Monday 20 November 2017

Anglo senior bonds fall on bets investors will lose money

Anglo Irish Bank government- guaranteed senior bonds fell for a sixth day as investors wagered they’ll be forced to share the cost of bailing out the nationalised lender with taxpayers.

Anglo’s floating-rate notes due 2013 fell to 83.1 cents on the euro from 95.8 a week ago and its 2014 securities dropped to 81.4 cents from 99.2 cents on September 17, according to so-called fair value prices on Bloomberg.

The notes are covered bonds supported by property loans and the borrower’s pledge to pay, as well as government backing, which expires at the end of this month.

The Sunday Times reported yesterday that the Government may seek to buy back Anglo debt at a discount or swap it for equity in the new asset recovery bank it’s creating.

The final cost of the bailout, which has already cost Ireland €22.9bn, is expected to be announced this week as the Government seeks to quell concern it will require funds from the European Union.

“It’s all about whether Ireland can afford the bailout of Anglo Irish,” said Tom Jenkins, a banking analyst at Jeffries International Ltd. in London. “There are also the other banks that need cash and all the wider political and economic issues the country has.”

Billy Murphy, an outside spokesman for Anglo, couldn’t immediately be reached for comment.

Moody’s downgrade

Moody’s Investors Service downgraded Anglo’s covered bond ratings today to A2, five levels above junk, from Aa2, citing concern that the bank won’t be able to ensure timely payments on the notes.

The New York-based firm also cut the bank’s senior unguaranteed rating by three levels to Baa3 from A3 and its subordinated grade six levels to Caa1 from Ba1.

The cost of salvaging the lender may be €35bn, about 20pc of the nation’s gross domestic product, according to Standard & Poor’s, an estimate the government contests.

The Department of Finance said it hasn’t “adopted” the debt exchange discussed in the Sunday Times article, while Dick Roche, a junior minister in the Government, said that “burning” bondholders “would be an absolute, utter disaster.” The Government has said on other occasions that there will be no default on Anglo Irish’s senior bonds.

Holders of other banks’ subordinated bonds have been forced to take losses on the debt, such as in the UK’s nationalisation of Bradford & Bingley in 2008, while holders of the housing lender’s senior and covered bonds were made whole.

Subordinated bonds

The company’s subordinated, lower Tier 2 bonds due 2014 fell 2 cents to 31 cents on the euro, according to Jeffries prices on Bloomberg.

The cost of credit-default swaps to insure the senior debt of Anglo rose 208 basis points from a week earlier to a record closing price of 959.5 basis points on September 23, according to data provider CMA.

The contracts, which have more than doubled since July, today cost 935 basis points, CMA prices show.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

A basis point on a credit-default swap contract protecting €10m of debt for five years is equivalent to 1,000 euros a year.


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