Almost a decade after its nationalization, Anglo Irish Bank still haunts us 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 euros in junior or subordinated bonds sold by the lender before its nationalization there are almost a decade are now ready to receive all their due.
Junior bondholders in Irish banks suffered €15bn in losses during the financial crisis, even as taxpayers were forced to commit €64bn to the sector to ensure that bondholders senior bonds, upstream food chain investors and depositors would be cured. .
But a small group of hedge and distressed debt funds that invested in Anglo junior bonds refused to fold in 2010 when most others agreed to accept 20% of what they were owed, after that the government threatened to inflict greater losses.
Digging in, an investor who had bought €17 million of cheap Anglo junior bonds, Munich-based Xaia Investment (then called Assenagon), filed a complaint in the UK High Court. And won. The ruling judge said in 2012 that the entire exercise amounted to “negative inducement” to force bondholders to accept the offer.
Anglo junior bonds changed hands at just 15 cents on the euro in 2013 and 2014, market sources said, after the government pushed IBRC into liquidation.
Other holders of the tickets, the sources say, include New York-based hedge funds Anchorage Capital and Elliott Management, the latter headed by fearsome billionaire Paul Singer, who is no stranger to the long game. Just ask Argentina. Elliott sued the South American country in US courts after defaulting on its debt in 2001. The hedge fund settled its case in early 2016, after more than a decade in the halving, and recovered 2.28 billions of dollars – mostly accrued interest.
When it began to appear in late 2014 that proceeds from the Anglo liquidation were coming in better than expected as the commercial property market rebounded, government officials began to fear that recalcitrant junior bondholders would eventually end up in the money.
Officially, IBRC’s liquidators would only say they would generate enough to repay between 75% and 100% of the claims of first-tier, state-led secured creditors who owed €1.2 billion.
The last government snuggled up when it insisted on the likelihood of recalcitrant junior bondholders being reimbursed. Then taoiseach Enda Kenny insisted in late 2014 that he couldn’t see such a scenario, and his tánaiste, Joan Burton, promised legal gymnastics to avoid payouts.
It is understood that the liquidators were lining up to pay a third 25% installment to senior creditors in the coming weeks, which would allow them to delay the inevitable, as they had 1.6 billion euros in cash in hand. February. However, it was decided on Monday that now was as good or bad a time as any to kick off the boil, pay off the latest senior claims and admit the juniors would be in the money.
The Department of Finance said the attorney general’s office had warned that attempting to circumvent those investors would not withstand a likely constitutional challenge.
Junior bonds have been offered within 60 cents of the euro’s range in recent months, the sources said, although it’s unclear whether any notes actually traded at that level.
Trading volumes have been very low over the past five years as notes were generally well held. But those who piled in at the bottom – paying 15 cents on the euro for the bonds after the IBRC went into liquidation – are expected to make a return of up to 566%.
And what about the 34.7 billion euros that the state injected into Anglo and Irish Nationwide during the crisis? There is only an outside chance to recover even a small part of this.
Digicel bondholders blink first
After nearly four months of negotiations, Denis O’Brien’s Digicel surprised skeptics earlier this week by coaxing holders of 95% of the $2bn (€1.75bn) bond due to be repaid in 2020 to defer repayment of their money for another two years.
Although there was talk at one point that O’Brien would have to find fresh money or outside assets to invest in Digicel to secure a deal on the line, the bondholders are content to move up the ranks in terms seniority of their claims on the company. Their annual interest rate will remain at 8.25%, although a drop in existing 2020 bonds this year left them yielding 35% in the market.
Digicel also expects, at the time of writing, to secure decent underwriting for another two-year redemption extension, on a separate $1 billion of bonds to be redeemed in 2022, before a midnight deadline. Friday, New York time.
The completion of the deals may look all the more impressive as the US high-yield corporate bond market is going through its worst issuance drought in a decade amid market volatility. However, Digicel bondholders were essentially a captive group, and squeezing a heavily indebted company too much would have been counterproductive.
The bigger question is whether the candle of O’Brien’s long love affair with the junk bond market has, in the process, been burned to ashes?