Anglo Irish Bank announced Thursday it will make its junior bondholders absorb heavy losses on their euro3.5 billion ($4.9 billion) investments _ the first loan defaults in Ireland since the nation's banking crisis began two years ago.
The nationalized Dublin lender, the most debt-crippled bank from Ireland's burst property bubble, said the two lowest tiers of bondholders would be offered payouts equivalent to 20 percent and 5 percent of their original investments, respectively.
The move represents the first concrete effort by Ireland to cut its losses from a euro45 billion bill for bailing out five banks, chiefly Anglo. The bailout cost is driving Ireland's deficit this year to a modern European record of 32 percent of GDP.
Anglo said it would offer holders of euro1.575 billion of bonds expiring in 2014, 2016 and 2017 new government-guaranteed, interest-bearing bonds that will be repaid in December 2011 _ but for just a fifth of that figure, euro315 million.
Analysts said Anglo's junior bondholders _ in many cases foreign hedge funds that have struggled to sell the bank's shattered securities on the open market _ would leap at the chance to get something back and escape. Ireland's government had offered a guarantee on Irish banks' subordinated bonds until Oct. 1.
"The stuff's been trading at such a major discount anyway, the bondholders should be willing to break your hand off to get this money," said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin.
McQuaid said bond markets might respond negatively, at least initially, to Anglo's punitive debt swap with its subordinated bondholders. But he said the move was "not a major surprise, it's been flagged for weeks," and foreign investors eventually would embrace it as "a logical move for Ireland."
Anglo said the lowest rung of bondholders, who own undated bonds with face values totaling euro1.2 billion and 650 million British pounds (euro732 million, $1.02 billion), would be offered final payouts equivalent to just 5 percent of their investment, or approximately euro97 million ($135 million).
Together the two concessions would shave more than euro3 billion from Ireland's securities-repayment bill at Anglo. However, the government has never clarified whether its estimated total bailout cost at Anglo _ euro29.3 billion _ factored in the likelihood of substantial defaults on the bank's subordinated securities.
Irish Finance Minister Brian Lenihan has emphasized this week that no holders of Irish senior bonds _ chiefly foreign banks that Ireland relies on to finance its own mounting national debt _ will suffer any losses.
Anglo's announcement to junior bondholders left them with little choice but to sue or accept. The bottom-tier Anglo bonds have been tough to sell, even at heavy discounts, even before Ireland nationalized the bank in early 2009 to prevent its collapse.
Those who refuse the swap will be repaid just euro1 for every euro100,000, or 0.001 percent, of the money they originally invested in Anglo.
Analysts said the only other Irish bank likely to dump losses on subordinated bondholders is the nationalized Irish Nationwide Building Society, which is midway into an estimated euro5.4 billion state bailout.
Like Anglo, Irish Nationwide borrowed aggressively from foreign banks and shelled out billions to the nation's top property developers. Many of them face bankruptcy in Ireland or have fled the country.
Russian billionaire Roman Abramovich, whose asset management agency Millhouse bought Irish Nationwide subordinated bonds in August 2009 that paid an exceptional 13 percent rate of interest, has threatened to sue Ireland if his investment is not repaid in full. Abramovich has declined to specify the size of his Irish Nationwide holding.
Anglo Irish statements, http://bit.ly/auwy3Z