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Banking Update: Emergency Legislation Paves the Way for Irish Debt Restructuring

AUTHOR(S): Patrick Molloy, Peter O’Brien, William Prentice, Chris Quinn
PRACTICE AREA GROUP: Banking, Banking and Financial Services
DATE: 13.02.2013

The Irish Bank Resolution Corporation Act 2013 (the “Act”) was enacted in Ireland on 7 February 2013.  This emergency legislation provides for the liquidation of the Irish Bank Resolution Corporation (“IBRC”) which was formerly Anglo Irish Bank, by means of a Special Liquidation Order and the sale or transfer of the assets and liabilities of IBRC.  The Act was drafted as part of a deal with the European Central Bank (“ECB”) that will result in a major improvement in the terms of Ireland’s bank debt.  The Act will also facilitate the termination of certain promissory notes used by IBRC as security to borrow from the Irish Central Bank.  The promissory notes will then be replaced with long-term bonds with a much longer repayment schedule.

Liquidation of IBRC

Joint special liquidators have been appointed to IBRC with immediate effect in order to wind up its business and operations.  The Minister for Finance, Michael Noonan, stated that the intention of the Act is for the net debt owed by IBRC to the Central Bank and its associated floating charge security to be purchased by National Asset Management Agency (“NAMA”), the Irish state “bad bank”, using NAMA bonds, in a way that ensures that there is no capital loss for the Central Bank.  The Minister also stated that the Ministerial Guarantee underpinning the net debt owed to the Central Bank by IBRC will also be transferred to NAMA and that eligible depositors, bondholders and counterparties will be repaid.

The assets of IBRC which are subject to the floating charge will, following an independent valuation process, be sold by the joint special liquidators to third parties at or above their independent valuation. It is expected that a large number of those assets will be sold within the next six months.  If the assets cannot be sold to third parties, they will be sold to NAMA at their valuation price.  Creditors will then be repaid from the proceeds of these sales in accordance with the normal sequence of priority, as set out under the Companies Acts, that is, preferred creditors (including employees) will be paid first followed by the IBRC debt to NAMA. Remaining proceeds (if any) will then be paid to unsecured creditors who have not been paid under the relevant guarantee schemes (namely, the Deposit Guarantee Scheme, which covers deposits up to a maximum of €100,000 per depositor per institution, and the Eligible Liabilities Guarantee Scheme, which only guarantees the balance of personal deposits in the participating institutions over the €100,000 limit of the Deposit Guarantee Scheme).  However, if the sale proceeds are not sufficient to cover the debt owed by IBRC to NAMA, the shortfall will be met by the Ministerial Guarantee.

The Act also provides for an immediate stay on all proceedings against IBRC and prevents any further action from being taken against IBRC without the consent of the High Court.

The Act will also result in the termination of all employee contracts on the winding-up of IBRC.  However, it is expected that the majority of staff will be re-hired on terms and for such duration as the special liquidators may decide. 

Replacement of Promissory Notes

Under an agreement reached by the Irish Government with the ECB on 7 February 2013, certain promissory notes are being exchanged for long-term Irish Government bonds with maturities of up to 40 years.

By way of background, in 2010, when it became evident that Anglo Irish Bank and Irish Nationwide Building Society would need a considerable injection of funds to pay back their depositors and most of their other creditors, the Irish Government provided IBRC with a promissory note for €31 billion, which it then used as security to borrow from the ECB via the Central Bank's Emergency Liquidity Assistance facility.  In 2011, the Government made its first payment of €3.1 billion, reducing the total outstanding to €28 billion. The average maturity of the promissory notes was seven to eight years, which is in stark contrast to the average maturity of 34 years for the bonds.  This means that the first principal payment will now not be made until 2038.

The Irish Taoiseach (Prime Minister) Enda Kenny stated that “in effect, they have replaced a short-term, high-interest rate overdraft that had to be paid down quickly through more expensive borrowings with long-term and cheap interest-only loans.”  The Taoiseach also pointed out that the average interest rate on the new bonds would begin at just over 3% compared with an interest rate of well over 8% on the promissory notes which is expected to result in a reduction in the State’s general Government deficit of approximately €1 billion per annum over the coming years. 

For further details in relation to the above, please contact Peter O’Brien or Erc Walsh or your usual contact at Matheson.

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