Anglo bondholders square up to Government over possible haircuts
Subordinated Anglo Irish Bank bondholders are threatening to block the restructuring of the bank if the Government imposes haircuts, but lawyers say they are facing an uphill struggle.
Posturing from both sides is more focused on agreeing the price of a debt buyback than the legal issues, sources told the Irish Independent.
Finance Minister Brian Lenihan is planning legislation allowing the Government to impose haircuts on these bondholders. But London-based hedge funds, who spoke to the Irish Independent yesterday, on condition of anonymity, said the situation was "messy" and holders of sub debt were talking to their legal teams.
The funds claim the Government's argument rests on the notion that without state capital the bonds would be worthless. But the funds are claiming this argument would also apply to senior debt holders and to select them in isolation for haircuts would be discriminatory.
But a government spokesman confirmed that a buyback could still go ahead in the meantime. He said lenders to the Government were told on a conference call with the minister on Friday that a buyback of Anglo sub debt was still on the cards.
The move to change the law provides a stick for the Government to encourage bondholders towards the carrot of a cash payment for agreeing to hand back bonds. That would be a simpler, and possibly cheaper, process than forcing them out through legislation.
Under bond market rules, if the Government gains control of a majority of the bonds any remaining bondholders would be forced to accept a deal.
Hedge funds are trying to outstare the Government and are threatening legal action, but a number of lawyers say their case is weak. They said the move is aimed at getting a better price to go away.
One capital markets lawyer, who asked not to be named, said he opted not to take the bondholder case because it had little chance of success.
The lawyer works for a US firm and specialises in advising hedge funds. He said he was receiving queries on the issue from subordinated debt holders in both Anglo and Irish Nationwide.
In his view, the Government was in a game of chicken with holders of subordinated bonds, each trying to maximise their bargaining position ahead of a buyback. He said the State had by far the stronger hand.