Reviled Anglo bondholders snatch up to 566% return by sitting tight

Almost a decade on from its nationalisation, Anglo Irish Bank still haunts from beyond the grave.

The liquidators of Anglo's successor, Irish Bank Resolution Corporation (IBRC), admitted for the first time on Tuesday that holders of almost €270 million of junior, or subordinated, bonds sold by the lender before its nationalisation almost a decade ago are now set to receive all that they are owed.

Junior bondholders in Irish banks suffered €15 billion of losses during the financial crisis, even as taxpayers were forced to commit €64 billion to the sector to help make sure that senior bondholders, investors higher up the food chain, and depositors would be made whole.

But a small group of hedge and distressed debt funds that invested in Anglo’s junior bonds refused to lie down in 2010 when most others agreed to accept 20 per cent of what they were owed, after the Government threatened to inflict bigger losses.

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Digging in, one investor that had snapped up €17 million Anglo junior bonds on the cheap, Munich-based Xaia Investment (then called Assenagon) took its plight to the UK high court. And won. The ruling judge said, in 2012, that the whole exercise amounted to a “negative inducement” to force bondholders to accept the offer.

The junior Anglo bonds were changing hands at as low as 15 cent on the euro in 2013 and 2014, according to markets sources, after the Government pushed IBRC into liquidation.

Remaining holders of the notes, according to the sources, include New York-based hedge funds Anchorage Capital and Elliott Management, the latter led by feared billionaire Paul Singer, who's no stranger to the long game. Just ask Argentina. Elliott sued the South American country in US courts after it defaulted on its debt in 2001. The hedge fund settled its case in early 2016, after more than a decade in the half, and recouped $2.28 billion – mostly accrued interest.

When it began to emerge in late 2014 that the proceeds from Anglo’s liquidation were coming in better than expected as the commercial property market rebounded, Government officials began to fear that the holdout junior bondholders could ultimately find themselves in the money.

Officially, IBRC’s liquidators would say only that they’d generate enough to repay between 75 per cent and 100 per cent of claims from senior secured creditors, led by the State, which was owed €1.2 billion.

The last government tied itself up in knots when pressed on the likelihood of the holdout junior bondholders being repaid. Then taoiseach Enda Kenny insisted in late 2014 he couldn't see any such scenario, and his tánaiste, Joan Burton, promised legal gymnastics to avert payouts.

It’s understood that the liquidators were lining up to pay a third 25 per cent instalment to senior creditors in the coming weeks, which would allow them to delay the inevitable, as they were sitting on €1.6 billion of cash as of February. However, it was decided on Monday that now was as good or as bad a time as any to lance the boil, repay the final senior claims, and admit that the juniors will be in the money.

The Department of Finance says the Attorney General's Office had warned that trying to circumvent these investors would not withstand a likely constitutional challenge.

The junior bonds were being offered in the 60 cent in the euro range in recent months, according to the sources, though it’s not clear if any notes actually traded at that level.

Trading volumes have been very low over the past five years, as the notes were generally tightly held. But those who piled in at the low point – paying 15 cent on the euro for the bonds after IBRC was put into liquidation – are set to make a return of up to 566 per cent.

And what of the €34.7 billion that the State pumped into Anglo and Irish Nationwide during the crisis? There’s only an outside chance of recovering even a small part of that.

Digicel bondholders blink first

After almost four months of negotiations, Denis O’Brien’s Digicel surprised sceptics earlier this week by cajoling holders of 95 per cent of $2 billion (€1.75 billion) of bonds due to be repaid in 2020 to defer getting their money back for a further two years.

While there was talk at one stage that O’Brien would be required to find fresh cash or outside assets to put into Digicel to get a deal over the line, the bondholders are making do with being moved up the ladder in terms of the seniority of their claims on the company. Their annual interest rate will remain at 8.25 per cent, even though a slump into the existing 2020 bonds this year had left them yielding 35 per cent on the market.

Digicel is also expecting, at the time of writing, to secure decent take-up for another two-year repayment extension, on a separate $1 billon of bonds due for repayment in 2022, by a midnight deadline on Friday, New York time.

Getting the deals over the line may look all the more impressive against the fact that the US high-yield corporate bond market is going through its biggest issuance drought in a decade, amid markets volatility. However, Digicel bondholders were essentially a captive bunch, and squeezing a highly-indebted company too much would have been self defeating.

The bigger question is whether the candle on O’Brien’s long love affair with the junk bond market has, in the process, been burnt to the stump?