ANGLO IRISH Bank’s offer to swap its subordinated debt for new bonds is “tantamount to a default” because of the penalties inflicted on investors who refuse to take part, according to the Canadian credit ratings agency, DBRS.

The bank’s non-senior ratings will be reduced by one notch step to D for “Default” after Anglo completes the exchange, the Toronto-based agency said.

The nationalised bank is offering investors 20 cents on the euro in new bonds on dated subordinated debt and 1 cent for every €1,000 face amount for those declining to take part.

“DBRS views the proposed exchange as offering bondholders limited options,” the agency said.

“Should the bondholders reject the proposed exchange, at an 80 per cent discount on tendered notes, they face the risk of significant burden-sharing.”

The Government’s bailout of Anglo is estimated to cost €29.3 billion and up to €34.3 billion under a worst-case scenario where the property market does not recover for a period of 10 years.

Minister for Finance Brian Lenihan has vowed to “address the issue” of junior bondholders taking a loss on their investments in nationalised banks and says they should make “a significant contribution” to the cost of Anglo.

Another ratings agency, Fitch, maintained its default ratings for Anglo at “BB-“ and kept the bank on negative watch, meaning it could face another downgrade.

The agency said it viewed the bank’s offer to subordinated bondholders as a “coercive debt exchange” because of Mr Lenihan’s promise to introduce legislation to share Anglo’s losses with subordinated bondholders.

Fitch also said the conditions of the exchange worsened the contractual position of the bank’s subordinated bondholders.

Analysts at French bank BNP Paribas said that Anglo’s offer to subordinated bondholders may trigger payouts on as much as $420 million of credit-default swap contracts.

Investors would have to approve changes to the terms of the bonds to exchange them, causing a so-called restructuring credit event on swaps linked to all of the bank’s debt, said BNP Paribas credit analyst Olivia Frieser.

“Most people will feel compelled to exchange,” she added.

The decision on whether buyers of default protection can demand payment on Anglo debt will be made by a committee of dealers and investors as members of the International Swaps and Derivatives Association.

Auctions may then be held to determine the value of the debt and how much should be paid out. – (Bloomberg)