It was the UK Liberal Democrat MP, John Hemming who finally revealed in the UK parliament three weeks ago that it was Ryan Giggs that was at the heart of the super-injunction/Imogen Thomas story. We might not have heard of this politician before but we are about to hear from him again. For he has now taken up the cause of some Bank of Ireland subordinated bondholders who our own Minister for Finance, Michael Noonan wants to burn. These subordinated bondholders are owners of bonds, denominated in sterling and paying 13.375% per annum. Bank of Ireland which is 36.5% state-owned but is likely to be majority owned in coming weeks, has offered these British bondholders 20p in the pound for their bonds. And they’re not happy. Some 2,000 of them have reportedly appointed a US law-firm to take Bank of Ireland to court in the UK, and they are also marshalling political support; enter the fearless Liberal Democrat, John. The UK’s Independent newspaper reports that John is to write to the Irish government complaining at the “lack of common decency and fair play”. By the way, the claim is that most of these subordinated bondholders are pensioners and orphans, though on closer reading of the Independent’s report they are in fact “pensioners and investors”.
On this side of the Irish sea, subordinated bondholders have already made it to court. Two companies holding subordinated bonds have cases before Dublin’s High Court concerning AIB’s bid to burn them. One of the companies, Abadi and Company Securities, withdrew its challenge in the past week though Minister Noonan has agreed to pay their legal costs which the Irish Times reported ran to six figures. It is not clear how much Abadi’s bondholding was worth and there may be lingering suspicions that the payment of legal costs may have contained some element of reward to offset the proposed haircut on the bonds. The other company, New York hedge fund, Aurelius Capital Management is continuing its case atDublin’s High Court. It too is an investor in AIB subordinated bonds and is apparently facing a 80-90% haircut on the nominal value of the bonds though it is not clear how much Aurelius paid for them. The company seemed to concede in court that it was a “fast money fund” as opposed to a “real money fund” with the implication that its investment expected high returns over short periods. The Irish Times reported the company saying “Attempts to demonise bondholders, irrespective of whether they were funds for “distressed gentlefolk”, orphans or hedge funds were inappropriate”. The case continues.
And in New York, the application by Fir Tree Capital against Anglo which was initiated in February 2011 seems to be held in abeyance. Yes, it seems that subordinated bondholders are not happy at being burned, despite the fact that they would lose 100% of their investment were it not for the people ofIreland providing up to €70bn of their own money to the banks. Personally I would pay good money for the opportunity to reply to MP John Hemming’s letter to Minister Noonan when he complains about a “lack of common decency and fair play”.
Despite the fact that senior bondholders in Irish state-guaranteed institutions continue to enjoy repayment of 100% of their outstanding bonds, moves are afoot to burn subordinated bondholders. This entry examines the present state of play of the various initiatives
First up, a little general background on bondholders generally.
What are bonds? They’re fancy IOUs issued by governments, banks, companies and in other countries by local authorities. The governments and other organisations which issue bonds are called “issuers”. They’re quite specific IOUs because they generally specify a date on which they’ll be repaid and also the interest rate that will apply – the former is called the “maturity date” and the latter “the coupon”. And these IOUs are traded so the person who initially gives the bank €1,000 for one of these IOUs may sell the IOU to a third party. Bonds are fancy IOUs because they come with legal terms which set out how they will operate and how they will be repaid. You can also insure bonds so that if the bank doesn’t repay the IOU, your insurer will pick up the loss. Sometimes bonds are repaid (or “redeemed”) by the issuer not at the face value of the bond but at a discount. Why would you accept a discount? Normally because the issuer has gotten into financial difficulty and can’t repay you 100%. The discount is called a “haircut”.
What are the different types of bond? In terms of the ones we hear about in Irish financial institutions, they can be broadly classified as senior and junior. Senior means that if the bank gets into trouble, the senior bonds will have seniority or first dibs on money available to repay creditors. Junior (or subordinated) bondholders have to take their place in the queue if the bank gets into difficulty. So senior bonds carry less risk, but also a lower interest rate than junior (or subordinated) bonds. Senior bonds can be further classified as “guaranteed” and “unguaranteed” which in Ireland means are subject to the disastrous bank guarantee in September 2008 (and its subsequent extensions) or not. And these senior bonds can be further still classified as “secured” and “unsecured” with the former being secured against specific or general assets within the issuer.
How much do Irish state-guaranteed institutions owe to bondholders? According to the Central Bank of Ireland in March 2011, this was the bondholding position of the six state-guaranteed financial institutions.
Having poured some €46bn of public funds into the banks with another €24bn earmarked, have any bondholders taken a loss yet? Absolutely, ever since September 2008, the state-guaranteed banks have been buying back subordinated bonds at discounts to their face value. In 2009, for example Anglo bought back €2,571m of subordinated bonds at discounts that ranged from 45% to 73%. Since September 2008, we have paid back €7.3bn of senior unguaranteed bonds and at 30th May 2011, there were still €36bn of senior bonds in the six state-guaranteed banks. I am not aware of any haircut whatsoever being applied to any senior bondholder.
