PWC’s Stress Tests

Now that Anglo has officially blown through essentially all of its capital, and given that the government regularly cites PWC’s recent assessment of BOI and AIB’s likely capital needs, I thought it might be a good moment to remind folks of this excerpt from the PWC report on Anglo (released in February, fieldwork concluded on December 10):

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.

Hoocoodanode?

Bradford and Bingley Precedent for Anglo Debt?

With Anglo about to report its results, last Sunday’s newspapers contained stories that the government was considering not honouring coupon payments on Anglo’s Tier 1 perpetual bonds. In light of that, it is interesting to note the following story (from Wednesday’s FT):

Bradford & Bingley, the nationalised mortgage bank, quietly issued three statements after the market had closed on Tuesday, informing holders of three classes of notes that they would not now be getting their next due interest payment.

The FT notes that the market value of these bonds collapsed on this news. Anglo’s perpetual bonds have been trading at about 15% of par value lately.

Update: Anglo results released here along with a statement from the Minister of Finance.  The loss of €4.1 billion essentially equates to all of its equity capital (see page 23 of the report’s PDF file.)   And from the Minister’s statement:

the Government has decided, subject to EU approval, to provide up to €4 billion of capital to Anglo. The bank is also in a position to generate further capital of its own by buying back certain outstanding subordinated loans from bondholders at a significant discount to par value. This exercise will generate profit and additional capital for the bank.

See page 50 of the report’s PDF file for details on Anglo’s subordinated debt, which has a book value of €4.9 billion.  About €2.1 billion of these bonds are dated, and thus covered by the guarantee up to September of next year (though the earliest maturity is 2014).  The remaining €2.8 billion are undated and are not covered by the guarantee.

From Bear Stearns to Anglo Irish: How Eurozone Sovereign Spreads Related to Financial Sector Vulnerability

Ashoka Mody of the IMF has written an interesting paper on European sovereign spreads: more details here.