Bondholders hit by Anglo losses to be compensated by insurers
Published 25/11/2010 | 05:00
Subordinated bondholders that suffered losses as a result of Monday's Anglo Irish Bank bond exchange will receive payouts through a bond insurance scheme.
It makes it more likely that holders of two further sets of Anglo subordinated bonds will also back the exchange offer when they vote because the ruling will reduce the overall losses they will suffer.
Bondholders pay for the insurance by buying credit default swaps (CDS), but they were unsure whether or not their insurance would pay out if they voted to accept a "burden-sharing deal".
A committee of the International Swaps and Derivatives Association (ISDA) ruled that the bondholders should be compensated.
The ruling only affects the holders of a set of €750m of debt who voted on Monday to swap their bonds for new bonds worth 20 cent per euro of bonds held.
ISDA is the trade body for the CDS market -- its members vote on whether they believe a debtor has defaulted, regardless of whether an actual default has occurred. Anglo is not in default. ISDA decided that the losses suffered by the bondholders mean compensation should be paid to insurance holders.
The level of compensation will be decided through an auction process but is likely to make up the bulk of the difference between the face value of the bonds and the value of the exchange offer -- about 80pc for most investors.
Meanwhile, fears that the latest round of the financial crisis will lead to haircuts for senior bondholders in European banks led to a surge in buying of CDS protection yesterday.
Bloomberg news agency said the cost of protecting a basket of European bank senior debt soared by 0.125pc to 1.635pc yesterday -- the biggest rise since June.