Part 2 should be published later today and will examine in detail the various subordinated bondholder initiatives presently in the public domain.
UPDATE: 15th July, 2011. It seems that MP John Hemming might have more than a simple political interest in the restructuring of the Irish banking system. It is revealed today in the Irish Times that John Hemming’s company, Scotchstone Capital is one of a number of shareholders in Irish Life and Permanent that is seeking a change to the government’s plans to recapitalise that bancassurer. John Hemming personally and Scotchstone along with, according to the Irish Times, “Arc Asset Management, Horizon Asset Management and investors Waseem Shakoor, Paul Curtis, Nigel Bunting and another party who did not want to be named” are seeking compensation for their shares at 90c a share. The shares closed at 4c a share in Dublin yesterday. The rebel shareholders are represented by British law firm, Brown Rudnick. The government’s plan to recapitalise the bancassurer is reportedly described by John Hemming as “backdoor expropriation”. The eight have apparently made an offer to accept 90c for their shares, an offer which expires at 4.30pm today. At this stage it seems the next step by the group will be an attempt to get a new motion tabled at the extraordinary general meeting being held by the bancassurer next week on 20th July, 2011 where the government’s recapitalisation plans were set to be approved. There also exists a possibility of legal action.
UPDATE: 20th September, 2011. Just a fortnight before the start of the new legal term in Dublin, the Irish Life and Permanent shareholder case briefly came before the courts yesterday where Piotr Skoczylas, managing director of Scotchstone Capital is reported to have claimed that the case was as one of the most important cases in the history of the state as it would expose an “unprecedented abuse of power” by the Irish authorities. Not surprisingly the State is defending the action.
NAMA Wine Lake 
My email to Mr Hemming:
John Curran to hemmingj
09:30
Dear Mr Hemming,
I understand that you are complaining to the Irish minister for finance that BOI’s attempt to burn subordinated,British based bondholders is indecent and against the principles of fairplay.
Any return that these bondholders get is based on payment by the Irish taxpayer. Could you explain to me why the Irish taxpayer should be liable for such liabilities? The only reason we are at all is because of very poor governance on our previous government’s part. These debts were privately issued, privately administered and should he privately payed or reneged on. It should have nothing whatsoever to do with the Irish Taxpayer. If I had my way we wouldn’t have paid anything to bondholders and the entire rotten debt ridden ECB banking system would collapse.
See here for my overall view on debt, well explained by Chris Martenson:
http://www.chrismartenson.com/blog/death-debt/58941?utm_source=newsletter_2011-06-11&utm_medium=email_newsletter&utm_content=node_teaser_58941&utm_campaign=weekly_newsletter_22
I suggest that you leave the Irish taxpayer alone and stick to Ryan Giggs’ private life. By the way, did you enjoy the rimming you got from that judge on newsnight?
Mr Hemming’s (immediate) response to me:
John Hemming to me
10:03
I get slightly misquoted from time to time. The problem is upending the capital heirarchy. It is entirely feasible to offer bondholders a deal to convert their bonds into tier 1 equity without basically appropriating the bonds. However, the government in ireland is in essence trying to maximise its position. It does not affect how much additional money needs to be injected into Bank of Ireland.
What hypocrisy! If BOI customers decide not to repay their debts, what is the likely response from BOI? Yet BOI are apparently too poor to pay their own debts, despite having 7 billion in equity should the bank be wound up.
BOI and UK Royal Mail customers beware – After this the only people left for the BOI to cheat is YOU!
NWL,
Just to split up your 46 billion already pumped into the black hole of Irish banks.
ANGLO = 29.3
AIB = 7.2
BOI = 3.5
INBS = 5.4
EBS = 0.9bn
Yikes, I am sorry, I am just an average human being with no special talents or qualifications in the world of economics, but these numbers are insane.
Way I see it, we are providing support to foreign Investors by strangle holding the Taxpayer, and ‘austeritizing’ the entire country into an even deeper recession.
Apparently the IMF was hacked yesterday. Suggestion to the hackers: Target ECB instead.
Your article is flawed in so many ways here are just a few:
1. Bank of Ireland is not the basket case that Anglo and AIB are and can very well continue to trade profitable into the future with some recapitalisation and not too much at that. This is about protecting the Irish states investment which was made as equity and preference shares. The rules and laws of capital structure dictate that equity and preference shares much stake the hit before bond holders. Passing laws to circumvent this has very grave consequences. You need to be careful what you wish for here Ireland. Demonising foreign investors is not a good strategy. You might not know it but Bank of Ireland depends heavily on UK Post office depositors for its very survival right now.
