Business Irish

Saturday 25 February 2017

Bondholders hinting at replacing State as BoI 'backstop'

Group hopes to better discount ahead of €2.2bn share sale

Donal O'Donovan and Tim Healy

BANK of Ireland's (BoI) subordinated bondholders could be prepared to replace the State in providing the "backstop" for the bank's €2.2bn share sale, if they are allowed to buy discounted bank shares.

A group holding $1bn (€611,000) of the bonds has formed a committee seeking to renegotiate an offer from the bank to swap bonds for bank shares or cash.

A source close to the group told the Irish Independent it did not object to having a debt-for-equity swap, but wanted better terms, including a bigger role in recapitalising the bank.

The source said bondholders could even be prepared to backstop the bank's planned sale of new shares. That would mean the bondholder group, and not the Government, would have to buy any unsold shares when the deal closed, but at a big discount to the current price.

That would shift the potential cost of recapitalising the bank from the Government to bondholders, but could ultimately lead to the country's biggest bank being sold to hedge funds.

BoI needs to raise €4.2bn of new cash to meet its capital targets. It has offered to buy back €2.6bn of subordinated bonds at steep discounts, paying for the bonds with either cash or bank shares, to help meet around €2bn of the target.

The bank will also sell up to €2.2bn of new shares via a rights issue. Current shareholders can buy the new shares at 11.3-11.8 cent per share, compared to the 14 cent per share market price. Bondholders are objecting because they are not being allowed to buy shares at that discounted price.

The Government has underwritten the shares so if there is no demand for them the State will end up with 87pc of BoI -- an effective nationalisation.

A bank source said it was willing to talk to any potential investor at any time. Any changes to the bank's capital plan would need government approval.

In a separate case, a hedge fund trying to stop "burden sharing" at AIB has accused the Department of Finance of a cover-up, and hiding documents that could affect the case.

Aurelius Capital is challenging the validity of the Subordinated Liabilities Order (SLO) obtained by the Finance Minister. They grant powers to inflict losses on 18 sets of AIB subordinated bondholders.

Liabilities

The case is being heard in the High Court. Aurelius said some parts of Department of Finance documents were blocked out when the papers were shared under discovery, until the court ordered that the full details be disclosed.

"We are appalled that Ireland's finance ministry engaged in a cover-up in connection with the subordinated liabilities order it obtained in April with respect to AIB," the firm said.

The Department of Finance said it was satisfied that it made full discovery of documentation in the case. A spokesperson said any challenge to discovery should be argued before the court.

Yesterday, the High Court confirmed that 16 out of 18 SLOs were effective, rejecting Aurelius's argument that they should be parked pending the outcome of the legal challenge.

Mr Justice John Cooke ruled that only the two sets of bonds held by Aurelius would be the subject of the hedge fund's court challenge.

Irish Independent

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