Anglo Bondholders to be Repaid in Full

Today’s Sunday Independent appears to provide the answer to the question I posed on Tuesday about the government’s position on Anglo bondholders. Despite Brian Hayes stating firmly on April 2 (go here and click on the April 2nd edition of Saturday View, about 56 minutes in) that the government’s position was that haircuts should apply to Anglo senior bonds, the Independent reports that the Department of Finance has confirmed that Anglo’s senior bondholders will be repaid in full.

This is a good time to point people in the direction of NAMAWineLake’s very useful post from Friday detailing all the outstanding bonds of the Irish banks by maturity. November 2nd promises to be a great day for those international hedge fund investors who chose to buy some of the $1 billion senior unsecured Anglo bond first issued in November 2006.

35 thoughts on “Anglo Bondholders to be Repaid in Full”

  1. @Karl,

    On a related matter – INBS and senior bondholders.

    Irish media last week reported that INBS would not need further capital beyond the €5.4bn already injected.

    That’s not what the Central Bank said. It said “This assessment has concluded that the loan loss forecasts, which were estimated for the capital calculation of INBS last September, remain robust. ”

    Do you see the difference?

    INBS slipped out its annual report without any fanfare whatsoever, and it revealed that at 31 Dec, INBS had net liabilities of €18m, even after receiving the €5.4bn of public funds. And since then they sold their deposits at a loss and despite what the CBI say, the actual stress tests last week showed that INBS might need another €50-200m to cover losses. Yes they made a profit on the redemption of some subordinated bondholders in Mar but the betting is that profit is offset by these other losses.

    The additional capital requirement is small beer, measurable in 10s of million euro or maybe a couple of hundred, but Taoiseach Kenny and Minister Noonan both said that they would not put another penny into INBS beyond the €5.4bn already committed unless senior bondholders contributed.

    It is indeed small beer but if you establish the principle on a small scale, what’s to stop you applying it to Anglo? Or maybe even AIB and Bank of Ireland.

  2. @ Japdip,

    The Central Bank are aware of this and have provided the escape clause from what Kenny and Noonan said. Here is an extract from page 83 (pdf) of the original stress test document from 31/03/2011.

    “However, even if loss rates comparable to those of the BlackRock stress case worst bank were realised on all portfolios, the resulting increase in provisions would be relatively small (estimated at up to €195m). Significantly, a large portion of the losses on mortgage portfolios would likely not be realised until after 2015. The Central Bank estimates that by this time, the surplus capital of the new merged entity (in excess of the requirement of an 8% Total capital ratio) would be more than adequate to absorb such additional losses.”

  3. @Seamus,

    Sorry but that’s an escape clause.

    I don’t know when the INBS report was published. It was announced on 19th May 2011 with some headline extracts which specifically did not admit that the institution was insolvent (liabilities>assets) and I checked the INBS every day more or less since 19th May and it was only last Tuesday 31st May that the report was made available on the INBS website (with a date of 20th May!).

    The point I’m making is that the INBS financial position was only recently established. At 31 Dec, it needed another €18m just to be solvent. Now in June, what does it need right now? €18m? €100m? Who knows, I asked the CBI and there has been no response to date.

    So this isn’t about 2015, it’s about June 2011 and the additional capital needs now. And if it is 1c, then 1c should be burned from senior bondholders, and once you establish the principle there are billions elsewhere to be burned.

  4. In the fullness of time no doubt we will learn that various senior ECB officials are moving on to non-executive directorships with those canny asset management outfits, whose names David Norris was forbidden to disclose and whose financial acumen our kids will be paying for (unless they emigrate of course).

    They make Charlie Haughey look very much like a bit player. There’s a story about the legendary robber-baron Jay Gould, reacting very compassionately when an office-boy was caught riffling the petty cash: “Don’t be too hard on him, we started small ourselves.”

  5. @ Jagdip

    I would have given the same answer as Seamus. They would point to the supposed solvency of the merged entity.

    As for establishing principles about burning bondholders, I take it that the government have either changed their mind about the desirability of this as a course of action or (more likely) the threats from the ECB and EU on this are credible enough that they believe they cannot act.

    Whichever it is, it’s fantastic news for those who bought Anglo bonds for a song because nobody believed they could possibly be paid out on.

