Central Bank loans will be used to repay bondholders

 

IRISH BANK Resolution Corporation (IBRC), formerly known as Anglo Irish Bank, will repay the $1 billion (€718 million) due to senior unguaranteed bondholders next week using emergency loans from the Central Bank, the proceeds of the sale of its US loans and loans maturing at the bank.

The bank no longer holds customer deposits to fund the repayment so will have to rely on further drawings under the Central Bank’s exceptional liquidity assistance (ELA) facility to repay the debt.

IBRC will also source the $1 billion payment from the initial proceeds of the sale of the $10 billion US loan book as they are being received and maturing loans.

The final composition of the repayment will depend on the pool of funding available to the bank on the day the senior bond matures.

The Government is facing growing political pressure over the full repayment of the senior bond as it is injecting €34.7 billion to cover the cost of Anglo and Irish Nationwide Building Society.

IBRC has a further €2.7 billion of senior unguaranteed unsecured bonds maturing next year, including a €1.25 billion repayment falling due on January 25th.

The identity of the beneficiaries of next week’s repayment is not known as IBRC repays the $1 billion through a clearing house for securities traded in the markets.

Bondholders can buy and sell the debt in the secondary markets and it is likely that most if not all of the original purchasers of the bond when it was issued in 2006 – who were known to the bank at the time – later sold the debt on. The identity of the buyers in the markets is not made known to IBRC.

The bond traded close to 50 cent in the euro early this year amid investor fears that the new Government would force losses on Anglo’s senior unguaranteed bonds after the February election.

This has attracted higher-risk investors into the bond who have made a large return as the bonds have since risen to 95 cent in the euro after the European Central Bank ruled out any haircut being imposed on Irish senior bank debt.

The value of bonds also rise as their maturity date edge closer.

The ECB reiterated last week that burning senior bondholders would “undermine confidence in the Irish banking system”.

The $1 billion bond documentation says IBRC would be liable to repay all of its senior guaranteed bonds immediately if there were “events of default” on unguaranteed debt issued by the bank under the same bond programme.

Meanwhile, Bank of Ireland and Irish Life and Permanent have raised €5.3 billion by issuing bonds to themselves under the Government guarantee and using them as collateral to borrow discounted funding from the ECB.

Irish Life and Permanent raised €3.3 billion of “own-use” bonds yesterday, while Bank of Ireland raised €2 billion on Monday under the Eligible Liabilities Guarantee.