IRISH LIFE & Permanent (IL&P)strongly opposed a decision to allow Anglo Irish Bank to go ahead of it in the sale of the first Government-guaranteed bonds in November 2008 in an exchange with the Department of Finance.
The decision changed the order of a pre-agreed sequence of bond sales by the six domestic lenders.
IL&P was due to be the third bank to borrow using the Government guarantee under a sequence agreed and choreographed by the Central Bank, the Financial Regulator and the Department of Finance.
The company was to follow AIB and Bank of Ireland with the launch of a Government-guaranteed bond, and ahead of Anglo Irish Bank, EBS Building Society and Irish Nationwide.
However, IL&P was told in late November that, contrary to the pre-agreed sequence, Anglo would be going ahead of the company with a bond sale in the days before the publication of Anglo’s annual results on December 3rd, 2008.
Bill Hannan, IL&P’s head of risk, e-mailed senior officials at the department, Aidan Carrigan and Anne Nolan, on November 25th, 2008, outlining why IL&P management “believe strongly” the company should precede Anglo.
“It is our strong view that the relevant banks should access the market in a sequence that reflects the credit standing of the different institutions. In that regard, IL&P has a better credit standing than Anglo Irish Bank, as measured in terms of credit default swap rates,” wrote Mr Hannan.
“We understand that this view is shared by all of the other banks covered by the Government guarantee, other than Anglo Irish Bank. This has been the rationale for AIB coming first to the market followed by BOI.”
Mr Hannan said that “to allow a bank of lower credit standing to enter the market first may result in interest rates payable being higher than necessary”.
He added that IL&P was concerned that there may be a further cost in higher interest rates “due to the inevitable uncertainty that arises in the days before a significant release of information to the market occurs. Anglo Irish Bank is due to report on 3 December”.
“Given the volatile state of the markets currently, that uncertainty could impact on the success of the issue and we are concerned that this could have very significant consequences for both the cost and success of subsequent issues,” wrote Mr Hannan.
“We do not believe that settling this matter by lottery, as proposed is appropriate. It is the responsibility of the department and/or the Central Bank to decide on the order of issuance based on sensible objective criteria to ensure an orderly market,” he said.
On December 2nd, 2008, the day before Anglo published its controversial results, the bank raised €1.5 billion by selling a Government-guaranteed bond in the markets. IL&P, which has the heaviest funding requirements of any of the Irish financial institutions, did not raise its first Government-guaranteed bond until February 2009.
The group paid more than double the spread over the benchmark rate on a €1 billion bond than Anglo paid on its bond two months earlier as the sale followed the nationalisation of Anglo.
The sequence of Government-guaranteed bond sales was agreed within weeks of the introduction of the guarantee on September 30th, 2008. The Central Bank and Financial Regulator agreed that the six domestic institutions would start raising guaranteed funding starting with the strongest bank.
An "orderly approach" on the sales was agreed at meeting of the Central Bank, regulator and the heads of treasury at the six lenders on November 6th. The aim of the sequence was "to minimise the risk of execution failure and to avoid any damage to the market rating of issues covered by the Irish Government guarantee", according to minutes of that meeting seen by The Irish Times.
