Bond market alarm grows on Anglo's future as losses soar
Published 04/09/2010 | 05:00
The bond market is growing increasingly concerned that Anglo Irish bondholders will be asked to bear some of the costs associated with the bank's disastrous losses.
Delays in getting a decision on the bank's future from the EU Commission, talk in Dublin circles about defaulting on some bonds and growing speculation of a government-inspired wind-down of the bank appear to be causing alarm in the bond market. Anglo is set to make losses of up to €15bn this year.
The cost of insuring senior bonds in Anglo has surged to its highest level since July 2009 and it now costs €687,000 to insure €10m worth of Anglo senior bonds. Credit-default swaps (CDSs) linked to the senior debt of Anglo Irish Bank jumped 54.5 basis points to 687 yesterday, according to data provider CMA.
While the risk of default on subordinated bonds has been high for more than a year, senior bonds in the bank appeared to be safe from these concerns, but this is changing even though the Government denies it plans not to honour debt obligations to these investors.
CDSs on subordinated Anglo bonds now stand at more than 1,000 basis points, up 16.95 basis points on Thursday alone. The holders of these instruments now appear to be concerned the bank will not honour their contracts, although some of the CDS trading is also likely to be purely speculative. Anglo's most recent balance sheet, to the end of June, shows the bank has €14.6bn in senior bonds, known as medium term notes. The bank is also on the hook for €2.4bn of subordinated bonds. Some of these are perpetual, with others maturing over the next four to five years.
The bank is facing major funding challenges this month with €7.9bn of government- guaranteed bonds due to mature. If these bonds cannot be rolled over, the bank will be forced to seek alternative funding via the European Central Bank (ECB).
The concern among investors will appear to many as illogical because the Government is guaranteeing all liabilities until the end of the month.
In addition, another guarantee programme, the Eligible Liabilities Guarantee, covers specific bond issues for periods of up to five years. However, once the original blanket guarantee ends some liabilities will not be covered.
The Government and the EU are discussing extending this guarantee, but subordinated bonds are vulnerable to some kind of deal where holders get well below par value.
Anglo has already stopped coupon (interest) payments on some subordinated bonds, upon instructions from the European Commission. Bond buybacks have also been undertaken. These involved Anglo offering investors below face value (but more than market value) for some bonds and then booking a gain based on the difference.