2. Part of what John Hemming is trying to campaign for is for bond holders to be treated fairly and equally. Right now it seems that Bank of Ireland wants to pay the little guy less than half what they are offering the larger institutional holders. They give no reason for this whatsoever.
3. It seems that you and parts of the Irish public are happy to see losses outside of Ireland as long as the poor Irish tax payer isn’t left with the burden. Well if that comes to pass and you show total disrespect for contract law you might find that your good name is tarnished for a very long time.
4. There are plenty of alternatives here for example sub-debt could be offered equity on much better terms and they would probably be happy to help recapitalise on these terms and share the burden.
5. If you are happy for sub-debt to burden share then presumably you’ll be happy for senior debt too burden share too – why differentiate if you are going to break the rules anyway.
http://www.protect-my-savings.co.uk
There is also internationally established contract law that describes ODIOUS debts as debts that need not to be repaid.
The debts imposed on Ireland constitute a hostile act against the people of Ireland, hence are odious.
@Tim, thank you for your comment, that perspective is sincerely appreciated.
This isn’t a Brits and Paddies issue at all, though it has the potential to be portrayed in that way. The anger felt here probably comes from two sources:
(1) Ireland has already put €46bn of citizens’ monies into what were private banks. Bank of Ireland has so far received €3.5bn. In addition, we are borrowing up to €24bn from the IMF/EU (and the EU includes bilateral loans from the UK), and that €24bn will also be injected into the banks. Up to €5.2bn of that additional €24bn has been earmarked for Bank of Ireland. So overall, up to €70bn of citizens funds are being injected into banks which have some €70bn of bonds outstanding. That’s €70bn for a country with a population of 4.5 million. And the €70bn comes from taxes and service cut-backs. This isn’t meant as a sob story, but these are the bald facts viewed from here.
(2) Ireland is receiving a bailout of €67.5bn in total from the IMF and EU. In addition, we’re contributing €17.5bn from our pension reserve funds to the bailout which is why you often hear €85bn being mentioned. Of the €67.5bn sourced externally, upto €45bn is coming from the EU. And we are paying an average interest rate of 5.8% on funds that cost 2.8% to raise. So the EU (including the UK) is profiting by roughly €7bn from our financial circumstances over the life of the bailout. When I say “profit”, I mean the difference between the cost of funds to the EU and what the EU is charging us. Our government agreed to these terms and they were ratified in our parliament (the Dail) so again, not meant as a sob story but these are the facts.
So addressing your points. Indeed Bank of Ireland is the healthiest of the six banks that have received citizens funds. Our government still owns 36.5% of that bank at present through the conversion of part of the €3.5bn previous bailout to ordinary shares; furthermore the likelihood is that we will end up owning 63-87% of the bank in coming weeks. There is still €6.1bn of senior bonds in BoI which are guaranteed and the ECB has insisted we pay back these bonds 100% as well as €17bn of senior unguaranteed bonds which the ECB likewise insist on being repaid 100%. So from our viewpoint, Bank of Ireland would not be solvent at all were it not for Ireland pouring upto €8.7bn of citizens money in. So our government is seeking a contribution from subordinated bondholders and that’s where the 80-90% haircut offer comes in. Ordinary shareholders have largely been wiped out (the shares were worth some €636m last Friday compared with more than €20bn in 2007), the ECB is insisting we repay senior bondholders 100% and there is an implicit threat it will withdraw its non-standard liquidity programme on which our banks depend, or vary its terms if we don’t comply with the threat.
As regards future subordinated bondholder investment in Irish banks, the betting here is that source will probably be closed to Irish banks for most of this decade, so I don’t think we will be overly concerned at hurting feelings. In terms of Ireland taking extraordinary and arguably draconian measures against bondholders, that is regrettable but so also was the commitment in September 2008 to guarantee all bondholders for two years. Without the guarantee, and the existing and committed state funding, Bank of Ireland would be broke and you would not receive anything for your bonds.
I must say I have sympathy with the debt for equity argument, though presumably much would hinge on the terms, and also sympathy with the apparent uneven treatment with some subordinated bondholders being “offered” an 80% haircut whilst others are being “offered” a 90% haircut.
Your point about the UK Post Office (2.3 million depositors with GBP £11bn on deposit at 31 December 2010 – https://namawinelake.wordpress.com/about/the-banks/) is well made and I note that the EU restructuring plan for BoI
Click to access n546-09.pdf
envisages the joint venture which would run out in 2020 be strengthened. If I held subordinated bonds, then I too would feel like threatening a cash cow (or rather deposit taking cow). But truth be told, our banks are dependent on the ECB for more than €120bn of liquidity so even if all 2.3m depositors withdrew all their funds, that would be but a small part of our liquidity funding from the ECB.
