Tag: Anglo Irish Bank

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.)

The Mechanics of Buybacks

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. 

Government Paid PWC €4.95 Million for Advice on Banks

The Irish state paid Price Waterhouse Coopers €4.95 million for advice and professional services in relation to the banking crisis.

PWC were commissioned after the state guarantee was put in place to assess the balance sheets of the covered banks. As I have noted here before, PWC finished their fieldwork in December 2008 and concluded in relation to Anglo:

Under the PwC highest stress scenario, Anglo’s core equity and tier 1 ratios are projected to exceed regulatory minima (Tier 1 – 4%) at 30 September 2010 after taking account of operating profits and stressed impairments … We used an independent firm of property valuers (Jones Lang LaSalle) to value a sample of 160 properties held as security in relation to the top 20 land & development exposures on Anglo’s books as identified in our Phase II review and report. The results of this work indicated that impairment charges over the period FY09 to FY11 would fall in a range between the two PwC impairment scenarios but closer PwC’s lower impairment scenario.

Can we ask for our €5 million back?

FT: No Irish Lazarus

The FT has a new editorial on Irish banking policy and it is perhaps surprisingly harsh. Text below:

Just shy of the second anniversary of the Lehman collapse, the Irish government last week issued its latest plan for Anglo Irish Bank. It reveals how little Dublin – and most other governments – have learnt from the crisis.

Back then, there were good reasons to offer taxpayer crutches to toppling banks. Contagion could bring the system to its knees. Panic made market valuation useless: even solid banks looked wobbly on a mark-to-market basis. It made sense to tide them over until the insolvent institutions could be distinguished from the illiquid.

Uncertainty is now receding. Unhappily, what is emerging in Ireland is how staggering bank losses are. It is time to let them fall where they should: on unsecured creditors once shareholders are wiped out. But Irish leaders are prolonging the uncertainty in the hope that zombie banks will, Lazarus-like, come back to life.

Dublin has poured €23bn into Anglo. The new plan – to split deposits from a “recovery” bank with loans not yet transferred to the government – looks like another round of three-card monty. It does not clarify the final size of the hole to be filled (S&P thinks it can reach €35bn), and continues to make citizens protect bondholders from their own folly.

Dublin fears that cutting loose Anglo’s bondholders will kill demand for Irish sovereign debt. The opposite is true, as record-high sovereign spreads show. Its huge fiscal deficits are manageable – just. It is the open-ended exposure to private liabilities across the banking system that drives up sovereign yields. Dublin must get its priorities right.

Irish depositors must be protected, but they fund less than half of the €776bn domestic banking balance sheet. Bondholders are owed €98bn, some of it guaranteed. Explicit state guarantees must be honoured. But the extension of a scheme to guarantee new debt issues to maturity forces taxpayers chained to a sinking ship to build lifeboats for exiting creditors.

The guarantee scheme should be cancelled for new issues, and sweeping resolution authority put in place immediately. It should apply to any bank that cannot refinance itself privately, and ensure that viable business continues while assets secure the claims of depositors and already-guaranteed creditors. Any shortfall thus crystallised should be put on the public balance sheet once and for all.

This will be painful. But investors who know the bleeding has stopped will soon prove that there is life after death.

Reading this, it strikes me as interesting how quickly we’ve gone from a situation where the government’s defenders were complaining about domestic malcontents and pointing to increasingly receptive audiences overseas to one where the exact same people are blaming the international press for our problems on the grounds that they don’t understand the situation as well as those who are living here.

Anglo Announcement: A Multiple Systems Failure

Anglo Irish Bank’s failure has become the single most costly fiscal problem in the history of the Irish Republic. The citizens of this state should at least expect to see evidence that the problem is now being managed in a competent manner and to be clearly informed about what is going on. Today’s announcement is a failure on so many levels that I can honestly say that, even by the low standards that have been set up to now by this government in its handling of the banking crisis, I fear we may have reached a new nadir.

Three issues are worth pointing out:

Communications Meltdown: The Department of Finance released a minimalist statement this afternoon on its website. However, much of the media discussion of today’s announcement has revolved around an FAQ document which, as of now (almost 11PM) the Department has not seen fit to release to the Irish public. On this site, we have been able to read the FAQ because anonymous commenter Eoin received it and posted it here (Thanks Eoin, much appreciated). I don’t think I’m giving away any secrets in saying that Eoin received this document because he works for a financial institution. Think for a moment about this as a communications strategy: Guys who work for banks get to read the answers to key questions but the taxpayers who have bankrolled this disaster don’t. For sheer tin ear, the Department officials deserve to be sent for three months compulsory service at the Terry Prone School for fake sincerity.

Mixed Messages to Depositors: The only, and really I mean this, the only advantage of the Good Bank\Bad Bank split was that it could reassure depositors that their deposits were going to be attached to a fully capitalised, fully functioning bank. Preventing a deposit flight from the bank is in everyone’s interest. That their deposits would not be attached to a fully functioning bank was clear from the DoF’s statement, which established that New Bank would not be making loans. However, the statement tried to reassure that “Depositors with the Funding Bank will be completely insulated from the future performance of the rest of the current Anglo Irish Bank loan book.” However, the FAQ (thanks again Eoin) informed us that

It is anticipated that the Asset Recovery bank will be funded by the Funding bank. Funding will be provided by the Funding Bank from normal sources. As the Recovery Bank reduces in size its funding requirements will also reduce.

In other words, if you have a deposit with Funding Bank, that bank’s assets are loans to the Asset Recovery bank, which (word has it) is insolvent. A statement that the deposits were being transferred to, for instance, Irish Life and Permanent (backed by NAMA bonds or other Anglo financial assets) might have been reassuring to depositers. Today’s messages to depositors were mixed and not reassuring.

Drawing a Line Under It/Message to Sovereign Bond Market: The sovereign bond market is crying out for some sign that we’ve got a final credible figure for the cost of Anglo Irish Bank. What did we get today? Assurances that more technical work would be done to figure out how much capital would be needed. Almost two years after Brian Lenihan talked about “going deep into the banks”, a year and a half since we were told that NAMA would provide clarity about losses and help us move on, over a year since new supposedly highly qualified management were put in place to preside over the bank, we’re being told that we need more time to look at the books? Give us a break.

Note that I haven’t even discussed any of our old bugbear issues of risk-sharing with bond holders (Lenihan indicated today that unguaranteed senior bond holder would be looked after.) The point is that even when judged against what the government wants to achieve, today’s announcement can only be judged as a complete failure.