Bank of Ireland plunges after buyback plan spooks market
BoI targets €2.6bn of subordinated bonds in aggressive move that pushes shares to all-time low of 14 cent
Published 01/06/2011 | 05:00
BANK of Ireland shares hit an all-time low yesterday as its shareholders face significant dilution, under a "burden-sharing" deal.
Shares plunged after the bank launched an aggressive offer aimed at cutting €2.6bn of subordinated debt, mostly by handing shares to bondholders.
It means current shareholders will see their stake diluted. BoI shares fell more than 20pc in a matter of hours after the news, to hit the all-time low of just 14 cent each.
The offer is part of the effort to cut the cost to the State of bailing out banks, by forcing some of the losses on private-sector investors, including subordinated bondholders and current shareholders.
Yesterday, BoI said it would offer to buy back and cancel €2.6bn of subordinated bonds. It will offer cash prices of 10 cent in the euro for 'Tier 1' securities and 20 cent in the euro for 'Tier 2' debt.
The cash-offer price does not include any accrued interest.
Bondholders that opt to be paid in bank shares instead of cash will get a better deal, however. The offer to swap bonds for shares has not yet been set, but the bank said it would be at a premium to the cash offer and would include a consideration for unpaid interest.
The cash price on offer is aggressively low. The 20 cent in the euro for the Tier 2 bonds compares to the 50 cent in the euro which the bonds were being traded for just before the terms were announced.
By yesterday afternoon the same bonds were trading at 37 to 40 cent in the euro. That's still well above the 20 cent per euro cash price.
The offer will include a clause to give the bank powers to hit bondholders that reject the deal with even bigger losses.
One bond trader said yesterday's bond prices reflected uncertainty about the final offer terms, as well as an effort by the market to estimate the value of the share offer.
Shares fell because the bond offer made it likely that the bank's current shareholders would end up with a smaller, less valuable stake.
The terms of the exchange offer will be finalised and launched to the market within days, according to people at the bank.
The buyback offer is part of the "burden sharing" the Government is using to reduce the overall cost to the taxpayer of recapitalising the banks.
BoI needs to raise €4.2bn in fresh cash in order to comply with tough new Central Bank rules. The buyback will help because the difference between the offer price and the face value of the bonds is counted as a profit for the bank.
If all of the subordinated bondholders take shares instead of cash it could end up costing the Government nothing.
However, even if all of the bonds are swapped for shares BoI still needs to raise a further €1.6bn in cash either from new investors, existing private sector shareholders, or the State.
It's not yet clear how large a share of the bank bondholders could end up controlling.
A source familiar with the deal said he did not expect bondholders to end up with a majority share.
If the deal succeeds, the Government will avoid raising its stake in the bank above the current 39pc shareholding.
Irish Life & Permanent (LI&P) and EBS Building Society also announced deals to impose losses of between 80pc and 90pc on their subordinated bondholders.
IL&P said it would offer lenders owed €840m of debt 20pc of the original value.
EBS will buy back around €260m of its subordinated bonds, at 10pc and 20pc of face value.
Finance minister Michael Noonan is pushing ahead with the buy backs in spite of legal efforts to block an earlier buyback of AIB bonds.
Investors Aurelius and Abadi are still waiting to go to court with their legal challenge to try to halt the buyback of AIB bonds.