could let us all know which horse is going to win the 14.30 at Ludlow today?

  28. @ dreaded_estate

    The ECB would freeze its emergency facility and would let the political leadership respond to the crisis. Otherwise, it would lose what is very important to a central banks – – credibility.

    The Irish Central Bank would likely provide a short term lifeline but over a few weeks with the focus of the financial world on Ireland, the fear of exiting the euro at home would create a run on the banks.

    It would be devastating to SMEs who rely on materials from overseas as supplirs would insist on cash payments.

  29. @Grumpy

    I think it would be a useful exercise, I have since lost count of the subbie gains over the last 3 months with all the offers made!

    I eman it is relatively straight forward for the 3 banks which are going to continue that the gains knock something off their capital target but I wonder, in the case of Anglo and INBS, if the subbie gains knock anything of their current bills of 29.3bn and 5.4bn.

  30. I do not understand very well personally why EU & ECB seem to be opposed to burning senior bondholders. On this blog, much data has shown that the exposure of the Euro area to senior bonds is in fact minimal. The idea that EU & ECB are trying to protect the banks of the rest of the Euro Area does not stand close scrutiny.

    Those arguing for burning senior bonds should think about that.

  31. It seems a tad silly that these figures are only beig published on a once-off basis. They should eb published monthly and backdated to pre-2008 so we can see exactly what we guaranteed and subsequently paid off over the period.

  32. [A run on the Irish banks] would be devastating to SMEs who rely on materials from overseas as supplirs would insist on cash payments.

    I would strongly urge the CEO of any SME who has not established a relationship with a non-Irish bank to fire the financial controller at once. If s/he hasn’t put facilities in place many months ago, you really need to ask what other obvious steps have been neglected. Have you backed up your databases recently? Do you have anti-virus software installed? It really is a basic as that. You do not tie the fate of your enterprise to that of a bank whose solvency you have good reason to doubt. Actually, if this is news to you, don’t just fire the financial controller — contact the Chairman and fess up to the fact that you’re really not up to the job. You might get a better severance package than you deserve.

  33. If the position is taken that the Europe wide (for starters) cost of possible contagion following default (assume a unilateral action and not a agreed/negotiated restructuring) would dwarf the savings to accrue to Ireland through restructuring then I believe that this creates a negotiating position?

    Secondly if the team the first time around (for varying reasons) more or less threw in the towel in negotiating – the new team that we have in place has a window of opportunity to do something.

    The threat of default has about another week’s value?

  34. @ Kevin Donoghue

    Kevin,

    You appear to be using the wrong textbook.

    Apart from in an aspiring dot.com, the term CEO would be out of place and it would be strange to have a separate chairman in an Irish SME.

    Besides, as cash-flow would be a common problem for all SMEs (2,900 companies collapsed in 2009 and 2010 + sole traders and partnerships leaving debts for other Irish companies to incur) as many of them would have experienced bad debt losses, opening up accounts in foreign banks or their Irish affiliates is not going to provide credit expect for those who don’t really need it.

    Customer debt periods would be already stretched and a banking crisis would be the last straw for many after 3 years of crisis.

  35. @Michael Hennigan
    “The ECB would freeze its emergency facility and would let the political leadership respond to the crisis. Otherwise, it would lose what is very important to a central banks – – credibility.

    The Irish Central Bank would likely provide a short term lifeline but over a few weeks with the focus of the financial world on Ireland, the fear of exiting the euro at home would create a run on the banks.”

    While the ECB may be able to freeze the emergency facility, I don’t think they could legally shut Ireland or Irish banks out of it.

    You also have to consider what the ECB’s stated motivations are for not allowing a default, namely to prevent contagion. The course you have suggested the ECB would follow would have far worse contagion effects on the wider European banking sector. Whether they would take these risks in effect to punish Ireland is debatable IMO.

    There is also the option of allowing taking the banks into a US style protection, allowing them to issue more bonds to themselves and replace all exiting deposits with Irish/ECB central bank funding through this route.

    Can’t see why we would have to or want to leave the euro because of a default on bank debt.

  36. @Michael Finfacts

    Ignoring the issue of senior debt for a moment, I see that there is 5 and a half billion of subordinated debt at BOI and AIB still outstanding.

    In your view can and should we simply pay nothing or next to nothing on this debt?

  37. @ Dreaded_Estate

    1. At a time when the ECB wants a ‘quantum leap’ in the system of ‘economic government,’ it would look stupid if it ignored a flagrant breach of policy. Trichet used the term ‘quantum leap’ just 2 mins ago at his press conference.

