Nationalized Banks Not Making Debt Payments

“In making its decision, the government will have to balance this upside with the possible downside associated with annoying liquidity providers.” -Scot Rankin, Davy

FN: Some nationalized banks have stopped interest payments on some of their debts. Anglo Irish Bank isn't the first... nor will it be the last. Bradford & Bingley did as well. When these banks were nationalized, halting interest payments on certain kinds of debt were part of the terms. The probable next step is that taxpayer money is used to 'buy back' this defaulted debt.

Anglo Irish May Stop Payments on Subordinated Debt (Update2): "Anglo Irish Bank Corp. said it may stop interest payments on some of its subordinated notes as it seeks approval to redeem as much as $4.5 billion of the debt.

The lender, which was seized by the government in January, may halt coupon payments on 1.2 billion euros ($1.68 billion) and 800 million pounds ($1.3 billion) of Tier 1 notes from September, the Dublin-based bank said today in a statement. The securities are issued by banks as capital required by regulators to cushion against losses.

Stopping interest payments on Tier 1 securities was a condition set by the European Commission when it approved a capital injection, the statement said. The Irish government has pumped 3 billion euros into the bank, the country’s third biggest, to boost capital eroded by losses on property loans. The bank posted a loss for the six months to March 31 of 3.77 billion euros.

“Obviously every euro less offered to bondholders is a euro gained by the Irish taxpayer,” Scott Rankin, analyst at securities firm Davy, said in a research note today. “In making its decision, the government will have to balance this upside with the possible downside associated with annoying liquidity providers.”

The bank is “actively working” on a plan to buy back the Tier 1 notes, as well as 750 million euros and 300 million pounds of higher-ranking Tier 2 debt, the statement said. The offer is subject to regulatory and Department of Finance approval, it said."

Bradford & Bingley Swaps Triggered by Credit Event (Update1): " Bradford & Bingley Plc’s failure to pay interest on some of its subordinated bonds will trigger settlement of credit-default swaps linked to about $414 million of the nationalized mortgage lender’s debt.

Dealers and investors agreed today that the Bingley, England-based company’s decision not to pay interest on 125 million pounds ($202 million) of 6.625 percent subordinated bonds maturing 2023 was a “credit event,” the International Swaps and Derivatives Association said on its Web site.

The ruling will prompt an auction to settle credit swap contracts even though the U.K. government changed the terms of the bank’s nationalization in February, allowing it to miss coupon payments without that constituting a default. Bradford & Bingley said in May it didn’t intend to pay interest on the notes, which form part of the bank’s so-called lower Tier 2 capital.

“Credit-default swap holders can now expect a payout based on the credit event,” said Louis Gargour, chief executive officer at hedge fund LNG Capital LLP in London. “It reinforces confidence in the efficient functioning of the market.”