Cost of insuring against default rises

THE cost of insuring Irish bank bonds against default increased after legislators approved a burden-sharing bill analysts said was harsher than expected.

The new law compels junior bondholders to share the cost of rescuing lenders after the Government was forced to accept a €85 billion aid package.

The Credit Institutions (Stablisation) Bill 2010, gives the finance minister the power to change bondholders’ rights, including interest and principal payments, as well as impose debt-for-equity swaps and asset transfers.

It’s “a harsh bill,” Eleonore Lamberty, an analyst at ING Bank in Amsterdam, wrote in a client note. The measure “will intensify the burden-sharing fear and will cause further pressure on subordinated bonds of pan-European banks which have received state aid,” she wrote.

Credit-default swaps on the subordinated debt of Allied Irish Banks rose 2.2 percentage points to 66% upfront and 5% a year, meaning it costs €6.6 million in advance and €500,000 annually to protect €10m of debt for five years. Swaps on the lender’s senior debt increased 1.4 percentage points to 19.2% upfront.

Contracts on Bank of Ireland's junior debt climbed 0.3 percentage points to 39.8% upfront, and senior swaps rose 1.7 percentage points to 13.6% in advance.

Default swaps on Government debt rose 16.5 basis points to 557. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose 2.5 basis point to 184. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Anglo is seeking to force bondholders to sell back junior notes at a discounted rate of 20 cents on the euro, or accept just 1 cent per €1,000.

Under the new regime, refusal to accept such an offer may leave investors with even bigger losses, CreditSights analysts said in a report.

Investors should accept Bank of Ireland’s offer to swap as much as €1.5bn of its subordinated debt for new notes guaranteed by the Government in an offer that expired yesterday at 5pm according to Lamberty. The lender was offering prices of 46% to 57.5% of face value in new guaranteed notes.

Bank of Ireland’s €420m of 4.625% subordinated notes due 2019 were little changed at about 48 cents on the euro, according to Jefferies International prices on Bloomberg. The lender’s €248m of floating rate subordinated bonds maturing in 2017 were at 46.5 cents, according to Jefferies. Allied Irish’s €869m of 12.5%, 2019 subordinated bonds were at 26 cents on the euro, according to Jefferies.