Anglo Irish Bank Subordinated Debt Ratings Cut On Restructuring Risk
29 September 2010 - 4:16PM
Dow Jones News
Anglo Irish Bank Corp.'s subordinated debt rating was cut by
Standard & Poor's Wednesday as market participants waited for
details of the bank's total cost to the Irish government, expected
Thursday.
Standard & Poor's downgraded the bank's lower tier 2
instruments to CCC from B, reflecting the "clear and present risk"
of the debt being restructured.
Trading on the debt dropped half a point Wednesday, and was
indicated at 25/26% of face value midmorning, according to a
trader. Credit default swaps on the subordinated debt are illiquid
and last priced at around 45-50 points upfront, according to
another trader. "Right now it's wait-and-see," he said.
In contrast, the bank's senior debt traded up two points to
around 86/87% of face value, as market participants grew more
confident the paper would be backed by the government. Senior
credit default swaps improved 17 basis points to 930, according to
Markit.
CDS are tradable, over-the-counter derivatives that function
like a default insurance contract for debt. If a borrower defaults,
the protection buyer is paid compensation by the protection seller.
Premiums are usually paid regularly over the term of the default
protection contract, but if a borrower becomes distressed the
protection seller will demand the premium for the life of the
contract upfront.
Standard & Poor's move follows Moody's Investors Service
Inc., which cut the bank's unguaranteed senior debt to Baa3 from A3
and dated subordinated debt to Caa1 from Ba1 on Monday.
Details of the final cost of reorganizing Anglo Irish are
expected to be released late Thursday, with expectations puttign
the figure around EUR30 billion, a strategist said. A capital
injection is also possible, although the government could indicate
it has a pot of money standing by, if required. A tender offer or
exchange is likely for the subordinated debt.
An exchange offer would likely be characterized as "distressed"
and the rating would be lowered to D, Standard & Poor's said.
It also noted comments made by Irish Finance Minister Brian Lenihan
supporting senior obligations, but not doing the same for
subordinated instruments.
The developments come as the widespread unpopularity of the
banking sector spills into street protests. A man was arrested
Wednesday after crashing a cement mixer truck with "Toxic Bank
Anglo" into the front gate of Ireland's parliament building in
Dublin. Labor unions are also demonstrating against government
austerity cuts and the Anglo Irish bailout.
Irish banks were hit particularly hard by the property crash.
The banks needed the Irish government to pump in billions to
recapitalize them after they made big loans to property developers,
many of which are unlikely to be repaid.
So far, the government has spent EUR33 billion--or roughly 20%
of its gross domestic product--rescuing banks.
By Irene Chapple, Dow Jones Newswires; 44 207 842 9291;
irene.chapple@dowjones.com (Neil Shah in London contributed to this
report)