You can bring the horse to water but you cannot make it drink.

 

Issuer: Anglo Irish Bank

Security:  Angiri Floater of November 2nd 2011

ISIN:  XS0273602622

Outstanding: US$ 1 bn 

Currency: USD

 

 

Everyone knows that Ireland is bankrupt, soon to be bankrupt, about to file bankruptcy, etc etc etc. So the trade here is to bet that they don't go bankrupt until November 2nd 2011. Thats right. The bet is that Ireland will not file for the next six months. If ireland does not file for 6 months the holder of the Angiri floaters of 11 makes 14 pts to the midpoint which equates to 17 pct, which annuallized equates to 34 pct. Bloomberg says the yield is 44 pct. I don't really subscribe to yield calculations on short term paper, but there it is if you want it.

 

This bond is Sr. Unsecured debt of Anglo Irish Bank, now owned by the government of Ireland, so the credits from my point of view are equivalent, w/ the potential extra kicker at Angiri, that maybe there is some value in the loan portfolio that the bank has made. By the looks of the bailout to the banks, it is pretty unlikely.

 

While there has been speculation that Ireland may eventually ask for Sr. Bondholder participation in any eventual future bailout, this is purely theoretical at this time. As seen by today's news coming out of Germany, http://online.wsj.com/article/SB10001424052702304563104576355514024153114.html?mod=WSJ_hp_LEFTWhatsNewsCollection&_nocache=1306808129735&mg=com-wsj , it is likely to be a long time before anyone in Europe or its periphery actually defaults. The reason, whether we like it or not, is relatively simple. Greece files, Ireland files, Ireland Files, Portugal Files, Portugal Files and there goes Spain and so on up the ladder until you get to a nice France default which we all know will not happen because by then the Common currency wont even be able to be used for toillette paper and the Greek riots will have spread to the Champs Elysees which translates into full blown European quantitative easing in order to save the banking system and while this may not preserve wealth in gold, it will preserve the corporate institutions to some degree and that is how the world actually runs in a novel not written by Ayn Rand. 

 

Now for the value part of the idea. Buy 5 yr Ireland Sr. protection at 680 over which for 3 months will cost you one half of the 680 so 340 and that way, you can sleep at night and are 90 pct hedged in the sense that there are few scenarios where the bank does not pay and ireland does. Obviously you have a duration mismatch, but it is hard to conceive of a scenario where this duration mismatch really hurts your return.