Kenny says junior bondholders won’t be paid but can he be sure?

Will we ever see the back of the junior bondholders? The unexpectedly large sums of money raised in the IBRC liquidation has brought up the possibility of remaining junior bondholders in the former Anglo Irish Bank getting back some or all of the €280 million they invested.

Cue political controversy and pressure on the Government to clarify what will happen. Now, Taoiseach Enda Kenny is saying he can see “no circumstances” in which the bondholders will be repaid.

But can he be sure?

Who are these investors?

They are financiers who invested in five separate subordinated bonds or notes issued by Anglo Irish Bank. What this means is they are investors who got a higher interest rate return, on the basis that they would be the last to get their money back if anything went wrong.

Of course “ something” did go wrong and the State had to bail out Anglo. As part of this, most of the subordinated or junior bondholders were bought out at a discount by the state.

In total some €4 billion was saved for the State by buying back junior bonds in Anglo and Irish Nationwide – which became IBRC – at a discount.

However, a small number of investors chose not to take up the buy-back offer and a London High Court case taken by one of them stopped the state from carrying through a promise to force those who did not sign up to take even bigger loses.

These €280 million in bonds are the ones in question. Some may have been bought in the meantime at a big discount by speculative investors from their original holders.

Why has this raised its head?

The IBRC special liquidators advertised earlier this year seeking details of all unsecured creditors. This is because the liquidation sale of IBRC assets is reaching its conclusion and was more successful than anticipated.

Because the commercial property market is so strong, the IBRC loans – the vast bulk linked to such properties – attracted huge international investor interest. The sale of assets will allow the liquidators to repay all the preferred creditors of the IBRC.

The liquidators have said that it is now anticipated that there will be some dividend for unsecured creditors, who have to lodge claims with them by next March/April. What this means is the cost to the State of €34.7 billion in winding up Anglo and Irish Nationwide will not rise any further, and that there is a likelihood that the net cost will fall a little.

However the issue now is what happens to any cash left over for unsecured creditors. The State will get most, but not all, of this.

So who gets any cash left over ?

The State and a group of other unsecured creditors are first in line for any pay out from cash left over after preferred creditors are paid. Only after these debts are fully paid will there be any cash left for the junior bondholders. The IBRC statement of affairs was never officially published but a leaked version suggested there was less than €2 billion in total unsecured creditors, when intercompany debts were netted out.

The State is owed over €1 billion because it had to pay-off the remaining depositors under the guarantee scheme when the IBRC was liquidated. It accounts for around 70 per cent of money owed to the main group of unsecured creditors. Also included in this group are trade creditors to whom the IBRC owed money and private investors and credit unions who had invested in specific Anglo investment products such as tracker bonds, not all of which were covered by the state guarantee. The liquidators must also make provision for legal claims in this category of creditors.

If all this cash is repaid, then the junior bondholders are entitled to anything left over, up to the amount they invested.

Can the Government refuse to pay them?

The process is covered by company law, as is any liquidation. As things stand, if the bondholders can prove their legal claim, then they would be entitled to any cash left over after the main group unsecured creditors are paid. This may not emerge for quite some time, however.

A key issue is that before paying them, the liquidators need to be sure they have enough left to meet any likely legal claims, including the litigation with the Quinn family in which there is a lot at stake.

So the whole process could conceivably go on for some time. However, it is not clear on what basis the Taoiseach made his statement that he saw “no circumstances” in which the bondholders would be paid, unless the IBRC special liquidators have indicated to the Government that there will not be enough money to do so.

Could the Government stop the payout?

This will come down to legal argument. If the bondholders can lodge a valid claim , then under company law they should be paid. There are various powers of the Minister for Finance to direct the special liquidators, but bondholders could presumably challenge any move to not pay in court.

In any event we still have to discover if there is enough money there to raise the issue at all – and the indicators are that the ongoing legal proceedings could delay this for quite some time - quite possibly until well after the next general election.