Who Owns Senior Irish Bank Bonds?

I’d like to pass on a few comments on the question of who owns senior Irish bank bonds, an issue that has been discussed on a number of occasions by Seamus Coffey from UCC.

Here’s a nice chart from Seamus’s blog using data from Table 4.2 of the Central Bank’s Money and Banking statistics. The chart shows that when the September 2008 guarantee was put in place, only €23 billion of the €97 billion in outstanding bonds of the covered banks were classified by the Central Bank as being held by Irish residents while today that share is €50.7 billion out of €77.6 billion.

There are a number of reasons why one should be careful in interpreting these statistics.

First, as I understand it, the Central Bank don’t keep track of secondary market activity in these bonds and so don’t actually know who the current owners of these bonds are. The estimates are largely based on the first holder of the debt when it is issued.

Second, in some cases, the “holder” is a trustee that manages the debt issuance and the subsequent payment streams on behalf of the issuing bank. So, for example, if an Irish bank issues debt that is held by an Irish resident firm Custodian Plc who manage the payment streams, but the ultimate beneficial owner of the debt (who ultimately gets the coupon payments, etc.) is a German pension fund, then the Central Bank statistics will report the debt securities as being held by Irish residents.

Third, much of the €50.7 billion currently deemed to be held by Irish residents is stuff like “own-use” bonds guaranteed by the Irish government. If, however, one is debating the question of failing to pay out on unguaranteed bonds, then you are generally talking about bonds issued prior to September 2008 and these are largely classified in these statistics as “foreign resident” bonds.

Finally, this may be obvious but it’s perhaps worth pointing out that the fact that some of these bonds may be owned by Irish residents is hardly a sufficient justification for using taxpayer funds to redeem them, rather than letting the pension funds or private citizens lose money on a bad investment.

To be honest, the fate of senior Irish bank bonds is probably generating more heat at this point than it should. It seems to me that there is no chance of the government adopting a policy of failing to pay out on AIB or Bank of Ireland’s senior bonds, so what is genuinely at debate is the roughly €4 billion or so in senior bonds outstanding at Anglo and Irish Nationwide. For what it’s worth, I suspect that most of these bonds are currently owned by international hedge funds and distressed debt desks of investment banks. So far, their investment strategy has been working out really well.

In relation to the cost of the banking bailout, an issue that may loom larger in the future than senior bonds is the policy the Irish government should adopt in a potential sovereign default situation to future payments on the Anglo and INBS promissory notes, keeping in mind that their major creditor is a certain Frankfurt-based institution.

19 thoughts on “Who Owns Senior Irish Bank Bonds?”

  1. A good reality check.

    As to future sovereign default it is not just the promissory notes, the main holder of sovereign guaranteed paper (as collateral) would seem to be the ECB.

    This all emphasises how unreal are debates about unilateral default. Our financial future is entirely in the hands of the Troika, and thank goodness for that.

  2. Karl
    Its not economics : its politics. I have said all along that even if we saved a net cent we should do it. By all means lets sort out our fiscal crisis, but lets NOT compound it by a cent more than we have to by bailing in. Going along this road we are on (by the ECB with willing cheerleaders here still) will result in an even larger swing to hard left politics in the next election. I suspect that that is not what the ECB would like to see.

  3. Very interesting and illuminating observations in Karl’s post. Particularly, for me,

    “So, for example, if an Irish bank issues debt that is held by an Irish resident firm Custodian Plc who manage the payment streams, but the ultimate beneficial owner of the debt (who ultimately gets the coupon payments, etc.) is a German pension fund, then the Central Bank statistics will report the debt securities as being held by Irish residents.”

    This raises the question of the substantial role of financial services operating out of the IFSC . For example, to what extent are subsidiaries of German and other foreign banks at the IFSC managing bonds for foreign banks and registering the debt securities as being held by Irish residents?

    The jump from €23 bn to €50.7 bn between 2008-11 of Irish resident held bonds should raise eyebrows? Can anyone suggest how this should be so? It appears to be some anomaly? Is there some deception transfer to Irish nominated addresses to these bondholders, to give substantial and false credence to the notion, senior bond holders cannot be burned, because they are Irish?

    The murky world of bond holders and CDO’s and CDS shorting is difficult to penetrate and information on them is a closely guarded secret and not at all transparent.

    On a more radical note, given the state of AIB, why was it saved and taxpayers put on the hook for its senior bonds? Surely, we could no more afford its losses than we could afford Anglo’s? Given that the bailout and response to our banking meltdown has been managed by former Irish bankers and Merrill Lynch, could we have expected differently?

    A real response would have rid us of AIB and put a new bank Irish business friendly bank in its place eg
    http://en.wikipedia.org/wiki/Bank_of_North_Dakota

    An even more radical response would have been to put BOI in the bin as well. With the record of reputational damage to these banks over the past decade, in the light of 2008, what was the point of saving them, except as always, to break the rules on moral hazard and put Irish taxpayers on tap for banks, whose management teams rather than still running them, should be under CAB investigation, or behind bars.

  4. For readers that don’t know this, investment houses, banks and individuals (for administrative convenience more usually than anything else) usually have their investments registered to a “nominee company” or “custodian”.

    This means the legal ownership is with the nominee. The beneficial ownership is with the custodian or nominee company’s clients.

    There is a LOT of back office stuff like this carried out in the IFSC.

  5. @Karl Whelan
    Good question! One might add: Who owns genuine sovereign bonds?

