Thursday 8 December 2016

Sovereign bond crisis takes huge toll on banks

INBS facing UK challenge in row on subordinated debt payment

Donal O'Donovan, Laura Noonan and Emmet Oliver

Published 06/11/2010 | 05:00

Bank shares plunged as much as 20pc last night as the sovereign bond crisis took its toll on Ireland's leading banking stocks.

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Government bonds remain firmly in danger territory even after Finance Minister Brian Lenihan's announcement of €6bn of cuts for next year.

Irish Nationwide, meanwhile, is being sued in a British court over attempts not to honour the face value of subordinated debt.

AIB shares fell to an all-time low of just under 27c last night, losing 12pc of their value in a brutal day's trading. AIB shares have dropped more than 40pc in the past month. Some investors have expressed concern about a fresh stress test being done at the bank.

The fall increases the gulf between AIB's 27c share price and the State's commitment to buy new AIB shares as 50c each later in the month.

Shares in bancassurer IL&P saw the sharpest fall yesterday, down almost 20pc at the close. It left the bank's shares at a level not seen since the dark days of April 2009.

Bank of Ireland's stock also slumped to its lowest since April 2009, closing down more than 11pc at just under 44c. The fall means the shares are now trading 35pc lower than they were a month ago.

The yield on Irish 10-year government bonds steadied over the course of yesterday to settle around 7.6pc. It is the first sign of stability for close to two weeks, even if the yield remains in the danger zone.

The difficult picture complicates fundraising efforts for a number of state bodies. The National Asset Management Agency has plans to issue a €2.5bn bond in the fourth quarter, but the agency may hold off issuance unless the climate improves. Bonds from Bord Gais and ESB are also believed to have been hit due to sovereign concerns and ratings downgrades.

Padhraic Garvey of ING Bank said the bonds were steadier after net buying overtook net selling for the first time since the recent crisis began.

While he had heard from other lenders of the European Central Bank buying Irish bonds yesterday, he had seen no evidence of it himself. He said the volume of trading in the bonds had been light.

Mr Garvey said private sector investors bought Irish and Portuguese bonds yesterday.

He said the buyers were not necessarily long-term holders but trading accounts that think the markets have over-sold peripheral bonds.

Ploy

Mr Garvey said the key to bringing down the cost of government debt would be hard numbers on the economy.

Meanwhile, two holders of subordinated bonds issued by Irish Nationwide Building Society (INBS) have petitioned the High Court in London to have the bank wound up. It comes as the subordinated bondholders are waiting for Mr Lenihan to offer to buy back their bonds in a repeat of the Anglo Irish Bank subordinated bond deal.

Anglo Irish's subordinated bondholders are trying to fight that deal by banding together to block the offer. They say the offer price is too low.

The INBS bondholders may well be involved in a similar ploy to try to increase the offer from the Government. Lawyers say there is little chance of a foreign court ordering the winding up of an Irish bank.

Irish Nationwide said it believed there was no basis to petition. It said no event of default had occurred and the terms and conditions of the bonds continued to be met. The society would vigorously defend against the action, it said.

Irish Independent

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