Government in bold move to cut €1bn off Anglo debt
Risky debt swap for guaranteed bonds but price may disappoint fund managers as yields increase again
Published 22/10/2010 | 05:00
THE Government last night launched an aggressively priced deal to slash more than a billion off Anglo Irish Bank's debts by crystallising losses for some bondholders.
The Government is offering to swap €1.57bn of risky Anglo Irish Bank debt for €314m of government guaranteed bonds. Holders of around €370m of even higher risk junior debt were offered just 1c per €1,000 of bonds -- though that is sweetened with a 5pc fee for accepting the offer.
Reacting to the announcement last night, bondholders were invited to join an existing group opposing attempts to apply haircuts on Anglo bonds. This group have a large number of members in the UK, who are unhappy with plans to discount the bonds severely.
Brown Rudnick and Houlihan Lokey said they were inviting all holders of lower Tier 2 subordinated notes to join an existing group.
Brown Rudnick is a law firm with offices in the US and Europe. Houlihan Lokey is an investment bank, involved in M&A and debt negotiations.
Brian Barry of Evolution Securities said the price offered would disappoint fund managers because it was below where the bonds were trading, but said he still expected traditional bondholders to back the deal.
There was a sharp rise in the interest rates on Irish government bonds yesterday, with 10-year debt yielding 6.64pc. This follows the ESRI criticism of the EU-backed austerity programme, but analysts said the rise in yields had nothing to do with that or the Anglo Irish deal.
A poor auction of Spanish government debt put pressure on almost all European sovereign debt, including Germany's, but hit peripheral countries with rises of more than 0.2pc.
Investors bid for 1.44 times the amount of 15-year securities Spain sold, down from a ratio of 2.57 at a July auction. The yield on the 10-year Spanish bond climbed 10 basis points to 4.17pc. Anglo bondholders have until November 19 to consider the proposals.Bondholders might try to push back against the offer by seeking a one-off "consent fee" for backing the deal, which requires the backing a majority of the affected bonds, a debt market source said.
A bond investor said making the same 20c per euro offer for three different classes of Anglo Irish subordinated bonds caught the market off guard.
He said the three types of bonds affected were all trading at different levels before the offer.
The punitive alternatives mean some subordinated bondholders will be hoping that the ratings agencies might ride to their rescue by classing the exchange as coercive. That could be considered a default and would trigger a pay out of bond insurance.
A ratings agency source, who declined to be named, said he did not believe that would happen. Because the subordinated debt is a relatively small part of the overall Anglo Irish debt package, classing the exchange a default would be disproportionate.
The €314m of new guaranteed bonds will pay interest of 3.75pc above the three month Euribor rate -- currently 1.025pc.
The new bonds are due to be repaid in cash next year compared to current repayment dates of 2014, 2016 and 2017.