Again thank you for your comment, it is particularly helpful as we tend not to hear counter viewpoints in Ireland.
@tim
“This isn’t a Brits and Paddies issue.”
Agreed. Its really a taxpayers and bondholders issue.
Tim
I am in full agreement with you and John Hemming MP. The whole thing is very unfair.
It is still not too late for the Irish goovernment to apply strict legal procedure.
Fold the banks. The subbies get nothing, nada, zero.
Even at this late stage that will avoid several billions on subbies alone.
It would also avoid a good portion of unsecured bond debt.
We would then have new banks and any losses to depositors would easily be made up from the savings got in telling the unsecured and subbies to take a hike.
Or we could introduce legislation exactly similar to the UK SRR (Special Resolution Regime), which would allow Ireland to do all this exactly as it is done in the UK, with the bondholders taking the hit.
And that would be the end of those nasty little legal issues.
There are going to be different opinions and views on this depending on whether you are a Bondholder or not.
What you must realise is that some of these Bonds were issued by a UK Building Society (Bristol & West) some yearrs ago. From a UK perspective, Bank of Ireland has come in, taken over the Building Society with the agreement of the UK Authorities, on the basis that BOI will honour its contracted obligations to Bondholders but now wants to “steal” the money. Why should the UK Government not get involved? These Bonds are issued under UK Law but that is being ignored by the Irish.
Cash invested in high yielding deposit accounts in Iceland were protected by the UK Government. They should take an interest here.
As full disclosure, I am a holder of some of the old Bristol & West Bonds and I am an “orphan” and soon to be “pensioner”.
As a holder of the particular issue in question, I wish to say that I understand very well the need to pass as much of the cost of bailing out the banks to bondholders. For this reason, I am perfectly prepared to convert all my debt to equity; take a “haircut” if I must; and, indeed, to add fresh capital from my own pocket to help the bank recover. In fact, I share with you in the outrage regarding senior debt of Anglo-Irish: why should the senior bondholders of that bankrupt fraud be spared? I think it’s a robbery.
No argument there: we understand each other perfectly.
But I think there are several very important principles at stake in the case of Bank of Ireland, principles which Bank of Ireland is violating; and these violations, if allowed to stand, cast a very dark light on the future of all European finance.
Just consider:
1. It is not necessary to haircut the sub bondholders of Bank of Ireland if they will agree to swap all their debt to shares. This is because of the way accounting works: the bank gets to book as profit the total amount of debt swapped — in effect, it stops being debt the moment it is swapped. Whether each bondholder gets shares equivalent to 20%, 50% or 100% of his debt holding makes no difference from the point of view of the balance sheet. In fact, this is exactly what Citibank did in the US 2 years ago: it swapped its subdebt at 100% value and the swap was a huge success. It is today one of the healthiest banks around.
So, why are we being asked to take a haircut? I think the only answer is political: the government think it is politically astute to look “tough”. I don’t know if kicking a small dog looks” tough” to you, to me it looks… pitiful. I think James Joyce makes a point like that somewhere. But the point is — the decision is not economic, it is political. We’re being asked to pay for Mr Noonan’s popularity. (Or, should I say, his inability, in the face of EC resistance, to haircut senior bondholders of Anglo).
2. Why is this *unnecessary haircut (see above) more severe in the case of Bank of Ireland than it was in the case of AIB (25 cents in the euro) and Anglo Irish (25 cents in the euro plus accumulated interest)? The truth is that Bank of Ireland is not nearly as broke as everyone else and, whatever the value of its Irish book, half its business is in the UK, where it manages the Post Office banking operation, which looks fine. It’s balance sheet looks better, non-performing loans look better, and it’s total capital need is much lower than in the case of Anglo or AIB. So why is the deal even more severe in our case than it was in the case of the other banks who are in fact worthless zombies? I think the answer is the same as above: someone thinks it will make him look good to kick a dog and he gets emboldened as he goes on kicking.
3. The mechanics of the offer. The offer is structured as a prisoner dilemma: accept 20 cents for your bond (worth 60 cents in the market today) and, at the same time, vote to change the terms of the bond so that those who vote against get 0.01 penny; or else risk that others accept 20 cents today and you end up with 0.01 penny. This type of exit clause is guaranteed to make people crumble and accept 20 cents whatever the value of their bond. Because it is diabolically pernicious it is expressly illegal in the United States (see: http://www.lw.com/Resources.aspx?page=FirmPublicationDetail&attno=01916&publication=2163) and, for this reason, has never been even tried in Europe. This is because this type of exit clause was used extensively to burn bondholders in fraudulent railroad schemes in the 19th century and US courts have recognized its diabolical nature and banned it. Europeans, properly expecting the clause will be overturned in European courts also, have not tried this type of exit clause here. Ireland is taking advantage of the fact that such a law isn’t on the books today, calculating that if there is a legal challenge, by the time it reaches European Court of Justice, the original bondholders will be dead. Note: dead but having taken a hair-cut they did not need to take.
