Anglo debt offer may trigger $420m swaps, BNP says
Anglo Irish Bank’s offer to swap subordinated bonds for new notes may trigger payouts on as much as $420m (€300m) of credit-default swap contracts, according to BNP Paribas.
Anglo offered investors a choice of trading €1.6bn of notes at 20 cents on the euro last week, or redeeming them for 1 cent per 1,000-euro face amount.
Investors will have to approve changes to the terms of the bonds to exchange them, causing a so-called restructuring credit event on swaps linked to all of the bank’s debt, said BNP Paribas credit analyst Olivia Frieser.
The proposals come after Finance Minister Brian Lenihan vowed to “address the issue” of junior bondholders taking a loss on their investments in nationalized banks.
The offer is “tantamount to a default,” and will lead to a downgrade of Anglo’s non-senior ratings to D for “Default” after the switch, Toronto-based ratings firm DBRS said today.
“Most people will feel compelled to exchange,” London- based Frieser said. The Government is “facing enormous political pressure not to treat bondholders too well.”
Credit-default swaps insuring €10m of Anglo’s junior debt for five years cost €7m in advance and €500,000 annually, BNP Paribas prices show.
Contracts on the bank’s senior debt cost €1.35m in advance and €500,000 annually.
Martha Kavanagh, an outside spokeswoman for the bank, declined to comment.
Anglo was nationalised in January after borrowing from mostly international investors and lending to property developers who couldn’t repay loans when the property market crashed. Commercial property prices in Ireland have fallen about 60pc since peaking in 2007.
The first opportunity to trigger the swaps is November 23, when holders of floating-rate lower Tier 2 notes due 2017 will vote on the debt exchange. The securities are trading at about 20.6 cents on the euro, according to data compiled by Bloomberg.
The decision on whether buyers of default protection can demand payment on Anglo Irish debt will be made by a committee of dealers and investors as members of the International Swaps & Derivatives Association. Auctions may then be held to determine the value of the debt and how much should be paid out.
A total 674 contracts protecting a net $420m of Anglo’s senior and subordinated debt were outstanding on October 15, according to the Depository Trust & Clearing Corp, which runs a central registry for the market.
Under the terms of the contracts, holders of swaps linked to both senior and subordinated debt can demand payment.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.