Anglo Irish Bank's proposed restructuring into two parts could hurt bondholders by forcing them to sell their investments at discount prices instead of holding them to maturity, according to market sources.
Last week, new Anglo chief executive Mike Aynsley told staff the bank would be pursuing a "hybrid solution" for the nationalised lender which would include winding down the old bank by hiving off its troubled loans and creating a new bank in its place.
Many institutional investors which own Anglo bonds have mandates to hold a certain amount of bank debt, however, and would have to sell their Anglo paper on the secondary market if the bulk of the banks assets were rolled into an asset holding company as proposed.
One major Dublin investment analyst who had seen Aynsley's internal memo told the Sunday Tribune he would advise his bond clients to dispose Anglo paper quickly if the plan went ahead, as their prices would probably drop from already somewhat depressed levels.
Yet although this outcome would cause significant losses for the bank's debt investors, it will most likely be seen as positive by competition authorities in Brussels, who have said they want bondholders to "share the pain" with taxpayers who have bailed out institutions such as Anglo with capital injections and other forms of aid.
Aynsley told the Sunday Tribune he would not be able to comment on Anglo's business plan until the European Commission had begun its review of the bank's proposal.
Anglo is submitting its comprehensive restructuring plan to the commission tomorrow under state-aid rules to ensure the bank is not gaining an unfair competitive advantage from the €4bn in capital it has received so far from the Irish state.
Aynsley said a number of possible structures for the bank were under consideration.
His memo said the "old Anglo" would "focus on managing down legacy issues" and would contain all the bad loans that did not make it into Nama, which is taking €28bn of property development and associated loans from the bank.
This would leave a tiny rump of SME loans in Ireland and much of the UK and US businesses to go into the new bank, plus more than €30bn in customer deposits, according to the most recent public accounts.