Information Note: End of the Floating Rate Notes

Where did the Floating Rate Bonds come from?

During the financial crisis Anglo and INBS faced severe financial difficulties, as did other Irish banks. In 2009, a capital injection of €4 billion was made by the State in Anglo, and €0.1 billion into INBS. In order to prevent the collapse of Anglo, the Irish Government provided further financial assistance in the way of a series of promissory notes. During 2010 €25.3 billion of promissory notes were issued to Anglo and €5.3 billion to INBS.

By the end of 2010 the State had provided a total of €34.7 billion to Anglo and INBS. The average interest on the promissory notes was estimated to be 5.8 per cent. A first payment of €0.6 billion was made in 2010 and an interest holiday applied in 2011 and 2012 (i.e. no interest was paid). As a result, the interest in later years would be substantially higher.

The situation deteriorated for Anglo and INBS: in early 2011 most of the remaining deposits from both institutions were transferred to other banks and in July 2011 the Irish Bank Resolution Corporation (IBRC) was formed by the merger of Anglo and INBS. At the same time, the separate promissory notes were combined into one. This promissory note was recorded as an asset on the balance sheet of IBRC.

In 2013 the IBRC was put into liquidation and its assets transferred to the CBI. Following engagement with the European Central Bank (ECB) the promissory notes, with an outstanding value of €25 billion, were exchanged for a portfolio of long-term government bonds – Floating Rate Notes. These bonds had maturities ranging from 25 to 40 years, compared with the weighted average maturity of the 7 to 8 years for the promissory notes - see Table 1.1.

What happened when bonds were sold?

The CBI was committed to disposing of the bonds with a condition that the sales were not disruptive to financial stability.

Interest was payable on the FRN – based on the 6-month Euribor rate plus a margin which averaged 2.63% across the eight issuances – and was included in the CBI profits. The CBI began selling some of its holding of the FRN in 2014 and this meant it would no longer receive the corresponding interest payment. However, as the value of Irish Government bonds had been increasing in the market the value of the FRN attracted a premium when sold. This realised gain contributed to the CBI profits each time there was a sale of FRN. The NTMA was the buyer of the FRN once the bonds were purchased, hence they were subsequently cancelled. The buybacks were funded by new bond issuance, so while the level of debt did not necessarily decrease, the interest rate cost did, with new bonds being issued at a lower rate. It can be considered that the floating rate bonds were refinanced at a cheaper rate.

Table 1.2 below shows the decade long purchase of the bonds by the NTMA. The difference between the nominal amount of bond purchased and the cash cost paid by the NTMA gives rise to the margin, or premium, on each sale. In order to fully buy the original €25 billion of bonds issued the NTMA paid almost €38 billion. The €12.8 billion ‘profit’ appears as capital gains for the CBI.

Where did the premium go?

The CBI is permitted to retain a maximum of 20% of its surplus for its reserves. The rest is paid to the Exchequer. The funds transferred each year appear in Note 2 of the Exchequer Statement. In cash terms this contributes to the budgetary position. In this way a large portion of the cash paid out by the NTMA returned to the Exchequer.

Statistical treatment of transactions

As noted already, the floating rate bonds are government liabilities and so are included in the Maastricht (general government) Debt. As the purchases were mainly a refinancing operation there is no significant change in the balance sheet.

The interesting part is how the CBI surplus impacts on the general government balance. The statistical framework – the European System of Accounts (ESA) 2010 – recognises dividends based on the ‘entrepreneurial profit’. What this means is that any distribution of capital gains is treated as a financial transaction, rather than revenue. As a result, part of the CBI surplus income benefits the general government balance and the remainder appears in the financial account.

This treatment is set out below. The amount of income received by the Exchequer is compared to the CBI surplus and capital gains from the previous year in order to allocate a dividend and a financial transaction for recording in government finance statistics.

In summary, combining the information regarding the purchases of the bonds and the Exchequer receipts, €38 billion was required to fund the transactions. Cumulatively the Exchequer received €14.7 billion from the CBI surplus. This was largely made up of interest received on the bonds and the capital gain on the sales.

A final consideration is that the CBI has experienced an exceptionally high level of profitability during this period which has been returning to normal. The interest paid on the FRN and the capital gains from the sales have been a significant part of the surpluses. In addition, large scale assets purchases programmes, by the ECB and Eurosystem central banks, were beneficial to central bank balance sheets in general. The ECB policy for 2% medium-term euro-area inflation has led to increased policy rates which will have a material impact on the CBI profitability. As can be seen in relation to the 2023 distribution, excluding capital gains meant there was no profit to record as a dividend, in ESA terms. Over the last decade the general government balance benefitted from €6 billion of dividends from CBI. For the next few years, it is unlikely there will be any significant receipts.