Business Irish

Wednesday 27 August 2014

State facing claims from bondholders forced to take losses

Thomas Molloy

Published 24/11/2012 | 05:00

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Multi-billion bill threat as efforts to solve bank bailouts intensify

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THE State could face compensation claims from out-of-pocket bondholders following reports that former subordinated bondholders in Bank of Ireland and Allied Irish Banks are seeking compensation for being forced to take massive losses on bonds they held.

A group of Bank of Ireland bondholders is now in discussions with the bank.

"A standstill agreement has been reached between Bank of Ireland and the bondholders to allow them to talk and reach a settlement. This agreement is indefinite," Reuters news wire said, quoting a legal source.

A spokeswoman for the bank declined to comment last night.

The group has also lodged letters with the Department of Finance, alongside a number of bondholders in Allied Irish, the report said. Allied Irish also declined to comment.

The moves by the bondholders could force banks to beg the State for fresh cash or prolong the losses posted by AIB, which effectively belongs to the State, and Bank of Ireland, which is part-owned by taxpayers.

The moves follow a UK court ruling in July that found a 'burden sharing' deal by the former Anglo Irish Bank that forced losses of around €1.6bn on some lenders to banks to be unlawful.

The ruling cast a huge question mark over the saving of €5bn from the overall cost of bank rescues through deals that "burned" so-called junior bondholders in Anglo Irish Bank, AIB, Bank of Ireland, Irish Life & Permanent (IL&P) and EBS Building Society.

The Irish Bank Resolution Corp is appealing the ruling. Most disputes about bonds issued in Ireland are subject to English law and are heard in the courts there. The case is expected to be heard in March.

If Anglo's appeal fails, it will leave state-backed banks having to reinstate the huge debt burden, just as efforts to draw a final line under the bank bailouts intensify.

All three of Ireland's major lenders carried out below-par tender offers for their junior debt as a way of bolstering their capital as part of a state-backed recapitalisation process between 2009 and 2011, using so-called exit consents from 2010 onwards.

This ended with Anglo Irish and Allied Irish Banks in state hands. However, a last-minute €1.1bn investment by US investors, led by Fairfax Financial, WL Ross, Capital Research and Fidelity, restricted the State's stake in Bank of Ireland to 15pc.

'Valueless'

In July, when the High Court decision was handed down, IBRC said "Anglo bonds would have been valueless without the recapitalisation of the bank by the Irish state".

The original case was taken against Anglo by German bond investor Assenagon Asset Management. 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 in July.

Irish Independent

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