    Andy Storey on an Irish Debt Audit … (worth a scan …)

    ‘We declare the right of senior bondholders to the ownership of Ireland, and to the unfettered control of Irish destinies, to be sovereign and indefeasible. The long usurpation of that right by the Irish people and government has not extinguished the right, nor can it ever be extinguished except by their repudiation of the bank debt…. The senior bondholders are entitled to, and hereby claim, the allegiance of every Irishman and Irishwoman.’ […]

    ‘Realistically, the [Debt]auditors will probably not be able to get clear and comprehensive answers to the questions they are asking. But that itself will be a telling finding. In the Sherlock Holmes short story ‘Silver Blaze’, the following famous exchange takes place:

    Gregory (Scotland Yard detective): Is there any other point to which you would wish to draw my attention?
    Holmes: To the curious incident of the dog in the night-time.
    Gregory: The dog did nothing in the night-time.
    Holmes: That was the curious incident.’

    http://www.irishleftreview.org/2011/05/01/unmasking-bondholders-audit-irelands-national-debt/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+irishleftreview%2Ffeed+%28Irish+Left+Review%29

    Hmmm ‘… a certain Frankfurt based institution …’ and other curious incidents! Methinks in a democracy that citizens, such as I, ‘paying’ for illegitimate debts are entitled to know who they are paying them TO…. or has democracy also been suspended?

  6. At last the government might be doing something right.

    If the ECB ‘won’t allow’ Ireland to burn bank bondholders, Ireland should do all it can to draw those bondholders a little closer to the fire that the rest of us are in.
    And use every single opportunity to stick their toes right into that fire.

    As for the bondies being worried about the hierarchy of payouts, it seems to me that they have got an excellent deal so far. Any legal action by them should be preceded by a legal action by Irish citizens against the banks for the full works(€70 billion or thereabouts). There would not be much left of the banks by the time those actions got under way.

    I also hope the Government has made 100% certain when issuing the in extremis preference shares etc that those shares rank about bondholders at every turn. If they did not then there must be a fatal stupidity at heart of the oxymoron that is government thinking.

  7. “when issuing the in extremis preference shares etc that those shares rank about bondholders at every turn.”

    Sorry. Dream on.

    I said it at the time.

    The preference shares were a scam.

  8. @Joseph R
    “There would not be much left of the banks by the time those actions got under way.”
    There is nothing left now other than what we/ECB have put in, more or less. So sue for 70b but whos going to pay?

  9. @Brian Lucey

    Both parties to legal action, the bondholders and the citizens get nothing. The baddy gets killed and well as the not so baddy. Just like a western.

    The town (or bank in this case) of course is a wreck! But it was worth it!.

  10. @Brian Lucey

    The banks are dead already – their “assets” are non productive elements of a 25 year credit / petrodollar explosion.
    However there is still wealth in this country and more can be developed – we just need to divorce the money supply from the commercial banks.

    If we don’t we are goosed

  11. @Grumpy,

    ”….This means the legal ownership is with the nominee. The beneficial ownership is with the custodian or nominee company’s clients….”

    What will happen if say Greece defaults ,things get out of control and there is a short squeeze on the euro, shares and bonds held by investment houses that then cant’ meet margin calls or whose customers cant then meet margin calls either;Do you think such a scenario can develop like in the Lehmans case?

    Where would this leave clients if the legal ownership is with the custodian?
    Would it be better to pay the extra for ownership and have a claim that could be enforced in law?

  12. …So, for example, if an Irish bank issues debt that is held by an Irish resident firm Custodian Plc who manage the payment streams, but the ultimate beneficial owner of the debt (who ultimately gets the coupon payments, etc.) is a German pension fund, then the Central Bank statistics will report the debt securities as being held by Irish residents.

    This is precisely the reason why I called Lenihan a name that I rather do not rephrase here when he came up with his remarks about the majority of senior bondholders being Irish.

    The way the public was and still is deliberately misinformed, it is beyond comprehension and deserves the harshest possible criticism.

  13. @sean
    “Would it be better to pay the extra for ownership and have a claim that could be enforced in law?”

    It is enforceable under trust law. The custodian is a bare trustee, merely an administrator. The gains or losses go straight through to the beneficial owner.

    It really is un-mysterious.

  14. Karl,

    This is a useful post, but it might be worth looking at the issue from the other end of the telescope too.

    The sovereign’s rating is now Baaa3 at Moody’s- one notch above ‘junk’. Anglo is Caa1 – with a negative outlook. The other agenices have issued comparable ratings.

    In both cases (and all those in between) these are credit ratings at which most mainstream pension and insurance funds are barred from holding the debt. The investor universe for debt such as this stretches only from ‘high-yield’ funds through to hedge funds and vulture funds.

    Contrary to the repeated assertions about risking widows and orphans funds, only professional investors or those seeking higher yield in return for higher default risk can now be holders of Irish debt.

  15. What we need is a national debt audit. We do not know to whom exactly the bank debt is owed, when it is due for repayment, how much has been repaid already and how much exactly is senior, guaranteed and subordinate. European technocrats, politicians and analysts will be chasing their own tail until this information is made explicit in the public domain. It is a right of every European taxpayer to have this information.

    See Andy Storey:

    http://politico.ie/crisisjam/7471-unmasking-the-bondholders-debt-audit

  16. Here are some holdings we can determine from various documents in the public domain.

    ILCU (31/12/2009): €601 million of unspecified bank bonds
    PTSB (31/12/2010): €651 million of bonds from the covered institutions
    BOI (31/12/2010): €416 million of bonds from the covered institiutions

    Although the CB data has limitations, like GDP data, it is useful to look at the changes rather than the absolute amounts. Excluding the self-held bonds, the total amount of bonds in the covered banks has fallen from €107 billion in Aug 2008 to around €60 billion now. Most of this money has left the country.

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