This is perhaps my single most important point here: if the exit clause is allowed to stand, nothing stops anyone from issuing the same kind of buy-back offer tomorrow. We all know European banks, corporations and states are overindebted. Do you have any doubt that following Irish success they will all rush out and launch their own prisoner dilemma-type debt-buy backs? And if you do not, let me ask you: do you have any money invested in any European bonds at all? If you think Bank of Ireland’s debt buyback should stand, perhaps you better sell everything and put it in New York or Hong Kong because everyone in Europe will be doing precisely the same thing tomorrow.
3. More on the mechanics of the offer. Bank of Ireland offers 20 cents cash or 40 cents in shares (for a bond worth about 65 cents just prior to the offer). Under these circumstances, most people would prefer to take the shares. Unfortunately, most people cannot. You can only take the shares if you have 122 thousand pounds worth of bonds. which, for this particular issue, is the case with fewer than 10 individuals. (Average holding is about 3000 pounds). So, the little guy — the guy who is to weak to sue — gets kicked more than the big guy who could sue.
4. Yet more on the mechanics of the offer: you can only accept the offer if the clearing system will forward to you the documents necessary to vote. Most of the holders of this bond hold their bond in Crest, and Crest does not forward voting instructions. This means that, if the vote passes, they will not get 20 cents: they will get 0.01 cents. My conversations with the Bank of Ireland indicate that they know this and do not care.
5. And more mechanics: the holders are asked to accept 20 cents and give Bank of Ireland their votes in favor of changing the terms of the bond. The bank will use those votes to change the contractual terms of the bond allowing them to buy it back from the dissenters at 0.01 penny. The Trust Deed of the bond (the agreement between the bank, the Trustee and the bondholders entered into at the time of the original sale of the bond) *expressly *prevent *Bank of Ireland, and any and all of its subsidiaries or representatives, from voting any bonds they buy back. The offer is therefore *illegal. Period. Challenged on this topic, Bank of Ireland says “no comment.”
6. Finally, capital hierarchy. This term is much bandied about without explanation and is not generally understood. The best way to explain it, I think, is this: the Irish national pension fund holds preference shares of Bank of Ireland (which are a kind of very low ranking subordinate debt); yet, they are not asked to haircut their bonds in the same manner in which all other subordinate debt holders are. This means that UK pensioners (the majority holders of my bond) are less important than Irish pensioners (the stake holders in the NPRF). Of course, we all think the Irish are the most important here, but half of the business of the Bank of Ireland is in the UK — and it is the better half. Whatever the legal aspect of treating some sub-debt holders preferentially at the cost of others, there is a political and commercial angle here which could cost Bank of Ireland a bundle. Whatever else happens to Bank of Ireland, it cannot afford to lose its UK business.
Look, guys, we want to swap debt into equity, and even put new money in the bank if we must. We just want it to happen legally and as a result of due process, and without establishing very dangerous precedents for all of Europe.
I should add that it now looks like subordinate debt holders are prepared to refinance the bank entirely with their own funds, in which case the Irish tax payer would not have to commit a penny. http://online.wsj.com/article/BT-CO-20110610-709612.html
If Mr Noonan has meant it when he said (repeatedly) that his point is to let a market based solution take place, and that all he wants is to avoid putting tax-payers money in, then he should let this deal happen. After all, saving the bank, and the taxpayer’s money, is the point, is it not?
Haruuumpphhh!
So these pensioners are becoming piqued because their risky investments have become, well, a risk. They claim the moral high ground, yet had no such scruples when it came to investing their money in dodgy banks for high interest. Keep in mind a lot of these “pensioners” would have taken quite a long hard look at where their money was going when they decided on their portfolios. Many may have personally selected Bank of Ireland, factoring in its interest rate.
These accusations strike me as being akin to a table of Bingo players griping that it is unfair that they losing since they paid for their tickets. I see no reason why the Irish State should guarantee the gambling bets these people took when they made their investments. These pensioners, of their own free will, put their savings into the Bank of Ireland One-Armed Bandit machine and now that the wheels have stopped spinning there’s no use complaining when all you got was a fruit, a golden circle, and a horseman galloping away.
I’m not obliged to pay for OAPs that lose their shirts in a casino, stock markets, bond markets or otherwise. They can be happy with their taxi fare home now, or else they can wait on for nothing later.
Obsessive
it’s a cheap shot, and you know it: we know the risks of the debt we hold. but, in civilized countries, such risks ought not to include corporations acting illegally with their own government’s connivance. Didn’t the Irish government tell us repeatedly that these banks were safe and adequately capitalized? Isn’t this why we accepted these risks in the first place?
