Anglo bonds offer could cut €1.65bn off bailout cost

ANGLO IRISH Bank could shave up to €1.65 billion off the cost of the taxpayers’ bailout of the bank in a voluntary deal announced yesterday to swap and buy back some of the bank’s subordinated bonds.

The bank has made an offer to one group of bondholders holding €1.6 billion of dated subordinated debt in Anglo amounting to 20 cent in the euro of what they are owed and 5 cent in the euro for investors in €330 million of undated subordinated debt.

Anglo has offered to exchange new one-year Government guaranteed bonds with investors holding dated subordinated debt, which was guaranteed by the Government until the end of last month.

If the investors take up the offer, some 80 per cent of this type of debt will be written off. Anglo is offering to pay bondholders holding undated subordinated debt just €16 million or 5 cent in the euro.

Should all the investors take up the two voluntary offers – the debt exchange and the debt buy back – the State stands to make a gain of about €1.65 billion from the deal.

“It will be a source of capital for the bank which reduces the Government’s cash commitment to the bank,” said analyst Sebastian Orsi at stockbrokers Merrion Capital.

“It reduces the strain on the State but it is relatively small in the overall scale of the bailout.”

The premium investors demand to hold Irish Government debt over the same benchmark German debt rose to 4.15 percentage points, its widest level in a week.

Minister for Finance Brian Lenihan said last month that the cost of Anglo to the State would be €29.3 billion, increasing to €34.3 billion if the property market fails to recover for a period of 10 years.

He said he expected subordinated bondholders to make a “significant contribution” to the cost.

The offer announced yesterday addresses this issue. It is structured to ensure the maximum level of investor participation.

Investors who don’t take up the exchange will be offered 1 cent for every €1,000 of the face value of their investment to redeem floating rate notes due over three years in 2014, 2016 and 2017. The new bonds being issued in the exchange will mature in a year and are guaranteed by the Government, according to the bank.

Holders of the more junior or less secure bonds will get a €50 or £50 consent fee to give the bank the right to buy them back at 1 cent or penny for each €1,000 or £1,000 on the face value of the Anglo debts.

“It is an interesting strategy and one which clearly forces bondholders to make a decision,” said Michael Cummins of Dublin financial services firm Glas Securities. “Either they accept the terms on offer or they get practically zero.”

Mr Cummins said the terms of the offer were below market levels and not as attractive as predicted.

Anglo’s dated subordinated debt was trading at around 25 cent in the euro in the bond markets, while undated subordinated debt was at about 5 cent in the euro.

“The key from a Government perspective is that the bondholders accept the terms via a majority vote,” said Mr Cummins.

“If not, any forced restructuring of the bonds will constitute a technical default, which is clearly not the desirable outcome.”