I have written this to clarify a lot of the facts. Comments and corrections welcome.
What is a bondholder?
A bondholder can be simply thought of as a lender to the bank or company. A bond is very similar to a loan in that there is a contractual agreement to repay the money at a fixed date and make interest payments (coupons) during the life of the bond.
What is subordinated and senior debt?
This simply reflects where the bondholder stands in the capital structure. In the event of liquidation, senior bondholders along with other unsecured creditors like depositors will get paid before subordinated debt. Subordinated debt is usually only seen in Banks and Insurance companies because of the capital requirement regulations that these institutions operate under.
Bank capital is actually a very complicated subject to understand and try to explain. The most important difference between subordinated debt and senior debt is that sub debt is included in the banks regulatory capital while senior debt isn't. This is because sub debt contains contractual terms that mean the debt is dsigned to absorb losses if the bank gets into trouble before unsecured creditors such as depositors and senior bond holders get hit. Within sub debt, there are different categories such as Tier 1, Upper Tier 2, Lower Tier 2 securities. Tier 1 is considered the purest form of capital as it includes shareholders equity. So for debt securities to be included in this, they must display a lot of equity like features. Tier 2 securities display some loss absorbtion features such as coupon deferral clauses etc but are not equity like enough to be considered core capital. Here is a copy of BOI's capital disclosures. You will see the breakdown on page 6. This is what the bank has to absorb losses. You will notice that senior debt as well as normal customer and interbank deposits are not included.
[broken link removed]
This explains the different types of capital better than I ever could.
How much does each institution have
I am not in work at the moment so not easy to see for every institution
but if we take the main two, the breakdown is as follows:
BOI: 45 billion of senior debt and 7.9 billion of Sub debt
AIB: 37.8 billion of senior debt and 4.5 billion of sub debt
What price are these trading at?
Again I don't have immediate access to the info but due to the Government Guarantee, all the short dated paper is trading at mid to high 90's to the best of my knowledge. I will have to check the longer dated paper.
It is important to remember that the most that bondholders will get back is par. The risk reward profile is completely different to shareholders.
Who holds this debt?
Mainly other financial institutions both Irish and Foreign. Also pension funds and insurance companies would also be big investors. I don't have a breakdown but people seem to think that the bonds might be mainly owned by rich individuals and that is who the Government is trying to protect. That is not the case.
Is it covered by the Irish government guarantee?
All senior debt and a small amount of dated sub debt is covered by the Guarantee.
What events trigger a default?
Obviously bankruptcy. But there are other events that would cause a default and lead to the credit ratings of the banks falling to junk. These include failure to pay e.g. not paying interest on senior debt or restructuring e.g. forcing bondholders to renegotiate the terms of the contracts.
If a bank is nationalised, is this debt automatically guaranteed?
Not 100% sure of this but I would imagine the bank's assets and liabilities become the State's so I would assume the State becomes liable for the debt.
What happens to bondholders if a bank defaults?
Assuming that there was no Government Guarantee in place, bondholders simply become unsecured creditors along with other people such as depositors (individuals, corporate and other banks), derivative counterparties. landlords etc etc etc. They would all rank pari passu in claims on the assets.
Not sure if there are any other questions that people have on the subject.
What is a bondholder?
A bondholder can be simply thought of as a lender to the bank or company. A bond is very similar to a loan in that there is a contractual agreement to repay the money at a fixed date and make interest payments (coupons) during the life of the bond.
What is subordinated and senior debt?
This simply reflects where the bondholder stands in the capital structure. In the event of liquidation, senior bondholders along with other unsecured creditors like depositors will get paid before subordinated debt. Subordinated debt is usually only seen in Banks and Insurance companies because of the capital requirement regulations that these institutions operate under.
Bank capital is actually a very complicated subject to understand and try to explain. The most important difference between subordinated debt and senior debt is that sub debt is included in the banks regulatory capital while senior debt isn't. This is because sub debt contains contractual terms that mean the debt is dsigned to absorb losses if the bank gets into trouble before unsecured creditors such as depositors and senior bond holders get hit. Within sub debt, there are different categories such as Tier 1, Upper Tier 2, Lower Tier 2 securities. Tier 1 is considered the purest form of capital as it includes shareholders equity. So for debt securities to be included in this, they must display a lot of equity like features. Tier 2 securities display some loss absorbtion features such as coupon deferral clauses etc but are not equity like enough to be considered core capital. Here is a copy of BOI's capital disclosures. You will see the breakdown on page 6. This is what the bank has to absorb losses. You will notice that senior debt as well as normal customer and interbank deposits are not included.
[broken link removed]
This explains the different types of capital better than I ever could.
How much does each institution have
I am not in work at the moment so not easy to see for every institution
but if we take the main two, the breakdown is as follows:
BOI: 45 billion of senior debt and 7.9 billion of Sub debt
AIB: 37.8 billion of senior debt and 4.5 billion of sub debt
What price are these trading at?
Again I don't have immediate access to the info but due to the Government Guarantee, all the short dated paper is trading at mid to high 90's to the best of my knowledge. I will have to check the longer dated paper.
It is important to remember that the most that bondholders will get back is par. The risk reward profile is completely different to shareholders.
Who holds this debt?
Mainly other financial institutions both Irish and Foreign. Also pension funds and insurance companies would also be big investors. I don't have a breakdown but people seem to think that the bonds might be mainly owned by rich individuals and that is who the Government is trying to protect. That is not the case.
Is it covered by the Irish government guarantee?
All senior debt and a small amount of dated sub debt is covered by the Guarantee.
What events trigger a default?
Obviously bankruptcy. But there are other events that would cause a default and lead to the credit ratings of the banks falling to junk. These include failure to pay e.g. not paying interest on senior debt or restructuring e.g. forcing bondholders to renegotiate the terms of the contracts.
If a bank is nationalised, is this debt automatically guaranteed?
Not 100% sure of this but I would imagine the bank's assets and liabilities become the State's so I would assume the State becomes liable for the debt.
What happens to bondholders if a bank defaults?
Assuming that there was no Government Guarantee in place, bondholders simply become unsecured creditors along with other people such as depositors (individuals, corporate and other banks), derivative counterparties. landlords etc etc etc. They would all rank pari passu in claims on the assets.
Not sure if there are any other questions that people have on the subject.