Come on, Ireland is either part of Europe and therefore must accept that laws are laws and due process must take place, or she belongs in Central Asia somewhere, rather below Kazakhstan (who had a similar bank workout two years ago and played it by the book). If the Kazakhs can do it, so can the Irish. One would think.
in any case, you may not have to pay anything here anyway. let us recapitalize the bank. we don’t need your money — or your cheerleading — to do it.
Say what you like about investing in “civilised countries”. Your position still boils down to the following: An investor must always be paid regardless, but must also be rewarded for the risk of losing their investment. This is an untenable proposal. If investors are never allowed to lose their money, then our society will swiftly break down.
We’re expected to do it all with goodwill and cheer? No, sadly the government will need my money–both my taxes and bank deposits–to pay these ageing UK gamblers their iced tea and Mediterranean holiday money. I resent having to pay it. I made no bets or investments, and saved my money, yet now my money has to cover the rightful losses of those who did otherwise. You call it recapitalisation; I’m inclined to call it something else.
Obsessive
“Your position still boils down to the following: An investor must always be paid regardless, but must also be rewarded for the risk of losing their investment.”
No. I don’t think you were reading me very carefully. That is not what I said. I said we are willing to share in the pain, we just don’t want to be confiscated for no good reason and in clear violation of existing laws and established practices.
“No, sadly the government will need my money–both my taxes and bank deposits–to pay these ageing UK gamblers their iced tea and Mediterranean holiday money. ”
No, very possibly not. If the sub-debt holders are allowed to swap debt for equity and put new money in Bank of Ireland, then you — Ireland, Irish tax payers — may not have to risk a penny. Remember: Bank of Ireland, unlike Anglo or Allied Irish is not bust. It is a relatively healthy, viable bank. There is no need to wipe out sub-debt holders of Bank of Ireland to recapitalize the it. The Irish people do not have to bail it out. We will. Let us.
I agree with you entirely regarding basket cases like Anglo and Allied Irish. But Bank of Ireland does not need the same treatment and its subordinate debt holders, who invested in the bank precisely because it was healthiest of them all, need not be treated as harshly — or, indeed, as the terms of the current tender offer stand, harsher still than those who gambled on Anglo and AIB.
@Reg, could you explain what you mean by a “debt for equity swap”. Say you have GBP £100 of par value (or nominal value) Bank of Ireland subordinated bonds. And say you are being offered GBP £20 for those bonds now. What do you mean by “debt for equity swap”. How much equity do you expect and how would the calculation work.
@namawinelake
The current LME (“tender”) offer from the Bank of Ireland offers £200 in cash for every £1000 bond; or, at the option of the bondholder, £400 in shares priced somewhere between 11.3 and 11.7 cents per share. So, on second option, a £1000 bond would be turned into 3900 shares or so. So, the equity offer is better, but not as good as it seems: since the state will be buying its shares at 10 cents, the debt/equity swap offer has an automatic further 17.5% loss on the new shares built into it.
Obviously, a fair offer would recognize the market value of our bond just prior to the LME — and give us £650 in shares for a £1000 bond on the same terms as the government (10c) — or 6500-7000 shares or so. Still a haircut to par value of the bond, but at least such a transaction would have a semblance of fairness.
For all this, I suppose we would take the present equity option without a fight: not a great offer, and who knows what will happen to the stock price given the turmoil in the market, the government is giving itself a sweeter deal, etc., but these are hard times, our bank does need capital, etc.
The really serious problem for us lies in the fact that under the current tender
a) we small guys are not allowed to take the equity, so the most we can hope for is £200 in cash while institutions can take £400 in shares.
and — and this is the real crux of the matter for us —
b) because of the tender system selected by the bank, most of us small fry-type of guys will not be able to tender/vote, meaning that, if the LME passes, we will receive… £1 for every £1000 bond! That’s considerably lower than the 80% write off reported in the media: it is… an outright confiscation. (What else would you call it). It’s risible that the RTE should report our complaint as “British bondholders not liking the haircut”.
Incredibly, when contacted, the bank acknowledges that this might happen to small retail holders and — gasp — shrugs! (Makes you wonder if the bank is familiar with the concept of “fiduciary duty”, and if not, if they are fit to be in position of public trust — e.g. take deposits, for instance).
Now, note, this is an offer from a Bank which is not bankrupt at all, but, on the contrary, relatively healthy; and which, if all sub-debt were swapped for equity, making a 2.6 billion contribution to capital, would only have to raise additional 1.6 billion on the new capital requirement. This is a lot of money for you or me, but a small sum for a leading Irish/UK bank of this size to raise in the market. But how can they raise any money in the market in an atmosphere of financial terror and uncertainty created by the Minister who every other day threats investors to do “whatever it takes” to wipe people out; and substantiated by what is in effect an illegal tender form the bank itself?
