Ireland to impose 90% of bank losses on bondholder NOT taxpayers

By Joe Brennan

Bank of Ireland Plc will seek to impose losses of as much as 90 percent on 2.6 billion euros ($3.7 billion) of subordinated debt as it offers bondholders an exchange for cash or equity.

The lender, ordered to raise 5.2 billion euros of capital, said in a statement it expects to offer to pay cash of 10 percent of nominal value for Tier 1 securities and 20 percent for Tier 2 debt, with no settlement of accrued interest. The Dublin-based bank said it may also offer an equity-swap alternative at a premium to the cash offer with a payment of accrued interest.

“We were expecting the terms of the offer to be bad, but this is worse than expected,” said Stephen Lyons, a fixed- income analyst with Dublin-based securities firm Davy. “Another approach would have to been to engage with subordinated bondholders and not leave such a bad taste in the mouths, particularly for investors that might take the equity alternative, who the bank may wish to participate in a subsequent share sale.”

Bank of Ireland’s 747 million euros of lower Tier 2 senior subordinated 10 percent bonds due 2020 were quoted at 30 cents on the euro, down from 52.5 cents, according to Jefferies International Ltd.

Burden Sharing

“The bank understands that the government will take whatever steps it considers necessary to maximize burden sharing” of losses with subordinated bondholders, Bank of Ireland said.

The lender also said the buyback will include a proposal to amend the terms of the bonds to include giving it the option to call the notes for cash at a price that would be “materially less” than offered in the tender. Anglo Irish Bank Corp. included a call at a level that wiped out holdouts in its bondholder offer last year.

EBS Building Society, which must raise 1.5 billion euros, said it’s offering to buy back 160 million euros and 30 million British pounds of junior securities at discounts of 80 percent. The Dublin-based lender said it will seek to pass an extraordinary resolution amending terms of bonds so that bondholders who refuse to take up the offer may be paid just 1 cent in the future for every $1,000 of debt held.

Bail Out

Ireland’s government, which has injected 46 billion euros into its banks in the past two years, is seeking to share the cost of bailing out the country’s lenders. The Irish central bank in March ordered Bank of Ireland to raise 4.2 billion euros of equity and 1 billion euros in contingent capital by the end of July, to boost reserves and cover loan losses.

“The levels of burden-sharing” being sought “are the minimum acceptable to the government,” Finance Minister Michael Noonan said in a statement. If the debt exchange offers “fail to deliver the expected core Tier 1 capital gains to each of the banks, the government will take whatever steps are necessary” under new laws introduced last year “to ensure that burden sharing is achieved.”

The take up of Bank of Ireland’s junior bonds exchange offer will determine how much needs to be raised from a share sale. The government has promised to provide any capital the bank cannot raise privately.

Irish Life

Separately, Irish Life & Permanent Plc, directed by regulators to raise 4 billion euros, said it will buy back as much as 840 million euros of subordinated liabilities, with the discount of 80 percent applying to most of the securities.

One security will be discounted by as much as about 91 percent, the company said, adding “no payment in respect of accrued interest” in relation to the debt will be paid.

On May 11, Allied Irish Banks Plc (ALBK) said it would offer to buy back junior debt at a discount of as much as 90 percent of face value, after the government obtained a court order allowing it to alter the terms of the bonds. The order is currently being challenged by two New York-based investment firms Abadi & Co. and Aurelius Capital Management LP. The case is set to be heard by the Dublin-based High Court on June 2.

Bank of Ireland was down 9.8 percent at 17 euro cents at 12:15 p.m. in Dublin trading, having earlier fallen as much as 10.4 percent. Irish Life fell 1 euro cent to 12 cents.

Irish two-year government notes rose, sending the yield down 71 basis points as of 12:49 p.m. in London. The 10-year bond yield dropped five basis points to 11.02 percent.

— With assistance from Finbarr Flynn and Cormac Mullen in Dublin and John Glover in London. Editors: Michael Shanahan, Dara Doyle


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