Who loses out if Anglo fails?

The government guarantee runs out in September (?) 2010. Let us say that Anglo is insolvent at that stage.

1) Presumably short term depositors will have taken out their money well before the guarantee expires. As they withdraw the money, the government will have to pump in cash to repay them.

2) If someone has a long-term deposit with Anglo which cannot be cashed before the guarantee expires, they would be covered by the government €100k guarantee I presume?

3) What is the order of priority after that?

Carramore said in another thread:

One alternative was to leave the bank stew, to let it burn through shareholers' funds, then to let it burn through the €4.9 billion of subordinated loans, which I understand are NOT covered by the government's guarantee scheme, and only then would the government have to put money in. In this scenario, the government would have the consolation of having the shareholders and subordinated note/ bond holders taking the pain first, before it got caught on the hook. ... If the bank were by any change to survive untill after the expiry of the guarantee period, it could then let the holders of debt securities (over €17 billion of them) go down before putting any depositors at risk.

Click to expand...

Here is a summary of the main items in the balance sheet as of 30th September

Assets
Loans to customers: €72 billion
Loans to banks: €14 billion
Bonds : €8 billion
Total assets: €94 billion

Liabilities
Deposits from customers: €50 billion
Deposits from banks : €20 billion
Debt securities: €17 billion
Subordinated Liabilities : €5 billion

Where will the government's €1.5 billion rank?

It seems that the Debt securities and Subordinated Liabilities all mature beyond September 2010, so they are in effect, not guaranteed.

I thought that any liability with greater than than two years to maturity must be at some risk of default, but it seems that is not what the market thinks.
As Carramore pointed out on an other thread the main class of Anglo holders to benefit from the guarantee are the bond holders. Bonds, that were trading at a significant discount are now trading at par even if their maturity is well beyond two years. Clearly the market sees the guarantee as not time limited.

[broken link removed]

"FitzPatrick bought 6.3 million units of Anglo debt when it was trading at discount prices of 86c on the euro and 87.5c on the euro.

This debt, which is made up of €750 million of notes due in 2014, is now fully guaranteed by the state guarantee scheme.This means it trades at a full 100c on the euro, bringing FitzPatrick a gain of around €800,000 on the purchase price of the bonds, as well as the coupon or interest rate they pay."

Folks

I am trying to clarify the facts in this thread, so to remain focussed I have deleted posts which speculate on the motivation of the government as these are distracting and are dealt with extensively in other threads.

Let's assume carramore, me, you, the whispering grass and everyone else is wrong and the government's guarantee is no longer extant for Anglo come September 2010 and it is let die.

Let's also assume that the balance sheet stays the same (i.e. profits match write-downs, so there is no change).

As I understand it, the government's 1.5 billion are second (I think) in the pecking order after the existing preference debts (2.3 billion, I think). After that comes senior debt, subordinate debt, depositors, and equity I believe. So, if the current 500 mn of net assets is not enough, as the assets have to be written down in value, then equity loses totally; the depositors will lose out next, with their losses being made good to the underfunded guarantee limit (so the taxpayer loses out there). And so on up the chain.

No, I think you're wrong, Y. Ordinary shareholders are first for the chop if things go wrong. According to the 30 September 08 balance sheet, their funds amount to €4.1 billion. Of course, we all know that their real value is much less than that, possibly zero. (Brendan omitted them from the list of liabilities at the start of this thread, presumably on the grounds that they're not truly "liabilities")

The next for the high jump are preference shareholders. That is the €1.5 billion that you and I, as taxpayers, are putting in.

Next to go are the subordinated loan stock and notes of €4.9 billion, i.e. they are still standing when the taxpayers' money has gone, which is what really gets me about the rescue package. Why should they be protected?

Next in line are the other loans ("debt securities") of €17 billion.

I should qualify all the above by stating that I'm not an expert in this area, but my understanding of company structures is that the general pecking order for liabilities is as above.

I am astonished that I have not seen this type of critical analysis anywhere else. Maybe it has been in the media, but I have not seen it. Maybe a stockbroker has done it, but I have not seen it.

It shows that we, and by that I mean not just Askaboutmoney but also the informed analysts, really know very little about what is going on. So when the media tells you that Anglo is insolvent, they don't really know what they are talking about.

Brendan

If a firms liabilities exceed their assets and cashflow, the firm is insolvent. Even if cashflow could meet future liabilities the firm could be cashflow insolvent if it can't discharge debts as they come due.

