The Sunday Business Post reports the government intends to launch a buyback from Anglo bondholders (available here).
The government is expected to launch a bond buyback for Anglo Irish Bank in the coming weeks, as part of a restructuring plan agreed with the EU Commission.
The buyback, which will reduce the bill for taxpayers, will offer some bondholders in the new Anglo asset recovery vehicle the option of a bond, or a term deposit, in the new funding bank at a significant discount.
In the discussion of buybacks, or “negotiating with bondholders”, it sometimes seems to be forgotten that the only way these negotiations succeed is that there is a credible threat that losses will be directly imposed on bondholders. One particularly strange example was when the Minister for Finance took credit for the earlier round of Anglo subordinated debt buybacks, even though these buybacks only took place because of the lack of credibility of the government’s policy of protecting bondholders. The main reason the bondholders were willing to accept the buyback must have been the risk of a change of government.
A good cop, bad cop routine may be going on at the moment, with the opposition parties being quite explicit about their intentions. The Post reports,
Last week, Fine Gael leader Enda Kenny wrote to the EU competition commission saying there was, in his party’s view, “no sound legal or economic case for the Irish taxpayer to repay bond investors in Anglo Irish Bank following the expiry of the guarantee”.
The letter made it clear that he was referring to those bondholders who invested before the September 2008 guarantee, both subordinated and senior debt holders.
In considering what the threat point in buyback negotiations should be, I have also been surprised by the lack of curiosity about the details of the proposed Anglo split. Most commentators have been content to repeat the mantra about the need for certainty on the cost and timing of resolving Anglo.
It will take some time before these uncertainties can be resolved. But surely we should be told now exactly how the mechanics of the split will work. What will be the value of the claim that the funding bank will hold on the recovery bank? Will this bond be guaranteed? How will capital be divided between the two entities?
On the last question, a number of reports make the point that the funding bank will only need light capitalisation given that it won’t be making new loans. This strikes me as a strange claim. The main purpose of capital is to protect depositors from losses. Surely a key objective of the split is to protect depositors so that they are willing to keep their funds in the funding bank, potentially weakening the need for guarantees of deposits or the bond issued by the recovery bank. On the other hand, if the goal is to encourage the bondholders to accept buybacks, shouldn’t the recovery bank be capitalised as lightly as possible? Some harder questioning about the mechanics of the split seems warranted.