  6. @ Jagdip,

    Yes, it is an escape clause. That’s the point I was making. Unfortunately, the principle will be based on the necessity to actually provide additional capital rather than if additional is required. In June 2011 it appears that INBS does not need any additional capital so burning senior bondholders is “off the table”.

    It does appear that if the losses as projected do materialise, INBS will need additional capital and that this will be provided by the merged Anglo/INBS entity. This is extremely disengenious. If there is surplus capital in Anglo it should be returned to the State and not used by or transferred to INBS. If INBS needs additional capital let them come out and say it and do it in an open fashion.

    Of course, that would mean Kenny and Noonan going against their word, and just like we know there will be “no additional bailout in 2012”, we also know that they “will not be putting another penny into INBS”. Both of these are technically correct but the actuality of the situation is somewhat different.

    We will need an extension of the EU/IMF deal and we will be putting more money into INBS. The EU/IMF deal will be extended in 2013 and the additional money for INBS will be provided via Anglo. What Kenny and Noonan are saying is not wrong, it’s just that it’s not right either.

  7. @Karl

    As I understand it, there are moves afoot to merge Anglo and INBS by 31 Dec 2011. INBS is today a separate entity to Anglo.

    In June 2011, INBS may well be insolvent and in need of capital right now. That was certainly the case in December 2010, the year end for which the annual report was made available by INBS last Tuesday 31st May, as far as I am aware.

    As far as I know, INBS still has a banking licence. Are there not rules that banks, indeed companies generally trade solvently? Has the Wild West of Irish banking become Wild Westier?

    And if the government has reneged on promises, fine it won’t be the first or last time. But in a democracy shouldn’t they be held to account and required to explain their change of stance?

    Not slip annual reports out unnoticed. Then the CBI to publish a stress test which was uniformly reported here as INBS not needing additional capital.

  8. The senior burning was always an act of political theatre leading upto the election. The troika always said it was not part of the deal and there are still a number of (not immaterial) legal and financial issues with actually impairing the senior debt.

    I hope no Irish institution was stupid enough to sell their Anglo seniors because of the grand standing by irish politicians and members of the media.

    The fact that subordinated debt in aib and boi is not getting totally zeroed may be more of a surprise to members of the public. This was not protected by the troika in any way. If senior burring was so easy if Europe had “only allowed us” then why is there so many legal hoops being jumped thru to impose less than 100% losses on the sub’s?

  9. @Tomc: The fact that subordinated debt in aib and boi is not getting totally zeroed may be more of a surprise to members of the public.

    I’m a member of the public. AFAIK the AIB-BoI subdebt has to be treated with kid gloves because the shareholders have not been completely wiped out. That problem could be solved by liquidating these zombie institutions. I know that’s not practical politics. So, while I see plenty to dislike about the way they have been handled, I see nothing surprising at all.

    I don’t see that this has any relevance whatever to the Anglo scandal. Perhaps you have a point to make, or perhaps you are merely saying: “Look over there! A spaceship!” As an inquisitive member of the public, I invite you to elaborate.

  10. @Kevin D

    The endless chatter about senior bondholder burning was always domestically focused rubbish which served no purpose other than to increase the sense of constant instability in the Irish banking system and present opportunities to international banks and hedge funds to make money trading and investing in Irish senior debt. This is not just about Anglo. Huge gains have also being made by guys buying aib and boi seniors during the bond holder burning media frenzy of jan and feb of this year. As as all this debt will now redeem at par, I keep asking myself who actually gained from all this.

    I’m mentioning the sub’s as it’s an example of the practical problems with bond holder impairment. If we can’t zero sub, how was senior ever up for debate?

  11. @Karl Whelan & Seamus Coffey
    The Central Bank (whether the ICB or the ECB) can only lend to solvent banks. So the solvency does matter now. It cannot be finessed to 2015 with an escape clause. Not if ELA or ECB repo is required.

  12. By the way, the INBS annual report and accounts for 2010 is here

    http://www.irishnationwide.ie/reports/inbs/INBS%20Annual%20Report%20and%20Accounts%202010.pdf

    And it is page 22 that sets out the balance sheet showing that at 31 Dec 2010, INBS was insolvent to the tune of €18.3m (insolvency being where liabilities exceed assets)

    Given the apparent drama with publishing the INBS annual report, I recommend you all take a look at the accounts for this company which we 100% own.

