Forced losses for bondholders of riskiest debt at AIB may be 'unavoidable'
Published 27/01/2011 | 05:00
FORCED losses for bondholders that own €775m of AIB's riskiest debt may be "unavoidable", analysts Davy's warned yesterday.
The comments come days after AIB reported a lacklustre response to its offer to buy back a separate €3.9bn pile of risky debt at a discount.
In a note to clients yesterday, Davy's warned that AIB's €775m pile of undated junior subordinate was likely to come in for attention as the bank battles to boost its capital by €6.1bn ahead of a February deadline.
The undated debt is the riskiest issued by AIB since it has no guaranteed repayment date.
Under the terms of its bailout, AIB is barred from tempting holders of undated debt with lower amounts of safer debt or cash, as usually happens with debt exchanges.
Instead, AIB can only offer the undated bondholders equity in the embattled bank, which has a market capitalisation of just €450m.
Davy's said such an equity offer would "attract a low take-up", since it would not be supported by "enticing equity valuation fundamentals" in light of the extra shares the bank is issuing to the Government.
The State's share in effectively AIB rose from 18pc to 92pc at the end of December as part of the latest bailout.
The Government's stake is set to increase again at the end of February, when it injects more cash to help the bank reach new regulatory requirements on reserves.
Another round of state cash may have to be ploughed in at the end of March, when the regulator completes another round of stress tests for the banks, heralding further shareholder dilution.
Given the difficulties presented by a voluntary offer, Davy said a "coercive action on the undated sub-debt is a credible real threat".
Some also fear AIB may force losses on holders of less risky subordinated debt who rejected the bank's recent voluntary tender.