Archive for November 26th, 2010

Consider the following facts:

(1) In 2009 Anglo redeemed “certain subordinated liabilities” namely “€1,805m of Tier 1, €307m of Upper Tier 2 and €388m of Lower Tier 2 securities were bought back at prices of 27%, 37% and 55% of par respectively”. In other words Anglo bought back €2,571m of subordinated debt for €819m, paying the subordinated bondholders an average of 32c in the euro. Anglo didn’t provide a description of the bonds redeemed so we don’t know if they were due or if Anglo redeemed the bonds before their redemption date. (Note 7 on page 42 of the 2009 Annual Report)

(2) In September 2010 (just two months ago), Anglo redeemed €7.9bn of senior bondholder debt at par value – that is, without any discount or haircut. (Note 26 on page 56 of the 2010 Interim Report)

(3) Anglo is now offering junior bondholders redemption of their bonds at 20c in the euro (that is, an 80% haircut or discount) (Report in the Independent at the end of October 2010)

It has taken the intervention of the IMF and to a lesser extent the EU to determine what we have known for some time – that the country is effectively bankrupt having assumed the burden of bank losses. And now it seems that we are on the threshold of doing what had originally been regarded as taboo and unmentionable, then became ambiguous with talks of “amicable discussions” but is now emerging as a fully formed position: Ireland can’t remain solvent if it has to honour the debts of certain banks operating here and we must therefore “burden share” the colossal losses in our banks or else the country will need default on its debt (sovereign or quasi-sovereign bank-guarantee related).

The Irish Times is reporting that the IMF, together with the EU (and presumably the ECB), is examining how senior bondholders can share the burden of losses in our banks. It seems that we might have solid proposals within the next 72 hours.

What seems tragic and lamentable is that over the past 26 months – since the State gave that blanket guarantee to the banks – we have been allowing the banks to redeem bonds either at par value (ie without any discount) or at discounts which appear ludicrous today (eg Anglo paying 31c in the euro last year when Anglo’s new-ish Chief Financial Officer seems confident we can pay 20c in the euro today – though there are others who protest that the subordinated bondholders should be paid 0c in the euro). There has also been a programme of replacing bonds issued pre-September 2008 with new State-backed bonds.

I show an extract below of the balance sheets for the six State guaranteed institutions (Irish Life and Permanent is not participating in NAMA because it claims not to have any eligible NAMA loans – the other five institutions are participating in NAMA). I show the liabilities section of their balance sheets as close to the September 2008 blanket guarantee as the institutions reporting allows and also the latest formal reporting. The line you should be looking at is “Debt Securities in issue” which roughly approximates to senior bondholders and “Subordinated liabilities and other capital instruments” which roughly approximates to junior or subordinated bondholders. A consolidated liabilities section of the balance sheet is also shown in which there appear to be some €114bn of senior bondholders and €13bn of junior bondholders. It should be said that although we refer to these creditors as “bondholders”, in truth they hold a variety of debt instruments.

Consolidated (six State-guaranteed banks)

Allied Irish Banks


Bank of Ireland


Irish Life and Permanent


From the above you will see that although we have redeemed a substantial amount of debt there is still a substantial amount outstanding. If the IMF in particular want the State to remain solvent then a substantial part of this debt will need to be written off or discounted. Meantime I hope there will be better oversight of what debts the State is paying off – the €7.9bn redemption of Anglo’s bondholders in September 2010 at par value was the subject of some rumour but in truth Anglo signalled it was going to execute the redemptions in its June 2010 accounts published at the end of August 2010.


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