Burning the bondholders – by how much have they been singed?

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Although not a single senior bondholder in bust Irish banks has been left behind in our financial crisis and all have so far been repaid 100%, we have been burning junior – or subordinated – bondholders since 2008. By “burning” we mean imposing or negotiating a discount or “haircut” on loans provided by the junior bondholders to Irish banks. Junior bonds are loans by investors to banks are more risky than senior bonds, and the parlous state of Irish banks was used a justification to burn these bondholders. Unfortunately, the ECB has flatly refused to permit Irish banks to impose haircuts on senior bondholders, even the ones in the zombiest of banks, Anglo.

So, how much have we burned?

In the Dail last week, the Sinn Fein social protection and housing spokespersons Anegus O’Snodaigh and Dessie Ellis asked Minister for Finance Michael Noonan for the figures since 2008, the year in which our financial crisis really exploded. To date since the start of 2008, we have repaid €26bn of junior bonds, but we only paid €12bn meaning we imposed haircuts totaling €14bn or an average 55% haircut.

Most of the haircutting was imposed during the tenure of the previous government, and pro-rataing the annual 2011 haircuts for 2 months representing the first two months of 2011 when the previous government was in power and adding those haircuts to the 2008-2010 haircuts, means that the previous administration was in power when about €9bn of the haircuts were imposed. The new administration oversaw €5bn of haircuts.

And why didn’t we burn more?

Minister Noonan merely says “I understand that these transactions were commercial decisions for the Institutions following consultation with their financial advisors” which is about as hands-off as you can get and contrasts with the lap-of-honour language being used in 2011.

And why is Minister Noonan no longer trumpeting the €5bn of haircuts since he took over?

Not sure, but one reason might be the series of law suits presently ongoing in the United States and the UK. We found out for the first time last week in the responses, that IBRC repaid €119m of subordinated bondholders in 2010 and imposed a haircut. One of the bondholders, a German company called Assénagon took Anglo or IBRC to court in the UK last year and won its case at London’s High Court which means that IBRC remains responsible for the haircut imposed on those bonds. That haircut isn’t public but in 2010, IBRC imposed average haircuts of 84% which, if applicable to the €119m of bonds about which Assenagon sued, would mean IBRC is liable to pay back €100m to those bondholders. In New York, Fir Tree is appealing the potential for a haircut, and Bank of Ireland junior bondholders are pursuing an action in the UK.

Whilst IBRC has appealed the Assenagon decision to the UK’s appeal courts and the hearing is scheduled for March 2013, as things stand, IBRC and in fact the other Irish banks face a raft of legal challenges on the €14bn so far burned. That might be why Minister Noonan is suddenly silent.

The full parliamentary question and response is here.

Deputy Dessie Ellis: To ask the Minister for Finance the process undertaken to redeem subordinated and junior bonds at the Covered Institutions, Covered Institutions (details supplied); and specifically the way the haircut offers were derived.

Deputy Aengus Ó Snodaigh: To ask the Minister for Finance if he will set out in tabular form by year for 2008, 2009, 2010, 2011 and 2012 for each of the Covered Institutions (details supplied), the total subordinated and junior bonds repaid including the nominal value of the bonds, the sums actually paid and the haircut representing the difference between the two.

Minister for Finance, Michael Noonan: I propose to answer questions 59 and 60 together.

1)        BOI figures are rounded to their nearest hundred million.

2)        Consideration provided as part of the Liability Management Exercises was in the form of cash, equity and other debt instruments.

3)        Foreign exchange rates are as at end financial period.

4)        On 27 July 2012, the English High Court delivered a judgement granting declaratory relief against IBRC in favour of Assénagon. The effect of the Assénagon judgement is that the redemption of certain dated notes by the Bank during November and December 2010 was invalid and consequently these notes therefore continue in existence on their original terms. The Bank continues to honour quarterly coupon obligations in respect of the notes pending the outcome of the Appeal.

The purpose of the Liability Management Exercise (LME) transactions was to create additional core tier 1 capital and to strengthen the quality of the capital base of the Banks.

I understand that these transactions were commercial decisions for the Institutions following consultation with their financial advisors.

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