June 2, 2011 / 9:10 AM / 8 years ago

IFR: Anglo Irish CDS bounce as senior gets off the hook

LONDON, June 2 (IFR) - The cost of insuring against a potential default in stricken Irish bank Anglo Irish has eased but dealers continue to demand a very high fee for credit protection as the burden-sharing threat to senior debt holders remains.

On Wednesday, Anglo Irish CDS fell by a percentage point, to 32 upfront, following the news that the bank would not need any added capital. This upfront fee is applicable to the debt insured from the onset of the contract and implies heightened concerns of default.

On Tuesday, Ireland’s central bank also said that Irish Nationwide Building Society would not be requiring added capital following the stress tests conducted on the two institutions.

The two institutions underwent separate stress tests from the ones conducted on Ireland’s viable banks. Since 2009, Anglo Irish and INBS have received EUR29.63bn and EUR5.4bn from the state respectively.

“Since these capital injections were made on the basis of loss estimates that have been found to be reasonable by BlackRock this analysis does not indicate that an additional capital requirement is required,” the central bank said in the statement.

The improvement in the cost of protection has been notable over the last two weeks. According to Markit data, the cost of a five-year CDS referencing Anglo Irish’s senior debt has fallen by four percentage points over that period.

At current rates, someone seeking to buy protection would have to pay 32 percentage points upfront, versus the 36 points that would have been payable on May 18. This upfront fee is in addition to a 500 basis points coupon that is paid per year over the life of the contract. For a EUR10 million notional trade, this translates to paying EUR3.2 million on initiation of the swap as well as EUR500,000 per year.

How safe is safe?

However, analysts remain split as to whether senior debt in the two institutions will be safe going forward and whether potential burden-sharing could still be on the cards.

Analysts at UniCredit wrote on Wednesday that while they remained bullish on Irish banks’ senior debt, they excluded Anglo Irish and INBS which would “continue to suffer from uncertainty” they wrote.

While the latest stress tests showed that neither institution had additional capital needs, Ireland’s central bank did add a caveat.

“The Central Bank remains satisfied that lifetime base losses provide a sufficiently conservative basis for determining these banks’ capital needs,” it said in its report. “It is noted, however, that as the actual results will only be known over time, as there is always potential downside.”

Meanwhile, analysts at CreditSights said that the fact the institutions did not require added capital reduced the threat that the government would seek to impose haircuts on Anglo senior debt “which we did not regard as the central scenario” they wrote.

Antonio Garcia Pascual, analyst at Barclays Capital said that the lack of burden-sharing had been a mistake by the authorities.

“Burden sharing by senior unsecured bond holders in Anglo and INBS would have been justified,” he wrote in a note published on Wednesday.

“(1) These two institutions incurred massive credit losses that led to their liquidation, and consequently led to enormous tax-payers costs; (2) burden sharing would alleviate some of the fiscal burden of the large fiscal consolidation programme (including from a social fairness perspective); (3) burden sharing by senior unsecured bondholders in these institutions under liquidation procedures does not constitute a threat to financial stability.”

In February, the deposits of Irish Nationwide and Anglo Irish were transferred to Allied Irish Banks, hereby ring fencing the two institutions.

(Helene Durand, deputy credit editor of IFR Markets and Reuters: tel: +44 207 542 3469)

helene.durand@thomsonreuters.com; Reuters messaging; helene.durand.thomsonreuters.com@reuters.net)

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