Think about it — if debt holders, who are supposed to have priority over shareholders can be treated in this manner — then who would ever want to put money in the lower-ranking stock? The government’s political posturing around “haircuts” is undermining the bank’s credibility and investor’s confidence in property rights in Ireland.
@Reg, truly grateful to you for articulating that position. It is a novelty in Irish media to hear the bondholder viewpoint.
Could you clarify the comment “because of the tender system selected by the bank, most of us small fry-type of guys will not be able to tender/vote, meaning that, if the LME passes, we will receive… £1 for every £1000 bond! That’s considerably lower than the 80% write off reported in the media: it is… an outright confiscation. (What else would you call it). It’s risible that the RTE should report our complaint as “British bondholders not liking the haircut”. ”
Why haven’t you (you say below you are a bondholder) received notification of the offer? Do you have a link to the RTE report, because that seems to go further than anything on here.
@namawinelake
1) here are some links to the coverage in UK media:
http://www.protect-my-savings.co.uk/press-coverage/
2) a good summary of the situation is to be found on the page of Mark Taber, who is leading our efforts and does not even hold the bond (kudos to a righteous man):
http://www.fixedincomeinvestments.org.uk/home/bank-of-ireland-13-375-subordinated-bonds
2) i hold my bonds in electronic form through a bank/broker; my bank/broker has not received the notification yet (June 13!); the equity option is only available for “early birds”, which has an acceptance deadline of June 22; because of the way brokers process their paper work, this probably means I will have to indicate my choice to my broker by June 16 or 17th — which I can only do if my bank receive the notification today or tomorrow; if this does not happen, i am shut out from the offer; if they receive the notice by end of this week, i am in the “lucky” position to still accept the 20 quid cash next week; if they don’t receive the offer, i will be taken out at a penny
3) many people who hold the electronic form (like me) but through CREST (an electronic securities processing system) which DOES NOT PASS NOTIFICATIONS OF BONDHOLDER MEETINGS OR VOTES — will be shut out from the offer altogether and taken out for a penny
4) when asked about this, the bank says “sell in the market to a bigger guy who can participate in the offer”; the joke is on the bondholders: according to LSE, this bond trades something like 24 bid 32 offer, with a volume of 5000 a day, IF YOU CAN GET A TRADE DONE; most days it doesn’t trade at all: i have been trying to sell for 6 weeks
5) unlike me, most holders of this bond hold it in certificate form (a piece of paper lying somewhere in one of their drawers); the bank is mailing the offer to them — many have not received it; those who do may ignore it — it’s just a plain envelope — looks like one of the million direct mail pieces you get from all kinds of banks several times a week; what chance they will read it, understand it and act in time? again, they will be taken out at a penny and won’t even know what hit them
6) i know the contents of the offer through a discussion board on the issue and have received a copy of the tender document (461 pages of it) by contacting Brown and Rudnick (the law firm we have engaged); i will be happy to email it to you, if you like: see if you can make any sense of it — I am sure no ordinary retail investor can
oh, incidentally, the equity offer depends on the successful acceptance of the deal by shareholders general meeting; if the shareholders of the bank reject it, the equity deal at 40p (even if you tender in time, your broker cooperates, you hold it electronically not through CREST, etc.) — does not go though and we get what we did not tender for — 20p cash (in the US i believe it is called a “bait and switch”)
thank you for taking the interest; i am not surprised by the quality of the coverage in the Irish media: the Finance Minister is the cheerleader on the “evil speculators”.
btw, thank you for running this excellent blog; your coverage of Greece was especially valuable to me — even the UK press does not cover it as well as you
@reg.
“(Makes you wonder if the bank is familiar with the concept of “fiduciary duty”, and if not, if they are fit to be in position of public trust — e.g. take deposits, for instance)”
I have sympathy with your position, you are being bullied.
If this bank (and others) were familiar with the concept of ‘fiduciary duty’ they would not have got themselves into this mess in the first place. They would not have ‘gone along’ with the government of Ireland backing their private bets in September 2008 and in the process bankrupting Ireland resulting in it being bailed by the IMF et al. They would not be trying to dump on you now.
They are.
What does that say about them?
What does that say about me (average Irish citizen) for letting our government do this on my behalf?
What does it say about you if you think giving these financial bastards more money is the solution?
We have all lost out, I and my extended family and a large group of friends will NEVER bank with any of these institutions again… NEVER.
p.s. I am not alone with these sentiments, what makes you think they are sound institutions?
@namawinelake
a little about the rte report (from an email from a friend in Ireland):
“Mention of the campaign on RTE Radio 1 news 08:00 Monday ( available in UK on Long Wave 252 )
Mentioned the UK high courst suit , mentioned that they were originally Bristol & West PIBS.
Then quoted the 13.375% coupon and the 20p offer – said the campaign group did not like the ‘haircut’.
