BUSINESS NEWS:ANGLO IRISH Bank is to stop paying interest to investors on some of the bank's bonds as it prepares to redeem up to €3.2 billion of debt in an exercise to boost its reserves of loss-absorbing capital.
The nationalised bank said that it would stop interest payments on some of its tier one bonds – the lowest-ranking debt that sits just above pure equity capital on Anglo’s books – from September.
The bank has said that it was considering “a liability management exercise” in which it would generate a profit by buying back some of its bonds that are trading at heavy discounts in the markets.
Anglo Irish said it was “actively working” on this exercise which would involve an offer for the €2.129 billion of tier one bonds – €1.2 billion and £800 million sterling – and €1.1 billion of tier two capital, which includes €750 million and £300 million notes.
Stopping interest payments on tier one securities was a condition laid down by the European Commission when it approved the Government’s capital injection.
The Government has so far injected €3 billion into Anglo Irish after the bank reported losses of €4.1 billion in the six months to the end of March on the back of rising bad property loans, wiping out the bank’s capital reserves.
The bank’s tier one debt is trading in the markets at an average discount of 25 to 30 cents in the euro across a range of securities, while the bank’s tier two debt is trading at an average of about 30 cents in the euro.
Anglo will have to buy back debt at a premium to these levels by offering cash or more secure debt to investors.
Anna Lalor, banking analyst at Goodbody Stockbrokers, said that ending the interest payments would save between €100 million and €125 million a year that the taxpayer would have been paying.
However, the move will encourage more investors to subscribe to the debt offer given the end to interest payments, she said.
“If anything, it will mean that the profit on buying back these instruments will be higher because more investors will be willing to take it up,” she said.
Bank of Ireland and Allied Irish Banks (AIB) have each generated €1 billion recently buying back debt which was trading at sharply reduced prices in the markets. Bank of Ireland bought back the bonds using cash, while AIB swapped debt for bonds that were more secure and paid investors a higher coupon or interest rate.
Anglo Irish is expected to follow AIB and offer investors senior debt for the tier one and tier two bonds instead of a cash offer.
The move should lead to a paper gain by swapping a debt liability at a fraction of the cost at which it is sitting on the books of the bank.
The transaction, if successful, will not increase the overall level of capital held by the bank but will bolster the level of loss-absorbing capital at the lender.
This is the fourth time the commission has insisted on deferring interest on tier one debt as a condition of state aid, following similar restrictions on German banks Bayerische Landesbank, HSH Nordbank and Commerzbank.
Fine Gael finance spokesman Richard Bruton said the commission’s ruling was “only fair” given that investors had given tens of billions of euros to a bank “without proper due diligence”.
“As Anglo is wound down in the next few years, every additional euro paid to the bank’s bondholders will be another euro lost to the Irish taxpayer,” he said.
In a separate development, mortgage-based securities issued by AIB, Irish Life Permanent, Bank of Ireland and its subsidiary ICS Building Society were downgraded by Moody’s yesterday.
