Anglo Irish Bank Corp.’s offer to swap subordinated bonds for new notes may trigger payouts on as much as $420 million of credit-default swap contracts, according to BNP Paribas SA.
Anglo Irish offered investors a choice of trading 1.6 billion euros ($2.2 billion) of notes at 20 cents on the euro last week, or redeeming them for 1 cent per 1,000-euro face amount. Investors will have to approve changes to the terms of the bonds to exchange them, causing a so-called restructuring credit event on swaps linked to all of the bank’s debt, said BNP Paribas credit analyst Olivia Frieser.
The proposals come after Finance Minister Brian Lenihan vowed to “address the issue” of junior bondholders taking a loss on their investments in nationalized banks. The offer is “tantamount to a default,” and will lead to a downgrade of Anglo Irish’s non-senior ratings to D for “Default” after the switch, Toronto-based ratings firm DBRS said today.
“Most people will feel compelled to exchange,” London- based Frieser said. The Irish government is “facing enormous political pressure not to treat bondholders too well.”
Credit-default swaps insuring 10 million euros of Anglo Irish’s junior debt for five years cost 7 million euros in advance and 500,000 euros annually, BNP Paribas prices show. Contracts on the bank’s senior debt cost 1.35 million euros in advance and 500,000 euros annually.
Martha Kavanagh, an outside spokeswoman for the bank, declined to comment.
Anglo Irish was nationalized in January after borrowing from mostly international investors and lending to property developers who couldn’t repay loans when the property market crashed. Commercial real estate prices in Ireland have fallen about 60 percent since peaking in 2007.
The first opportunity to trigger the swaps is Nov. 23, when holders of floating-rate lower Tier 2 notes due 2017 will vote on the debt exchange. The securities are trading at about 20.6 cents on the euro, according to data compiled by Bloomberg.
The decision on whether buyers of default protection can demand payment on Anglo Irish debt will be made by a committee of dealers and investors as members of the International Swaps & Derivatives Association. Auctions may then be held to determine the value of the debt and how much should be paid out.
A total 674 contracts protecting a net $420 million of Anglo Irish’s senior and subordinated debt were outstanding on Oct. 15, according to the Depository Trust & Clearing Corp., which runs a central registry for the market. Under the terms of the contracts, holders of swaps linked to both senior and subordinated debt can demand payment.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.
To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net
see my posting on derivatives here
I have been warning about these obscure financial derivatives now for a long time and the chicken are now comming home to roost now!
also place the word “derivatives” in the blogs search box for earlier postings on derivatives