iceland

01:55 04Nov2008 DJ 2nd UPDATE:Iceland Bk Debt Hugely Discounted Ahead Of Auction
01:55 04Nov2008 DJ 2nd UPDATE:Iceland Bk Debt Hugely Discounted Ahead Of Auction

DJ 2nd UPDATE:Iceland Bk Debt Hugely Discounted Ahead Of Auction

(Adds further background.)

LONDON (Dow Jones)--Icelandic bank debt was trading at discounts of between
95% and 99% of face value Monday, suggesting heavy losses for investors at
auctions to settle prices for credit-derivative trades of three major Icelandic
banks beginning Tuesday.
The bonds are now almost valueless, indicating that market participants which
sold credit protection on the banks would have to honor weighty settlements on
credit-protection valued at $7.6 billion.
The auctions, which will be run by U.S.-based inter-dealer broker Creditex
and international portfolio valuation service provider Markit, will be the first
of their kind to take pace in Europe.
The scheduled auctions include bonds issued by Iceland's three largest banks.
Landsbanki Islands Hf. (LAIS.IC) senior bonds traded at the biggest discount
Monday, down at 2.0/3.0 cents on the euro and subordinated bonds at 1.0/1.5
cents, according to a dealer.
Glitnir Banki Hf. (GLB.IC) senior debt is currently at 2.5/3.5 cents on the
euro, while subordinated debt trades at 0.75/1.75 cents. Glitnir's bonds are due
Wednesday.
Kaupthing Bunadarbanki Hf. (KAUP.IC) senior bonds are trading at 4.0/5.0
cents on the euro, while the bank's subordinated bonds are quoted at 1.0/2.0
cents on the euro, said a dealer. Its auction is due Thursday.
Initial results of the senior bond auctions will be available at 1030 GMT,
with initial results on the subordinated bonds are due around 1145 GMT. Final
results on senior and subordinated debt are due at 1400 GMT and 1545 GMT,
respectively.
Monday's trading levels imply that sellers of default protection on
Landsbanki face a payout of 97 or 98 cents for every euro of senior debt and 98.5
or 99 cents on the bank's subordinated bonds.
The purpose of the auctions is to decide the amount that buyers of default
protection will receive after Landsbanki, Glitnir and Kaupthing were taken into
receivership by the Icelandic government earlier this month.
Iceland's once-vibrant banking system ran into trouble after its
heavily-indebted banks were cut off from short-term funding markets as the global
credit crisis intensified over the summer.
These low prices indicate that bond investors expect an extremely low level
of recovery on the bank's bonds and a large payout by sellers of credit default
protection.
According to Markit and Creditex, bidders on the Landsbanki auction include
Bank of America Corp. (BAC), Barclays PLC (BCS), BNP Paribas SA (BNPQY),
Citigroup Inc. (C), Credit Suisse International (CS), Deutsche Bank AG (DB),
Dresdner Bank AG , Goldman Sachs International (GS), HSBC Bank PLC (HBC),
JPMorgan Chase Bank (JPM), Merrill Lynch International (MER), Morgan Stanley &
Co. International (MS), The Royal Bank of Scotland Group PLC (RBS) and UBS AG
(UBS).
Last month, U.S.-based Depository Trust and Clearing Corporation said the
maximum amount of net funds transferred between net sellers and net buyers of
credit protection won't exceed $1.8 billion for Landsbanki, $2 billion for
Glitnir and $3.8 billion for Kaupthing.
The calculation is based on the net notional value of outstanding single-name
credit-default swaps written on the Icelandic banks in DTCC's Trade Information
Warehouse.
Settlement is scheduled for Nov. 20.
However, it does not necessarily follow that all the money being paid by
protection sellers to protection buyers will change hands on that date.
Credit-default swap market participants point out that the market is fully
collateralized, and that counterparties post collateral with one another as the
mark-to-market value of their contracts changes. This means a large chunk of the
payouts have, in effect, probably already been made.
The auction to determine the payout of Lehman Brothers Holdings Inc. (LEH)
protection contracts, which took place Oct. 10, settled at 8.75 cents, leaving
protection sellers with a payout of 91.25 cents on the dollar.

-By Michael Wilson, Dow Jones Newswires; 44 20 7842 9349;
michael.wilson@dowjones.com
(Mark Brown in London contributed to this story.)

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Tuesday, 04 November 2008 01:55:23DJN [nDJR3022EC] {C}ENDS