Business Irish

Thursday 22 February 2018

AIB bonds fall on concern IMF to impose loss

Allied Irish Banks subordinated notes tumbled on speculation a bailout by the European Union and International Monetary Fund will impose losses on bondholders.

“The traditional role of the IMF is typically the one of the ‘bad guy,’” said Philip Gisdakis, a Munich-based credit strategist at UniCredit SpA.

It will “have negative implications for European banks, insurance companies and other institutional investors, which hold the bank debt in question.”

Allied Irish Bank’s 12.5pc subordinated bonds due 2019 were quoted at a bid price of about 45pc of face value, according to Jefferies International in London, down from 100pc in September.

Credit-default swaps insuring €10m of the debt cost €5.1m in advance and €500,000 annually, according to CMA.

Central bank Governor Patrick Honohan said he expects the country to ask for aid from the European Union and the IMF worth “tens of billions” of euros to rescue its battered banks and stop contagion across the region.

The Government already pledged to impose losses on junior bondholders at Anglo Irish Bank and Irish Nationwide Building Society.

Anglo Irish was nationalised in January 2009. The Government also has taken a 36pc stake in Bank of Ireland and is preparing to take a majority stake in Allied Irish Bank.

Credit-default swaps on the junior debt of Bank of Ireland cost €2.6m in advance and €500,000 a year, signaling a 55.7pc likelihood of default within five years. Contracts on Anglo’s sub debt cost €7.9m upfront, showing a 99.95pc probability of default.

Burden sharing

Burden sharing “would have the obvious impact of hitting sentiment across the bank subordinated debt spectrum,” Harpreet Parhar, a strategist at Credit Agricole SA, wrote in a note to investors.

The prospect of a bailout boosted confidence in the region’s government debt, driving down the cost of default insurance.

Ireland led the decline, with swaps dropping 30.5 basis points to 493.5, according to CMA. Contracts on Greece declined 17 to 939, Portugal fell 14 to 394, Spain was 4 lower at 253 and Italy was down 3.5 at 183.5.

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments declined 1.5 basis points to 164. The cost of insuring against losses on European corporate bonds also fell, according to JPMorgan.

The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings declined 7 basis points to 456, and the Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 1.25 basis points to 100.75.

A basis point on a credit-default swap contract protecting €10m of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.


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