Saturday 24 March 2018

AIB, Bank of Ireland bonds drop amid bailout

AIB senior debt slumped today. Photo: Bloomberg News
AIB senior debt slumped today. Photo: Bloomberg News

Allied Irish Bank and Bank of Ireland’s senior debt slumped on concern the Government will force some of the cost of bailing out the country’s banks on senior bondholders.

European Union and International Monetary Fund officials are taking legal advice on how senior bondholders can share the cost of Ireland’s €85bn bailout without triggering lawsuits, according to reports today.

Allied Irish’s €750m of 5.625 percent senior notes due 2014 plunged 4 cents on the euro to 73 cents, a 5.2pc decline, according to composite prices on Bloomberg.

Bank of Ireland’s €974m of 4.625 percent senior unsecured notes maturing in 2013 fell 3.6 cents on the euro, or 4.2 percent, to 81 cents.

“While junior bondholders always faced the prospect of taking a haircut on their investments,” senior bondholders “have been sacrosanct” until now, Eamonn Hughes, an analyst with Goodbody Stockbrokers in Dublin, said in a note to clients today.

“It is clear that more radical solutions than simply pumping more equity into the bank system are in the offing.”

Two years ago, the Government assured senior bondholders that they wouldn’t lose their money if banks failed. Holders of the debt are typically the last investors to lose out when a company founders.

Allied Irish Bank

Allied Irish has about €5.9bn of senior unsecured debt and €12.1bn of senior secured notes, all of which are covered bonds, according to data compiled by Bloomberg.

Bank of Ireland has €5.4bn of senior unsecured debt and another €5.9bn of government- guaranteed bonds, the data show.

Holders of European senior bank bonds have been paid the par value of their investments in troubled lenders, except in the case of Iceland, Morgan Stanley analysts including Carlos Egea said in a note on October 15.

There, creditors of Iceland’s Kaupthing Bank, Glitnir Bank and Landsbanki Islands are owed as much as $86bn. Bondholders of Lehman Brothers weren’t bailed out after the firm filed for bankruptcy in 2008.

Allied Irish shares rose as much as 6.3pc in Dublin on speculation that burden-sharing with bondholders would help the bank avoid outright nationalisation. The stock was down 1.6pc at 29.5 cents at 11:24am in Dublin.

Shareholder dilution

“While shareholders would still get diluted, AIB could avoid being nationalised, which would potentially benefit investors” as the shares would still have some value and be tradable, Oliver Gilvarry, head of research at Dolmen Securities in Dublin, said in a telephone interview.

Bank of Ireland shares fell 4.3pc to 24.5 cents. The five-member ISEQ Financial Index has fallen about 98pc from its peak in February 2007.

The Government will seek to raise banks’ core Tier 1 capital ratio, a measure of financial strength, to between 10.5pc and 12pc, up from the central bank’s 8pc target, two people familiar with the situation said November 24.

Allied Irish Bank would require an additional €3bn to the €6.6bn fundraising the Government is already underwriting to meet the 12pc target, Niall O’Connor, a London-based analyst with Credit Suisse, said in a note to clients yesterday.

The Government’s AIB stake would rise to as much as 97pc from 19pc today, he said.

Forcing losses on senior bondholders “sets a nasty,” if understandable, “precedent,” Marc Ostwald, a strategist at Monument Securities in London, said in a note today.

“The constant ‘goal-post moving’ in terms of regulation” does “enormous damage to investor and entrepreneurial confidence.”


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