Ended with the comment that BOI would strongly defend the suit.
In my opinion the item sounded better for BOI than the campaign, it could be understood
that British (Foreign) investors did not like the ‘haircut’. ”
incidentally, the bonds were initially issued by a UK building society to its depositors/owners; which Bank of Ireland eventually took over; the issuer of this bond was then substituted from B+W to BoI without permission of the bondholders, and with paperwork which looks (perhaps not intentionally, but i am not generously inclined this morning) sloppy. (for instance, the original bond required a B+W guarantee in the event of a substitution. it now appears no such guarantee was ever issued).
the more i read about it the more astounded i am how your big boys do it downtown. :)
@JR
no kidding. thanks for your sympathy. you have mine.
anyway, now that there are US hedgies on the horizon, perhaps in the case of BoI at least you won’t have to stomp up anymore of your money to save that one bank. this may make no difference for me: i have a very short deadline during which to accept or reject the tender — unless the tender is pulled, but, knowing what I know of Mr Noonan already, I think we can believe him when he says he means business.
Reg, I have a question for you as a bondholder, on which I’d like to hear your first-hand opinion. This is: Do you accept the proposition that you will have to lose money on your Irish bank investments, and if so, how much of your investment do you think you will or should lose if all things were equitable between retail and institutional investors?
I would like to hear from an actual bondholder about how much they feel they should be getting paid.
@John Tanner
I have to say the prospect of taking equity in Bank of Ireland does frighten me. It shouldn’t: it’s not especially sick and, once it receives new capital, it will be very strong, so shareholders should be alright. But what guarantee is there they won’t then turn around and SKRW the shareholders, too? And why not? If they get away with this, they might properly judge they can get away with anything. What they are doing now is so blatant — and especially because it is entirely unnecessary.
@Obsessive
Yes, I think we are prepared to take a hit on the bonds AND put new money into the bank. What the debt/equity exchange ratio should be in the case of BoI I am not sure: personally, I think there is no reason why it should not happen at par (i.e. get shares equal to 100% of the bond — I have explained above why this is perfectly sensible) but I understand that the politics make this impossible and Mr Noonan’s political future depends on delivering a wallop to somebody — anybody — with the word “bond” in his name. So, if you insist you could use the market price on the day of the announcement as a guide — 65p, or a 35% haircut. I think this is what we were expecting – cursing but resigned to it.
But — oh, no! – consider:
Anglo (a dead zombie): sub-debt holders were offered 25 cents + interest (which works out about 75% haircut)
Allied Irish (a half-dead zombie, but way better than Anglo): sub-debt holders were offered 25 and no interest (and there was a lot of interest on the 12.5s, so more like an 80% haircut)
Bank of Ireland (actually and incredibly half-alive — not only is half their book viable UK business but even their Irish book seems semi-alright): sub-debt holders are offered 20, no interest and many will have to take 0.1 — a haircut between 85% (because includes loss of interest) and 99.9%.
@ Reg
You have a point. The government and the Central Bank issued statements about the strength of the Irish Banks. Also, with the creation of the IFSC the government allowed the financial services sector to become a disproportionately large part of the economy (even larger when you factor in that Ireland’s GNP is little over half of it’s GDP because of profits being washed through the country by US multinationals). The necessary checks and balances were never put in place, either intentionally or not. The Government is elected by the taxpayer to represent their interests. So, the taxpayer has some moral obligation to the bondholders and ECB.
That said, should the governments now do what’s morally right they should do what’s in their citizens best interests? Successful countries seem to do what’s in their best interest.
@Frank
“Ireland’s GNP is little over half of it’s GDP”.
Not so.
In 2010, Ireland’s GDP was €153.9 bn and the GNP was €124.9 bn. On this basis, GNP was 81% of GDP. Big difference!
@Brian,
Even at 81%, it’s an oddity by European and international standards. The vast majority of countries have GNP’s that are approximately the same as their GDP. Countries that have substantially lower GNP’s are typically ‘tax havens.’ Charlie Haughey had a big part to play in sending Ireland down this path. He was regarded by most as a crook but yet was elected over and over again by the taxpayer. Wasn’t Charlie and Allied Irish Bank involved in some shenanigans in the early 80’s? The great hero Frank Aiken stood down from public life when he saw people like Charlie getting elected. Well it hasn’t worked out too well and the taxpayer has no one to blame but himself.
The taxpayer needs to stop electing ‘snake oil salesmen.’ There are no shortcuts to economic prosperity and sovereignty. Ireland needs to foster indigenous industry and strive to become competitive. I was there in May and was shocked to see that everything is still a rip off in the country. It’s still unsustainable.
@Frank
“Successful countries seem to do what’s in their best interest.”
it is in Ireland’s interest to appear a law-abiding country. remember: ireland’s success was in part built on becoming a financial center and that means fair dealing in financial instruments