Anglo lenders in line for 82pc compensation
BANKS that insured lenders to Anglo Irish Bank will have to pay out as much as 82pc of the value of the bonds to compensate for losses from so-called "burden sharing".
Even senior bondholders that have not suffered any loss can claim some compensation after an auction was held in London.
The compensation will be paid by providers of Credit Default Swaps (CDS). CDS providers protect lenders to companies against losses suffered as a result of a borrower defaulting in exchange for an annual fee.
An auction was held in London last night where the providers bid to decide the value of all Anglo Irish Bank's bonds -- the compensation paid is the difference between the value decided at the auction and the full face value of the bonds.
The contracts to protect lenders to Anglo Irish Bank became so valuable that they were changing hands for cash down plus the annual fee by the time burden sharing was announced as a policy.
Holders of subordinated bonds that suffered losses when the bank bought back bonds at 80pc below face value are in line for the highest payout. The auction process valued the two sets of bonds affected by the buyback at 18pc and 18.5pc. They will receive the difference between the valuation and face value in cash and can keep the new "20pc" bonds they swapped for the old paper.
If a debtor is considered to be in default by the International Swaps and Derivatives Association (ISDA), holders of any of its bonds can make a claim for insurers to pay out.
It means even senior Anglo Irish Bank bondholders can make a claim for compensation. The auction valued the senior bonds at 76.25pc which means eligible bondholders could pick up 23.75pc even though the Government has made clear they will not suffer losses at Anglo.
To claim the insurance payout, bondholders can either hand over their bonds or pay the insurance provider cash at the level set in yesterday's auction.
It means a senior bondholder can keep their senior bond which has been vouched for by the Government and receive a cash payout.
Meanwhile, the Bank of Ireland's subordinated bonds were bid higher in the secondary market yesterday after the bank announced a plan to buy back its debt late on Wednesday.
Bank of Ireland is seeking to take advantage of the sell off of Irish bonds by offering to buy €1.5bn of debt it borrowed through bonds sales at around half its face value.
Depending on the particular bond, holders are being offered between 48pc and 57.5pc of the nominal value of their debt instruments,
Yesterday the bonds being targeted for the buyback rose in secondary trading. At one stage both sets of bonds were changing hands above the buyback price but quickly fell back to the level set by the bank.
Traders said the bonds were trading 3pc to 4pc below the offer price just before the buyback was announced, meaning a small premium was paid.