From the figures you have given, Anglo has 94 billion of assets and 92 billion of liabilities. With the government preferences, that makes it 93.5 billion of liabilities. That means that shareholder equity (remaining value for common stock of assets after all other liabilities have been discharged) has been reduced to 500 million already?

Anyway, a writedown of 1% of assets (940 million) would make Anglo insolvent. No? Do you think a writedown of 1% is at all unlikely?

Carramore, yes, you are right, I think; it makes more sense anyway. So the structure would be:
Senior debt (bondholders)
Creditors (depositors?)
Preferred shares
Common shares

Yogan

The suggestion of burning the cash in St Stephen's Green has not actually been implemented yet.

The net asset position will not change after the government's investment. They will, of course, get €1.5 billion in cash on the asset side while getting a €1.5 billion liability on the other side.

My figures are the main items in the balance sheet.

The book net asset value as represented by shareholders' funds is around €4 billion.

Brendan

You're quite right (*add to both sides dummy*). But from the figures you give above the net asset value is only 2 billion?

So a 3% write-down would lead to insolvency? As I've posted elsewhere, the losses in Sweden were around the 12% mark, with higher percentages in C&D and commercial and lower in consumer and residential.

edit: 3% of 72 bn in loans is probably the correct figure to use for asset write-downs as the bonds and loans to banks should be relatively safe.
edit2: ah - the 'missing' 2 bn is things like fixed assets, directors' loans, goodwill and the like?

I have just used the big figures. If you look at the accounts on their website you will see the exact figure for net assets/shareholders' funds. I haven't bothered with it as it's really just the net result after lots of estimates.

Whether it says € 2 billion or €4 billion, doesn't really matter in the context of things.

Brendan

Brendan said:

I am astonished that I have not seen this type of critical analysis anywhere else. Maybe it has been in the media, but I have not seen it. Maybe a stockbroker has done it, but I have not seen it.

It shows that we, and by that I mean not just Askaboutmoney but also the informed analysts, really know very little about what is going on. So when the media tells you that Anglo is insolvent, they don't really know what they are talking about.

Brendan

Click to expand...

I heard some professor on RTE questioning whether the taxpayers' prefs would rank above or below existing prefs/sub liabilities. Maybe this wasn't decided yet. It would certainly make the whole deal much more palatable if they ranked above existing sub liabilities.

The bad news is that the subordinated debt is covered by the government guarantee so the relative ranking with respect to the preference shares is effectively irrelevant. The tax-payers are paying for everything no matter which way you structure things.

I'm repeating myself I know, but the original mistake was giving such a ludicrous guarantee in the first place. The 1.5 billion is the first tranche payout to pay for the liability the government assumed when they offered the guarantee. So much for the "free" guarantee.

So it makes no sense to get indignant about this 1.5 billion - Morgan Kelly is completely wrong that it's equivalent to burning it. The indignation was appropriate regarding the nature of September's guarantee but that decision has tied the government's hands since then. There's simply nothing they can do to avoid paying for the hole in Anglo's loan book.

What I do find somewhat objectionable is the fact that Anglo is not being wound up completely. For example, I've heard that the employees received on average 80% of the bonuses in 2008 that they received in 2007. The bank should be closed as soon as possible - at least saving the running costs. Some arrangement could be made with BOI and AIB to administer it's assets and liabilities on behalf of the government so as to attempt to recover as much of value as possible from the balance sheet.

To address the original question. The shareholders obviously have lost out almost completely and now effectively hold pieces of paper which represent long shot lottery tickets. They'll probably end up losing the last few cents too. The only other loser is the tax-payer; everyone else gets off scot free.

The bad news is that the subordinated debt is covered by the government guarantee

Click to expand...

But the guarantee expires in September 2010. Does the guarantee continue for all loans in existence at that date?

Brendan said:

Here is a summary of the main items in the balance sheet as of 30th September

Assets
Loans to customers: €72 billion
Loans to banks: €14 billion
Bonds : €8 billion
Total assets: €94 billion

Liabilities
Deposits from customers: €50 billion
Deposits from banks : €20 billion
Debt securities: €17 billion
Subordinated Liabilities : €5 billion

Where will the government's €1.5 billion rank?

It seems that the Debt securities and Subordinated Liabilities all mature beyond September 2010, so they are in effect, not guaranteed.

Click to expand...

