AIB planning to raise €350m by restructuring risky bonds
Allied Irish Banks has received the go-ahead from the financial watchdog to launch a restructuring of some of its riskier bonds, which is expected to raise up to €350m of much-needed capital for the bank.
The bank confirmed yesterday it was planning to redeem almost €2.9bn worth of debt -- or so-called lower tier 2 bonds -- which are trading at a discount on the market, despite the fact that they are covered by the original banking guarantee scheme.
AIB can book as pure profit the difference between the market price and how the bonds are carried on its own balance sheet, as a liability.
But instead of paying cash, AIB is offering to exchange the notes for longer-dated bonds, which have an annual coupon -- or interest rate -- of between 10.75pc and 11.5pc. This is higher than the current yield on the bonds in the market.
"The bondholders will have to decide if they want to crystallise a loss in exchange for a higher interest rate on the new notes," said Sebastian Orsi, an analyst with Merrion Capital.
"But for shareholders, the exchange should generate over €300m in accounting gains, which will improve the capital position."
The Government has argued in the past that such transactions are an example of the banks' riskier bondholders taking some of the pain that has already been inflicted on their ordinary shareholders.
Davy analyst Emer Lang said: "This is the first step in the process of AIB generating capital through self-help measures. A 100pc take-up would generate capital in the region of €570m. But a more realistic 50pc-60pc take-up would bring in between €285m and €342m."
The bond exchange follows on from a similar move by Bank of Ireland a month ago, which generated €405m. Some 55pc of relevant bondholders took the bank up on its offer.
The market expects that AIB will need to raise about €4bn this year to rebuild its balance sheet as NAMA discounts and impairment losses hit its remaining loan book. BoI is expected to require over €2.5bn. However, the final figures will be determined over the next week or so, as the Financial Regulator outlines the level of capital banks will need to hold in future.
NCB Stockbrokers banking analyst Ciaran Callaghan said the higher coupon -- in the scenario of 50pc take-up -- would shave between €60m and €70m off AIB's annual profits before bad loan provisions.
"As was the case with Bank of Ireland (bond exchange), it is a quick-fix solution to limit shareholder dilution at this important junction," he said.