Lenders face huge compensation bill after UK High Court decision
STATE-backed Irish banks are facing a potentially massive compensation bill after the High Court in London ruled that a 'burden sharing' deal that forced losses on some lenders was unlawful.
The UK court ruling has deemed the "coercive" measures taken to persuade junior bondholders to accept losses on €1.6bn owed by Anglo Irish Bank in 2010 breached UK law.
Last night, Finance Minister Michael Noonan said in a statement that the investments affected by the deal would have been worthless if the State had not swept in to save the bank.
Mr Noonan added that he would continue to explore all avenues available to ensure the maximum level of burden sharing with subordinated bondholders.
The case was taken against Anglo by German bond investor Assenagon Asset Management.
It was heard in London because the contracts for many globally traded bonds are governed by English law.
It means the courts in London have jurisdiction in contract disputes affecting the securities, even if the debtor and lender are based outside the UK, as in this case.
Assenagon suffered an almost total loss on €17m of the Anglo junior bonds in 2010.
It received just one cent for every €1,000 it was owed when 92pc of the other bondholders voted to back a government deal to slash Anglo's debts.
Under that deal, Anglo offered so-called junior bondholders -- a type of lender -- 20c in the euro to hand back their investment in the bank's bonds.
The payment would only be made, however, if they also voted to force even bigger losses on any fellow bondholders that rejected the offer.
It is that last aspect of the deal that Justice Michael Briggs deemed unlawful yesterday.
He said it was not lawful "for the majority to lend its aid to the coercion of a minority by voting for a resolution which expropriates the minority's rights under their bonds for a nominal consideration".
The judge admitted the decision could have major repercussions right across the eurozone and gave Irish Bank Resolution Corp (IRBC), which owns what remains of Anglo, leave to appeal the decision.
The bank was last night considering its legal options, but is almost certain to appeal.
If not, it faces a huge compensation bill from other investors affected by the same deal.
Investors hit with losses in similar actions by Bank of Ireland and AIB are also likely to seek to re-open their settlements, if yesterday's judgment goes unchallenged. Bank of Ireland and AIB each saved in the region of €2bn by forcing similar losses on bondholders, and Irish Life & Permanent (LI&P) and EBS Building Society also saved smaller but considerable amounts with similar actions.
A similar technique was used to force losses on lenders to the Greek government earlier this year and has been planned as part of an effort to restore the Spanish banks.