Anglo offer on subordinated debt 'tantamount to default'
Published 26/10/2010 | 05:00
ANGLO Irish Bank's offer to buy out investors who hold risky subordinated debt is "tantamount to a default", a Canadian ratings agency said yesterday.
The comments from DBRS came as top tier ratings agency Fitch described the Anglo offer as "coercive", citing the penal terms for those who refuse to participate.
BNP Paribas, meanwhile, said the Anglo offer could trigger payouts of $420m (€300m) on so-called credit default swap contracts as investors call in the insurance they took out on the bank's debt.
Anglo is offering investors who hold €1.6bn in risky subordinated debt 20c in the euro. Those who refuse to take up the offer will get 1c for every €1,000 of bonds they hold at face value.
"DBRS views the proposed exchange as offering bondholders limited options," the ratings agency said, as it signalled plans to cut Anglo's non-senior ratings one notch to D for "default".
The concerns were echoed by ratings agency Fitch, which described Anglo's offer as a "coercive debt exchange", citing the Government's insistence that subordinated bondholders make a "significant contribution to burden-sharing" as well as the "conditions of the exchange" proposed.
Fitch made an "exception" to its normal procedure and stopped short of placing Anglo's issuer default rating on "restrictive default", citing the "expression of continuing support for senior creditors by the minister".
A spokeswoman for the agency was unable to say how many times Fitch had made this exception, but cited one other recent example in the UK.
Meanwhile, BNP Paribas yesterday predicted the Anglo deal could trigger payments of as much as $420m on credit default swap contracts investors took to insure against Anglo's default.
London-based BNP analyst Olivia Freiser said investors would have to approve changes to the terms of their bonds, triggering a so-called "restructuring credit event" on swaps linked to all of the bank's debt.
"Most people will feel compelled to exchange," Ms Freiser said, adding that the Irish 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.
Anglo's subordinated debt has been the subject of fierce debate, with opposition politicians and commentators sharply criticising the Government's decision to include the risky bonds in the original bank guarantee scheme.
The debt fell out of the guarantee at the end of September, and Finance Minister Brian Lenihan has come under fierce pressure to "share the pain" of Anglo's €30bn collapse with subordinated debt holders.
Mr Lenihan has publicly acknowledged that holders of Anglo's riskiest debt were rewarded with higher interest rates in recognition of the risk they were taking and therefore should also accept the downside risk.
Mr Lenihan has repeatedly insisted, however, that those who hold Anglo's less risky "senior" debt should not have losses forced on them since they have the same legal status as depositers. (Additional reporting Bloomberg)