    2. Merkel would look very exposed politically if she also accommodated a default.

    3. The fears about the membership of the EMU would likely be whipped up by the crisis rather than any desire of the Irish authorities to quit the system.

    4. The ECB wouldn’t shut Irish banks but if the emergency liquidity was frozen and further maturing debt was expected to be defaulted, there would be a credit freeze as happened in the US after the collapse of Lehman Bros.

    @ christy

    We should do everything we can to reduce the debt exposure.

  38. I posted on a thread a week or so ago that I knew a few Italians who had ‘survived’ the Argentinian crises on the last 80s and onwards. Because of the dollar peg, their savings got hammered (euro membership prevents that). However, investment and savings bonds, and the stock market shrunk to keyhole size. Argentinian companies couldn’t get credit to cover foreign transactions, etc. However, reading the thread here, apparently we can all applaud if Ireland defaults,.., this time it will be different…

  39. @ Finfacts

    In your view is it possible to impose losses on BOI subbies without nationalising the bank?

    If no, and the stress tests reveal a need for capital that implies that the bank has suffered losses greater than the sum of its initial private equity and subordinated debt, should BOI be nationalised and subbies wiped out?

  40. @ The Alchemist

    The majority of comments here appear to be calling for a default on private banking debt in order to try and help to avoid a default on Irish sovereign debt, which would likely result in experiences similar to those in Argentina.

    If Ireland were able to avoid default given the size of its sovereign debt burden, as exacerbated by bailing out the banks, then to borrow your/Reinhart & Rogoff’s phrase – this time it would indeed be different. Unfortunately, as Rogoff outlined again this morning on Bloomberg, (http://www.bloomberg.com/news/2011-03-02/rogoff-says-debt-restructuring-inevitable-in-greece-ireland.html) it appears more likely to many that the debts of the banks will force the country into the sovereign default you’ve been warning about.

    The country is in a terrible hole at the moment, regardless how or why the debt burden arose. Usually, when I find myself in a hole, I stop digging.

  41. You appear to be using the wrong textbook.

    You’re probably right. Certainly it failed to forewarn me about the the failure of Bankhaus Herstatt in 1974, which caused me a lot of problems although I had no dealings whatever with them. (Some UK banks my employer relied on did have dealings with them and became quite paranoid as a result.)

    The manner of that closure came as a bolt from the blue for many bankers. They never foresaw that the Bundesbank would cut the ground from under them like that. But that was 37 years ago. I don’t have much sympathy for people who haven’t figured out that the ECB is the Bundesbank’s successor and it can do much the same thing at any time. We’ve had plenty of warning about the state of our banks. Irrespective of their formal titles, the acting head bottle-washers of SMEs should have prepared themselves by now.

    Not that I give a shit about titles anyway, but the it seems the ISME is using the wrong one too: “… ISME members – CEO’s, MD’s and selected key staff members.”

  42. @Edward

    “The majority of comments here appear to be calling for a default on private banking debt in order to try and help to avoid a default on Irish sovereign debt, which would likely result in experiences similar to those in Argentina.”

    The entailment of the bank guarantee dissolves in the most part the distinction between bank debt and sovereign debt, no?

  43. @Michael Hennigan

    4. The ECB wouldn’t shut Irish banks but if the emergency liquidity was frozen and further maturing debt was expected to be defaulted, there would be a credit freeze as happened in the US after the collapse of Lehman Bros.

    You have side-stepped D_E’s point (which is mine also) that if the ECB were to freeze supplying liquidity they would cause much worse contagion than any consequences of allowing the unguaranteed seniors to be hit. Why do you think that the Lehman’s-like credit freeze that you mention would have less impact on the EU as a whole than the haircut?

    Amagerbanken defaulted on seniors a month ago, and the sky has not fallen in Denmark. Both Danish banks, and German banks exposed to Danish debt, have been downgraded a notch or two by the ratings agencies, but otherwise there has been little fallout. This shows that a default in the absence of a liquidity crisis for other banks did not cause significant problems. So if the ECB’s position is – “if you haircut unguaranteed seniors we’ll trigger a Lehman’s style credit freeze/liquidity crisis” then it makes no sense. Going nuclear makes the problem worse.

  44. @ christy

    If the BoI situation is as described, then the unsecured debt should be subject to adjustment.

    @ Bryan G

    Denmark isn’t in the EMU.

    For a member of the EMU with such dependency on emergency funding to fly solo would inevitably invite serious sanction – – otherwise the ECB would lose market credibility.

    Who among the other 16 would support us?

    As I said earlier, I would expect the facility to be suspended – – even on the basis of the fiduciary duty of the bank.

    The issue would then be passed over to governments to sort out.

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