  13. @ All

    it took the most “draconian” and “over powering” piece of financial legislation created during this crisis to get sub debt loss impairment down to 20% or so even after clear insolvency was established post-PCAR. This legislation, when first enacted, was deemed by opponents of the previous government, some of whom comment on here and some of whom now sit in cabinet, as being anti-democractic and near dictatorial in nature. The ECB briefly went beserk at its enaction, until assurances were given that its practical scope would not meet its theoretical one. And, again, that legislation only dealt with sub debt, and was not able to zero that rank of creditor.

    Quite why people are still, at this point, surprised at the treatment of seniors, in lieu of the political and economic realities being pushed by the EU and ECB, and, apparently, the US Treasury, baffles me. (Though we did have the memorable sight, on that fateful Friday before the IMF/EU bailout was announced, of one of the more well known celebrity economists pulling his pants down on this forum, waving his backside at everyone, saying, literally, “nah nah nah nah nah”, and telling anyone who’d listen just how amazingly prescient he had been all along against all foes, when it seemed like senior may actually have been pushed into the firing line. They subsequently weren’t). Others have been saying, regretfully, but honestly, for the last two years that seniors couldn’t, wouldn’t, and possibly shouldn’t be faced with loss impairment during this crisis. I’m not saying i told you so, i’m simply glad in some ways that the debate, upon which so so so so much political capital was spent from so many quarters, and which so so so so many column inches were expended on over the last two years or so, is finally over.

    Burden sharing with the EU/ECB is required at some level potentially (and can come in many very different forms), but addressing the argument from a debt sustainability point of view rather than simply wishing to “burn” bad and/or nefarious bond holders stands a greater chance of actually working.

  14. Who would have thunk that EColi could have relevance to the current economic crisis?
    http://www.rte.ie/news/2011/0605/ecoli.html

    Europe’s leading economy is finding it difficult to cope because it has run down its own public services so much that it has not enough doctors to cope.

    There has been a global running down of public services (Michael Hennigan would be delighted!). In New York this Winter they couldn’t cope with the snow-falls. We had Jesper talking about problems with healthcare in Sweden and now we have this. (I should present more evidence but you know what I mean..)

    The war here is not between us and the EU or the EU and the ECB. The war here is between the general public across the world and the moneylenders. Moneylenders are simply diverting taxes from the public services to enrich themselves.

    This won’t sort itself out quickly but Gordon Brown’s vision of global financial supervision will eventually become a reality but he (and probably most of us) won’t be alive to see it

  15. @All

    The “I told you so” righteous argument holds no water and more to the point those who have been proven correct in their assessment of the senior bond burning situation does not mean they are right in any normal sense other than they called it correctly.

    It goes without saying that the normal risk return dynamics of capital economics (widely defined I appreciate) has been completely bypassed by the recent actions of the ECB et al and the Irish Govt since Sept 2008.

    The losses that should have been imposed on those who lent monies to insolvent banking institutions hasn’t happened in the normal manner as it would in a bog standard manufacturing or retail business. This is wrong. No amount of argument about system saving etc will convince me otherwise.

    Wrong from all angles, so please, those who called it ‘right’ , do not give yourself any self congratulatory high fives because it is shallow and baseless and goes against even the most basic economic thought since Adam Smith started that particular ball rolling c230 years ago.

    Sad to think we’re not able to muster up enough brain power to convince the cheque writers that this comedy will eventually end up an unholy tragedy for all concerned. Too late it seems.

  16. I’m going to be sick. Why doesn’t the government just write blank cheques for the bond-holding classes and leave it at that.

  17. Thats for the post and the link to namawinelake.

    A quick calculation on that site shows about €16 billion of bonds due to ILP/Anglo/INBS–all clearly bust banks or non banks.

    What kind of insanity prompts a sovereign State to pay these.
    If the ECB are insisting, we should say no. Simple NO. Do your worst.

    Even for the supine, and there appears to be a hell of lot of those, we should pay with 30 year Irish bonds at a nominal rate. Take it or leave it.
    If the ECB doesn’t like it, then no bonds get paid.

