FAQ Bondholders


The bond documentation will usually state where the investor ranks in the capital structure i.e. senior unsecured creditor or subordinated creditor. The pricing of the bond reflects this difference. If I buy a senior bond, I become a senior unsecured creditor of that institution. If I put my money on deposit (ignoring guarantees), I become a senior unsecured creditor of the bank. That is why they say that senior bondholders and depositors rank pari passu in the event of liquidation.
The law needs to be looked at and a bank resolution scheme needs to be introduced but it's not easy. If you make senior bond investors structually subordinate to depositors, then the cost of funding for the banks will rise. Not necessarily a bad thing but people need to accept the days of cheap banking are over not just for loans but for everyday banking services. (and they have been cheap compared to other European Countries).
 
Sunny, has a bank ever negoiated with senior bond holders before?
This option has been suggested from several sources and I'm wondering has it been done before and what were the consequences.
 
Sunny, has a bank ever negoiated with senior bond holders before?
This option has been suggested from several sources and I'm wondering has it been done before and what were the consequences.

I think something was done in Kazachstan last year but I can't think of any other occasion off the top of my head. Banks have been allowed fail but generally not in the UK or the Eurozone. Happens more in the US because of cororpate structures and the fact that many regional banks do not depend on international funding.
The problem with negotiating with senior bondholders is that you are not coming from a position of power. If you tell them that you will off them 40%, they will take their chances on liquidation and hope for a larger recovery rate. Last analysis I saw was that senior bondholders in Anglo could expect to recover 80-85% in the event of liquidation so you couldn't offer a haircut much below that. Therefore you might save about a €1 billion but the cost of such a move to the other banks and the Sovereign would probably more than offset this. AIB especially would be left with a funding hole that the State would have to fill. Bond investors would not go near it.
 
Hi Sunny
thanks for that. Do you know was that analysis based on the last estimate on the 29-34 billion cost to Anglo or one of the earlier ones ?
 
Hi Sunny, does the 80-85% recovery rate you gave in October still stand?
 
Hi Sunny, does the 80-85% recovery rate you gave in October still stand?

I haven't seen anything since. Obviously if there was a firesale, the recovery would be less but I think everyone including the EU and the IMF while wanting banks to deleverage don't want a firesale of assets. To be honest Puple, the whole concept is theoretical in Europe. It has never been tested. I would be very sceptical about the success of a negotiated settlement. Not saying it can't or shouldn't be done but just haven't heard anyone suggest a way to make it work.