By John Glover and Abigail Moses
Oct. 28 (Bloomberg) -- The cost of insuring against a default on Ireland?s debt surged to the highest in a month as Anglo Irish Bank Corp. note holders headed for a showdown with the nation?s government.
Creditors holding a ?blocking position? of Anglo Irish subordinated bonds plan to oppose a debt exchange worth 20 percent of their 1.6 billion euros ($2.2 billion) of securities, adviser Houlihan Lokey said in a statement today. The government has said it will legislate to allow it to impose penalties on subordinated creditors while making senior investors whole, while the bank?s chairman, Alan Dukes, said today he won?t negotiate with junior bondholders opposing the exchange.
?Bondholders are gambling the government is willing to pay up and doesn?t want to use the draft legislation to impose losses,? said Brian Barry, an analyst at Evolution Securities Ltd. in London. Imposing losses ?has a knock-on impact on other banks, it creates uncertainty and raises the question of what the government is willing to do in extreme situations.?
Credit-default swaps insuring Irish sovereign debt jumped 19 basis points to 463, according to data provider CMA. That means it costs $463,000 annually to insure $10 million of the nation?s bonds for five years.
Investors holding 690 million euros of lower Tier 2 notes plan to reject Anglo Irish?s Oct. 21 offer, which Houlihan Lokey said is an attempt ?to strong-arm noteholders to vote in favor? by ?threatening to eliminate minority dissenting noteholders? rights to repayment of monies.?
Sharing Burden
Ireland faces a bill of more than 50 billion euros to prop up its banks and is seeking to ensure the losses of lenders it owns outright are shared with subordinated noteholders. Anglo Irish was nationalized by the government in 2009.
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar-maturity government debt fell 1 basis point to 164 basis points, according to Bank of America Merrill Lynch?s Global Broad Market Corporate Index. The spread has narrowed from this year?s high of 201 basis points on June 11. Yields averaged 3.515 percent, from 3.483 percent Oct. 26.
Travelers Cos., the New York-based insurer added to the Dow Jones Industrial Average in 2009, sold $500 million of 3.9 percent, 10-year notes and $750 million of 5.35 percent, 30-year bonds in an issue boosted from $1 billion, Bloomberg data show.
The company tapped the U.S. corporate bond market after Chief Executive Officer Jay Fishman told investors last week the cost of debt versus equity has widened to the most he?s seen in his career. Companies tendered for $30.5 billion of bonds last month, the most since April, and may buy another $24.3 billion this month, Bloomberg data show.
?Continued Onslaught?
?There?s a continued onslaught of companies trying to buy back their debt,? said Tom Murphy, a money manager who helps oversee more than $22 billion of investment-grade credit at Columbia Management in Minneapolis.
The weighted average cost of debt capital for Travelers is 0.61 percent, while the weighted average cost of equity capital is 7.27 percent, Bloomberg data show.
Bonds from Fairfield, Connecticut-based General Electric Co. were the most actively traded U.S. corporate securities by dealers yesterday with 146 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Leveraged Loans
The Standard & Poor?s/LSTA US Leveraged Loan 100 Index rose 0.03 cent to 91.22 cents on the dollar, the highest since May 10. The index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has returned 1.6 percent this month.
The extra yield investors demand to hold emerging-market bonds rather than government debentures rose 1 basis point to 254 basis points, according to JPMorgan Chase & Co data.
The standoff between Anglo Irish and its subordinated creditors is undermining confidence in the creditworthiness of Ireland?s other banks.
Credit-default swaps tied to Allied Irish Banks Plc bonds rose 13.5 basis points to 634.5, according to CMA. The extra yield demanded to hold Irish 10-year bonds over German debt rose by about 5 basis points to 424 basis points, approaching the record 449 basis points last month.
Credit-default swaps typically rise as investor confidence deteriorates and fall as it improves. Contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Anglo Irish subordinated bonds due 2014 rose 0.71 cent to 20.8 cents on the euro, according to pricing data compiled by Bloomberg.
1 Cent
Anglo Irish has said that bondholders who don?t accept the terms of the debt exchange will be given 1 cent per 1,000-euro face amount for their securities.
Martha Kavanagh, an outside spokeswoman for Anglo Irish, said the bank was unable to comment while the exchange offer was open. Ray Gordon, outside spokesman for Ireland?s National Treasury Management Agency, which manages certain bank oversight functions for the state, declined to comment. An official at the Department of Finance also wouldn?t comment.
The challenge by investors risks ending up in court, especially if no consensus is reached and new legislation is introduced, according to Simon Adamson, an analyst at CreditSights Inc. in London.
?If bondholders are determined to challenge this, it could be quite a long, drawn-out situation,? Adamson said. ?This goes against the general thrust of regulation right now, which is all about getting bondholders to share losses. There doesn?t seem to be much upside, except for the lawyers.?
The exchange of the lower Tier 2 notes will generate a capital gain of about 1.26 billion euros that the bank can use to bolster its capital ratios, according to analysts at Barclays Capital in London. A repurchase of more-junior so-called Tier 1 debt that was also announced this month, will generate a gain of 347 million euros, the analysts said.
The bondholder meetings to approve the exchange must have a minimum attendance of holders of 66 percent of the notes, 75 percent of whom must agree to the changes, according to JPMorgan Chase & Co., which is managing the offer.
--With assistance from Joe Brennan in Dublin. Editors: Michael Shanahan, Paul Armstrong
To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net; To contact the reporter on this story: Abigail Moses in London at To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net
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