    This cannot and will not go on.
    The State is paying these bonds knowing full well that it does not have the cash to pay the €12 billion Govt bonds due in January 2014.
    Our national sovereignty is being crushed like a empty coke can.

    There is a small way of protesting. For both State and public.
    Withdraw all funds from European banks and place with British or American banks.
    As an Irish public people need to start to draw swords in this fight for survival.

    PS. What is real interest rate on the Troika loan, when the total repayment must include the payment in full of monies other than the loan monies i.e the bank bondholders

    The true rate of interest must be close to 2000%.
    That is two thousand per cent.

    To paraphrase General DuCroit at Sedan.

    “nous sommes dans un pot de chambre, et nous y ‘sommes’ emmerdes.

  18. @ ObsessiveMathsFreak
    The government are writing the blank cheques for bondholders so that their own cheques don’t bounce. They have put cashing their own cheques above the national interest. However, when the tax revolt comes and it will come, they will be totally unprepared for the extent and ferocity of it. Once the extent of the surrender document becomes apparent the fight back will begin and as the government will already have redeemed the bonds the anger will be translated into removal of the government itself. We had 3 elections in the space of 18 months back in 81, 82 and it is going to happen again.

  19. Anglo Bondholders to be Repaid in Full

    Unlike the many retail shareholders who also based their investments on published and broker relayed information about the health of the bank. Of course, in time it was made clear that the year end accounts were not quite what they seemed to put it mildly.

    In any halfways normal democracy, a government would have stepped in to ensure that shareholders were reimbursed but in Ireland the main semi-official preoccupation is brushing any suggestion of white collar wrong-doing under the carpet and sticking the ‘ordinary’ investor in the neck.

    The crazy situation is that retail shareholders are massively shortchanged and no one is charged with any wrong doing. Great country.

  20. @ Joseph

    I wouldn’t put IL&P in the same category as Anglo and INBS. AIB better fits the zombie bill than IL&P.

    There are some significant differences between the figures for outstanding bonds in the banks in NWL’s recent post and the table released by the Central Bank back in April. Then we were led to believe that there was “only” €6.3 billion of bonds in Anglo with €3 billion of that guaranteed. The NWL table puts this at €11.4 billion with maybe half of that unguaranteed. The article Karl links to puts this at €3.4 billion.

    Whatever the numbers actually are these are massive amounts of money. We are sitting on a €30 billion (plus interest) liability for this failed bank. Senior bondholders should also feel the pain of investing in a failed company. Once these are paid our only avenue to reduce the burden of Anglo will be to renege on the Promissory Notes. If they go it is the CBoI who would suffer and the State has promised to make good any losses the CBoI incurs on its ELA lending. The bondholders are the last chance to spread the Anglo burden and that ship is pretty close to leaving the sailing over the horizon.

  21. @Bond. Eoin Bond

    Burden sharing with the EU/ECB is required at some level potentially (and can come in many very different forms), but addressing the argument from a debt sustainability point of view rather than simply wishing to “burn” bad and/or nefarious bond holders stands a greater chance of actually working.

    So should people say:

    1. We cannot sustain this level of debt and therefore we may have to burn burn State bondholders in a little over two years from now. But we will trust ourselves to the kindness of strangers in two years time at which time the strangers will have mellowed their current threatening stance.

    or

    2. We cannot sustain this level of debt because it was never ours to begin with and therefore want to burn bank bondholders now in order to protect State bondholders two years down the road.

    or

    3. We want to burn bank bondholders, not because we are arsonist at heart but because the reasons are perfectly obvious to everybody except the bank bondholders and their proctectors, particularly the ECB.

    You seem to have a preference for no 1, as a form of communicating this national predicament and deferring confronting it.

  22. @Seamus.
    Thanks for post re diff in NML /CB/KW figures re Anglo bonds outstanding.

    NWL has put dates etc on his list.

    Is it possible that the diff may be the “Govt LIQUID GTD” , which total €6.6 billion for Anglo in the NWL list. All issued in 2010. Could it be possible that these bonds were taken on by Anglo in a liability swop for the deposits, which I think Anglo was to sell to AIB earlier this year?

