Tuesday, 15 February 2011

[Amagerbanken] Denmark shows us how to do debt-for-equity swaps

Spotted by GolemXIV at Bloomberg:

Denmark is dealing with Amagerbanken under regulations introduced in October designed to ensure taxpayers don’t have to meet the bill when lenders fail. The bank estimates its assets amount to about 59 percent of liabilities, meaning that creditors, including holders of senior unsecured bonds on which a government guarantee expired Sept. 30 and depositors with more than the insured maximum in their accounts, will face write-offs of about 41 percent.

“The bank hasn’t collapsed and gone into bankruptcy like the Icelandic banks, but has been selectively bailed out with a transfer of assets and a partial transfer of liabilities,” said Simon Adamson, an analyst at CreditSights Inc. in London. “Normally when this happens, senior debt and deposits are protected, such is the sensitivity around them, but this is bank resolution with debt and deposit haircuts, rather than a simple liquidation.”

OK, this is slightly harsher than a normal debt-for-equity swap*, as it's not clear whether the bondholders would share in any upside if it turns out that the bank's assets actually turn out to be worth more than the current estimate, but hey. Denmark, like Iceland, has shown idiots in the USA, UK, Ireland etc how to do things.

* In an idealised version, bondholders give up part of the nominal value of their bonds (a repayable claim on the bank's assets) in exchange for new shares (a non-repayable claim), which if done properly leads to nobody losing (or gaining) money at the time of the swap (the market value of the new shares handed out = market value of the bonds cancelled), but hey.


Umbongo said...

"Denmark, like Iceland, has shown idiots in the USA, UK, Ireland etc how to do things"

Absolutely. OTOH I wonder how much Danes - and their banks - have thrown down the drain in vain pursuit of the dream (or should it be nightmare) of wind "energy".

Mark Wadsworth said...

U, the answer is "lots" and that's a good thing for us in the UK because somebody else ran the experiment and failed and not us.

And if the loss to the Danish banks is written off as part of this debt-for-equity swap, then at least the Danish taxpayer isn't on the hook (although the article to which you link tells us that they have the electricity bills from Hell).

View from the Solent said...

"... somebody else ran the experiment and failed and not us"

Mark, all you have to do now is to get the Huhne to see that.
Good luck.

Mark Wadsworth said...

VFTS, splendid idea.

I'll print off that Telegraph article and send him a copy with a brief explanation. He's an intelligent and honest man, I'm sure he'll soon realise the error of his ways.

Bayard said...

Have the bankers lost their grip in Denmark? Why are they not getting their stooges in the government to bail them out with public money?

Mark Wadsworth said...

B, clearly not. Maybe it's not in the Scandinavian psyche to bail out banks, Denmark is also a tad more Georgist than most countries.

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TheFatBigot said...

The strength of debt-for-equity swaps is not just that they allow loss to lie with those who gambled for a profit. It is also that very little, if any, harm results to anyone.

Bondholders and existing shareholders suffer a capital loss on paper but the capital gain was only on paper in the first place.

Of course any liquidation of an investment dependent on that paper capital will take a hit, but it will only take a hit compared to the artificially inflated value it had before the losses inherent in the business were crystallised.

Bailing out these institutions using taxpayers' money can maintain the artificially inflated value but it cannot eliminate the artificiality. All it can do is mask it. In time the bubble will either be eliminated by an increase in the underlying value of the institution or it will not. That's quite a gamble for the taxpayers and allows the real gamblers to keep their artificial profits. It's just nuts.

Mark Wadsworth said...

TFB, good summary, ta.

Deniro said...

The Danish mortgage market is interesting

The mortager can retire a mortgage by swapping with mortgage bonds bought at a market price which tends to move with the property price


Mark Wadsworth said...

Den, that was another of my Bright Ideas (but I can't remember if I posted it here or at HPC).

Clearly if a lot of people lose their jobs and house prices fall, the value of the corresponding mortgage falls (from the banks' point of view). If the bank has sold on the mortgages, then the value of the RMBS falls.

Let's say house bought for £100 with mortgage £100 and the house and mortgage are now worth £60 each.

But there is only one real £40 loss (suffered by newly unemployed homebuyer in nequity). It would be incorrect to also add on the £40 loss suffered by holder of RMBS (the loss has to be shared between the two parties) to arrive at a total loss of £80*.

Therefore, if RMBS sells the original £100 mortgage back to the homebuyer for £60, the RMBS owner suffers the loss and the homebuyer breaks even (he can sell the house for £60 to raise the money to buy the bond and can walk away).

Or the RMBS could sell the mortgage back to homebuyer for £80 and they share the loss £20 each.

There's still a loss, but this way it is clear that there is only one loss and how it has to be shared.

* The banks and politicians are running round insisting that there is an £80 loss (or £120 if the bank has guaranteed the RMBS, or £160 if the RBMS holder is an SPV which borrowed £100 to buy the RMBS) in order to cajole the public into bailing out the banks.

Anonymous said...

Just for information, The Danish mortgage system is constructed in such a way, that banks hold very little of new issues. 99,5% of all bonds goes straight from borrower to investor, and the mortgage institutions are not allowed to "play" the curve. This matched funding helps the system in time of crises.
The borrower in Denmark has 2 options in a normal fixed coupon bond.
1. the right to call at par
2. a delivery option to buy back at market price. (in the market, so the seller does not have to sell). This gives the borrower a loan with negative duration. This combinations insures the borrower against falling houseprices as a conseqens of rising interest rates. For these 2 embedded options the borrower pays around 180 basis points to the goverment yield curve. As an investor it is also possitive, because the more "insuance" the borrower pays for, the more secure the bond is.

During the crises 2008- the mortgage institutions have had around 1% in loss on their outstanding volume which by far is covered in the different cover pools.