Sunday 11 December 2016

Since when did creditors' priority get decided by moral issues?

Published 09/06/2015 | 02:30

'IBRC is embroiled in a range of legal actions. The litigation could run for years, and the outcomes are uncertain'
'IBRC is embroiled in a range of legal actions. The litigation could run for years, and the outcomes are uncertain'

What are junior bondholders?

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Junior bondholders are investors who get paid back after other lenders if the company they have invested in goes bust - at least that's what normally happens.

During the bailout of Anglo Irish Bank, State money was put on the line even though most lenders were able to get out. Following the bank nationalisation, subordinated - or junior - bondholders were offered the chance to be bought out and most accepted. However, those who refused may end up getting paid after all, from the proceeds of the liquidation of €21.7bn Anglo Irish Bank and Irish Nationwide Building Society (INBS) assets that have been sold off since February 2013 by the special liquidators.

But I thought IBRC no longer existed. Why are we suddenly talking about paying junior bondholders?

The fact that we are able to talk about the possibility of paying bondholders at all is actually good, in a way, because it reflects that the liquidation is expected to generate a surplus. That means it went better than expected.

But it also means that junior bondholders will expect to get their money back. And paying Anglo Irish Bank bondholders, whose investment would have failed without massive Government support, is still politically toxic for the Coalition. Central Bank Governor Patrick Honohan has, in the past, expressed his view of the futility of guaranteeing subordinated bondholders.

Will the State not get anything back from the surplus?

The State is due to get some money back. For example, the money from the surplus would be used to cover the costs and expenses of the ongoing liquidation. NAMA has already been paid back money it was owed, and some bills due to the Government, such as recovering pay outs made to depositors whose savings were guaranteed by the State, are close to the top of the queue for repayment.

Other creditors include employee and pension claims arising prior to the date of the liquidation, as well as suppliers.

Subordinated creditors rank second last in the queue. However, they are ranked before the State would get any money back for the funds used for the controversial promissory notes.

Mr Honohan believes the moral argument is that whatever money is left after initial creditors are paid, should go back to the State. And the junior bondholders should not get repaid.

What would happen if we just didn't pay them?

Legal action. Ann Nolan said the Department had sought the advice of the Attorney General as to whether there were any legal mechanisms available to recover a portion of the funds injected by means of the promissory note ahead of the junior bondholders.

Since when did creditors' priority get decided by moral issues?

Good point. Paying hard cash to bondholders of the failed lender may be galling, but the Department of Finance is suggesting that it won't be an easy battle to win if the State tries to block it.

But don't expect cheques to start rushing out any time soon. IBRC is embroiled in a range of legal actions. Money to cover those cases must be set aside under the special liquidation. The litigation could run for years, and the outcomes are uncertain.

Irish Independent

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