Not trying to go off topic, but do you believe the balance sheet? It's hard to judge a companies assets versus liabilities if one can't be sure of the figures.

tyoung said:

I thought that any liability with greater than than two years to maturity must be at some risk of default, but it seems that is not what the market thinks.
As Carramore pointed out on an other thread the main class of Anglo holders to benefit from the guarantee are the bond holders. Bonds, that were trading at a significant discount are now trading at par even if their maturity is well beyond two years. Clearly the market sees the guarantee as not time limited.

[broken link removed]

"FitzPatrick bought 6.3 million units of Anglo debt when it was trading at discount prices of 86c on the euro and 87.5c on the euro.

This debt, which is made up of €750 million of notes due in 2014, is now fully guaranteed by the state guarantee scheme.This means it trades at a full 100c on the euro, bringing FitzPatrick a gain of around €800,000 on the purchase price of the bonds, as well as the coupon or interest rate they pay."

Click to expand...

That article is wrong. That bond is trading at nowhere near par. Bid/Offer is 68/73 (would be lucky to get someone to pay that). The bonds are guaranteed for two years so investors are only covered if Anglo goes out of business during that period so there is still a risk of default after 2010. The only bonds trading above these levels are bonds with maturities within the next two years.

Sunny
Thank you for clearing that up. It did seem odd to me. Someone should email the Sunday Business Post.
Regards

Is there a way of finding out the maturity profile of the term debt the bank owes? This would at least allow us to predict the exact sequence of pressures Anglo will face in the medium term future. However I think I can argue that it is almost irrelevant anyway.

Out of interest I did a superficial google, and found the following as part of the August 2008 management statement:

In the global wholesale markets we continue to have good access out to one year duration. In addition, we have sourced longer term funding through structured instruments, private placings and bilateral repo transactions. The Bank's liquidity position remains strong with a significant surplus to operating and regulatory requirements.

Click to expand...

I think we can be confident that no long term funding was raised subsequently. This does not give any quantitative measure of the term structure of their debt but it sounds like the majority of the debt matures in a year or less.

So what is the likely future for Anglo? They are facing an inescapable liquidity vice which will almost inevitably lead to the the tax-payer picking up the tab regardless of the maturity profile of their market debt.

In the next 20 months we can expect much of this debt to become due. Similarly we can expect customer deposits to start heading for the door as Sept 2010 approaches. (While they claim that much of this money is in the form of term deposits these products almost invariably allow early redemption and in fact falling interest rates generally means that no redemption fee can be charged.) How is Anglo going to meet these obligations? It's ability to raise funds in the markets will evaporate as the guarantee expiration approaches. At best they will be able to defer things by issuing shorter and shorter term debt with higher and higher coupons.

Lets look at their assets. Some of their assets look reasonably liquid. Lets say they sell their 8 billion bond portfolio and take their 14 billion back from other banks. To make things simple, lets say this covers the 20 billion deposits of other bank's money they owe.

This leaves them with 72 billion of loans as assets and 50 billion of customer deposits and 22 billion of debt securities (including the subordinated debt) as liabilities.

The problem is that this inevitable sequence makes it impossible for Anglo to "limp over" the expiration date even if let's say 10 billion of their their market debt (subordinated and normal) was long term and didn't become due before Sept 2010. It's simply inconceivable that the 72 billion of loans could be liquidated to the extent to allow them to pay off these obligations (expiring market debt and the exodus of deposits) even if they started doing it immediately. Off the top of my head, they are likely to be tens of billions short and so they are going bust for sure. So even the small crumb of comfort for the tax payer of seeing the longer term debt act as a buffer for our liabilities will not exist.

If anyone can envisage any other sequence of events I'd be interested in hearing them.

This might be slightly off topic but what I don't understand is the savings rates that Anglo are offering.

They are clear market leader in regular saver accounts, 6 months TD, 1 year TD, 2 year TD, 3 year TD, on demand savings and on some sterling products. Not only that some of their rates are well above all of the competition. The ECB has cut rates by 175 basis points (so far) but yet Anglo's Savings rates (in some cases) have gone up.

Why? Can they not borrow from the inter bank market at lower rates? Is this a short term land grab to get more savings accounts or do they quite simply need the deposits at any cost !?

Fungus, you are only focussing on the accounts they promote to attract new money. Like all banks, they have plenty of customers in accounts which are no longer promoted as well as those who are in short term fixed term accounts that are money market based. I have an easy access account with them that i keep meaning to switch out of that is only paying 4%. Also, they have a big savings business in the UK, so its not all irish rates based.