  23. @Bond. Eoin Bond: …one of the more well known celebrity economists pulling his pants down on this forum, waving his backside at everyone, saying, literally, “nah nah nah nah nah”, and telling anyone who’d listen just how amazingly prescient he had been all along….

    He really gets up your nose, doesn’t he? (Not literally of course.)

  24. @Karl / Bond. Eoin Bond… Says:

    A coercive senior bond burning exercise would require amendment to CISA – that ultimately requires political will and puts RoI at loggerheads with ECB.

    A non-coercive senior LME involving burden-sharing requires a structuring team to address (a) transaction structure where the main issue would be a mechanism of repaying investors ahead of repaying ELA (ELA paydown typically has priority). Can be done but unlikely opaque enough to avoid a fraught discussion with the ECB; and (b) investor incentives. For example in November there is a 750m payout. Discounting 6months still gives below nominal par (just) but the pull-to-par is very strong and the temptation for the hedge funds to not participate is very high. Clearly paying over the odds would be politically unacceptable.

    The overall conclusion is that for senior bond burden sharing now it will have to be coercive and that requires legislation. If the Independent’s article on Sunday is right, this isn’t going to happen.

    @ Jagdip / Seamus Coffey

    The INBS report is unusual in that it has negative members reserves of 18m (Page 22 of Annual report) but has positive regulatory capital of 906m (page 133 of Annual Report). There are two observations:
    • The auditors did not qualify the accounts although there was a rather lame emphasis of matter (page 20). Clearly audit standards in RoI have some way to go;
    • The positive regulatory capital position can only have been achieved through the use of regulatory filters. Sure enough the AFS reserve provides the answer. The fair value loss on the Promissory Note accounts for most of it. Clearly regulatory standards in RoI have some way to go.

    The acquisition by Anglo is probably the way out of this predicament for INBS as the Promissory Note would be accounted for under Anglo policies as a loan and its carrying value not be subject to interest rate volatility. The interesting question will be how the asset is recognised at acquisition – we’re likely in for another AIB-like explanation.

    The final point to make is that all the effort to maintain the status of credit institution for Anglo and INBS seems somewhat pointless. Now that the deposits are transferred from these institutions to AIB and ILP, these bank and building society are effectively defeasance transactions. (as per ESA95). I suppose we have to wait for the next Eurostat visit to RoI to see what it makes of all this chicanery and whether these two institutions remain classified off the govt balance sheet. If so, the banking sector will have de-levered substantially.

    @ Jagdip

    The difference between the c. €6bn on senior unsecured (gtee and un-gtee) Anglo bonds and the NWL c.€11bn is the covered bond program. These are bonds that were eligible at the ECB. More recent to the figures, the UK covered bond program would have become ineligible and the numbers are probably nearer €8bn than €11bn now. Any competent Treasurer would have plans (if not already auctioned) to re-route the collateral to either the parent to use to secure ELA or more likely into the Mortgage Bank subsidiary to allow it to issue more ECB-eligible securities.

    DottyD

  25. @ Kevin

    he offers populist, poorly-informed, silver bullets, and then goes on any and every media outlet to tell the even more poorly informed huddled masses about these wonder cures. I don’t believe it helps matters in any way, shape or form.

  26. ….sickening…. just sickening….

    I am really tired listening to these ‘Say one thing, mean another’ polit-bitches.

  27. WEDNESDAY 01 Dec 10

    Bank bailout is Ireland’s economic Iraq – Hayes

    Speech by Fine Gael Public Expenditure Spokesman Brian Hayes TD during the Bank Bailout Debate in Dáil Éireann

  28. @Dotty D

    The difference between the c. €6bn on senior unsecured (gtee and un-gtee) Anglo bonds and the NWL c.€11bn is the covered bond program. These are bonds that were eligible at the ECB. More recent to the figures, the UK covered bond program would have become ineligible and the numbers are probably nearer €8bn than €11bn now. Any competent Treasurer would have plans (if not already auctioned) to re-route the collateral to either the parent to use to secure ELA or more likely into the Mortgage Bank subsidiary to allow it to issue more ECB-eligible securities.

    Could I ask you to elaborate a little please.
    If INBS ows €11 billion in bonds, then why would a covered bond program make any difference to that figure.
    PS. I have no idea what a covered bond is. But how does it convert a liability of 11B to 4Billion?

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