Anglo junior bonds valued as low as 18.25pc
Sellers of default insurance on Anglo Irish Bank may have to pay as much as 81.75 cents on the euro to settle contracts linked to the lender’s subordinated debt.
Credit-default swaps traders set initial recovery values in auctions today of 18.25pc and 18.5pc on the lender’s junior bonds, according to administrators Markit Group and Creditex Group Inc results varied because of the different maturities of notes being auctioned.
Anglo Irish default swaps are being settled because the nationalised lender changed terms on 2017 subordinated bonds, virtually wiping out investors who refused to accept an 80pc discount on their notes.
Investors can choose not to settle contracts, betting they will get more if losses are imposed on the lender’s remaining junior notes maturing in 2014 and 2016.
“If you have a bearish view, you may wait to get out of your position in a few weeks time with another CDS auction, and if spreads deteriorate you will have benefited,” said Tim Brunne, a Munich-based credit strategist at UniCredit SpA. “There’s a clear will this restructuring will happen.”
Legislation “to facilitate further burden-sharing” by subordinated bondholders in Irish banks will be submitted to the Dail next week, Finance Minister Brian Lenihan said December 7 when presenting the Budget.
Final values from today’s subordinated auctions will be set at 3:30pm in London and initial results from auctions for the lender’s senior notes will be posted at 1pm.
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.
A total of 699 contracts insuring $397.7m of Anglo’s senior and subordinated debt were outstanding on December 3, 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.
Anglo Irish, which was nationalised last year and needs about €34bn of fresh capital, said last month holders of 92pc of its €750m of notes accepted the so-called haircut and exchange into new 2011 securities.
Investors that refused the 20 cents on the euros offer received a penalty rate of 1 cent per 1,000-euro face amount for their debt.