Wednesday 11 December 2019

Bondholders: everything you wanted to know but were too confused to ask

IN dealing rooms, conference rooms and men's rooms across the world's financial capitals, the same debate is raging. Should Ireland honour its debt to Anglo Irish Bank's senior bondholders in full -- or should we make them pick up some of the tab?

Some major asset managers are warning they won't lend any more money to Ireland if the Government forces "pain" on those who own senior debt in Anglo Irish Bank.

But several market insiders say the threats are just scare tactics and the asset managers will continue to plough money into Ireland regardless of the Anglo outcome. The commentary comes as the debate rages over how the Government should deal with Anglo's so-called "senior bondholders", who are owed about €2.4bn by the nationalised bank.

Finance Minister Brian Lenihan has insisted the markets would extract massive retribution if government-owned Anglo refused to pay back the money in full.

The argument is supported by the fact that Irish law gives those who've bought senior bonds the same protection as those who put money on deposit in banks.

Mr Lenihan also frequently points out that any market backlash would be particularly painful at a time when the Irish Government is borrowing €20bn a year to plug a budget shortfall.

But opposition politicians and some commentators have argued that the senior bondholders should be forced to share some of Anglo's €29-€34bn bill with the taxpayer.

They insist senior bondholders knew they were taking a risk and should be forced to live with the consequences when that risk backfires.

And they say the Irish taxpayer shouldn't be forced to take all the pain while faceless asset managers and hedge funds get off scot-free.

Bondholders are a notoriously secretive bunch, with all kinds of confidentiality rules governing their engagement with the media. Of more than 30 contacted this week, not one would speak publicly.

Several market sources, however, gave an insight into the international debate that's raging around the prospect of burning the Anglo bondholders.

"When we talk to international investors, everyone's asking about the Anglo bond- holders," said one source. "It's a huge concern for everyone with Irish debt, even if they don't have anything invested in Anglo. The problem is that it would set a precedent."

That precedent could trigger a fall in the price across all Irish bank bonds, since those who owned the bonds could no longer be certain of full repayment.

"People are saying if Ireland burns senior bondholders that's absolutely fine, just don't ever ask us to invest in a senior bond in Ireland again," said one source.

Others said investors are saying they will not only refuse to buy more Irish bonds, they'll also sell the ones they already have to eliminate the chance of further forced losses.

Several sources, however, take a more moderate view. One fund manager said some people would welcome forced losses on bonds, since it would "protect" the Irish State.

A senior financial manager who has detailed knowledge of the debt markets pointed out that bond investors would "sell their own mother" to make money and wouldn't opt out of Ireland just to take revenge.

"They make rational financial decisions, and they make really selfish financial decisions," he said. "A lot of the arguments that are being made are rubbish."

The point is backed up by a fund manager who says there is "no point where we will consider the news coming out of Ireland too difficult to get to grips with. We have a fiduciary duty to assess the situation for every account".

Meanwhile, a senior executive from an Irish company that is considering raising bonds itself over the coming years said he wasn't concerned about the Anglo backlash.

"The market will judge us on our own case, not on what happened with Anglo," he said. "I don't see it figuring."

(Additional reporting: Donal O'Donovan)

Irish Independent

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