“Liability management” (or buying backbonds to capitalise on the fact they are trading at a fraction of face value).
That’s a phrase we could be hearing more of as the Irish government prepares to deal with Anglo Irish Bank’s €1.7bn of “controversial” subordinated debt.
But as Thursday’s price action in the sovereign debt and CDS market has highlighted, it’s important to understand what a restructuring of Anglo’s sub-debt actually means for Ireland.
And it’s here we bring in RBS.
What it’s not, according to the bank, is a step to sovereign default:
Any liability management exercise on the sub paper is likely to be confused by the media and perhaps some sovereign investors as a step to sovereign default. This is (very) incorrect. It may even help matters domestically if there is some evidence of burden sharing in the financial/fiscal adjustments.
In other words, if sub-debt holders are offerred a deal — and note this will need EU approval and would probably take the form of a tender offer — this will help limit Ireland’s exposure to the toxic bank.
And, as noted previously, the fact the sub-debt is worth about 30 per cent less than government-guarantee, which is due to run out on subordinated bonds at the end of this month, would suggests the market knows what is coming.
Here are the bonds in question:
14s 29.25- 32.25 2×3 (flat of accrued) XS0194937503
16s 24.50- 26.50 2×2 (flat of accrued) XS0257752013
17s 24.25- 26.25 2×2 (flat of accrued) XS0305277807
What is also important to understand, RBS says, is what happens to the senior debt.
On that front, all the indications are that it won’t be affected by the Anglo Irish wind down:
That is, the Irish Finance Minister stated that banks will NOT be allowed to default on any senior bonds. After the end of the blanket guarantee on 30th Sept, around €4 bn of senior debt falls out of the explicit government guarantee. This is the focus of the market – and as Lenihan notes senior debt is a very different animal from sub debt, and the Irish press describe the minister at pains to stress senior debt is treated differently and the country would not default on its obligations in this area. We think all senior debt will be made full for the simple reason that both AIB and BKIR would be severely hurt otherwise.
In other words, the Irish government has no choice but to make whole the senior debt holders.
Which brings us to THE question. What will be the eventual cost of recapitalising Anglo Irish Bank? RBS is sticking to €25bn:
We understand that €25 bn, as the government previously said, is likely to be the announced amount. The government has committed a total of €22.9 billion to recapitalise the bank – €18.9 billion of this will be from promissory notes (written commitments to give the bank capital as it is required).
But even it’s higher, RBS reckons Ireland can manage:
On the RBS stress test of the bank bailout costs we use a number near €38 bn and yet still find that net debt for the Irish state is manageable. We think many investors think likewise and do not see Ireland being shut out of the govie markets.
Well at least someone has not given up on the Emerald Isle.
Although Thursday’s weaker than expected GDP release doesn’t exactly help Ireland’s appeal.
From the FT:
Ireland failed to emerge from recession after its economy contracted in the second quarter, putting further pressure on the country’s government to deal with its struggling banks. The Central Statistics Office said on Thursday that gross domestic product fell by 1.2 per cent in the three months to the end of June. This compares with growth of 2.2 per cent in the first quarter.
Looks like the department for finance will have to revise its forecast for positive GDP growth of 1 per cent for 2010.
What was the number for the IMF?
Related links:
The Rock of O’Sisyphus – FT Alphaville
The Ashes of O’Austerity – FT Alphaville
Eurozone banking worries batter stocks – FT’s rolling global market overview