Anglo Irish Banks Junior Bonds Haircut Leads to Small Bang


Recently bond holders in Anglo Irish Banks agreed to a voluntary reduction to 20% of face value on 2017 junior bonds.  This morning the ISDA Determiniation Comittee (International Swaps and Derivatives Association) announced that this constituted a restructuring credit event, triggering CDSs (Credit Default Swaps) on Anglo Irish Bank.  Restructuring credit events trigger what is known as the "Small Bang Protocol" for CDSs which cover some events which are not complete defaults.
CDSs are an instrument similar to an insurance contract, allowing a purchaser to hedge against default or credit restructuring.  Typically insurance contracts require that the the buyer owns the underlying asset being insured, but this is not necessary for a CDS.

The potential impact of the triggering event is not yet known as CDSs are not sold on the open market, but are agreed privately between buyer and seller.  If a substantial fraction of the sellers of the CDSs are Irish Banks this could lead to further instabilities in the banking sector, which could potentially make the "small bang" a misnomer.

There will be an auction held to settle the $379m of credit default swaps linked to the bonds.  The total nominal value of bonds which triggered the event is $917m and the agreed "haircut" lowers that value to $183m.

WORDS: Gavin Gleeson