Bank of Ireland is understood to be considering a €500m plan to beef up its capital base -- and limit potential state ownership -- by offering to convert some of its subordinated bondholders into ordinary shareholders.
Sources suggested that BoI would look to announce a debt-for-equity swap package over the coming months -- at the same time as it unveils a 'rights issue' stock sale to existing shareholders, and the outcome of its EU restructuring plan.
Conversion of the bonds would take place at a discounted rate, linked to where the bonds are trading in the market and the pricing of the 'rights issue', they said.
BoI would also be able to book as profit the difference between the discounted price and how they are carried, as liabilities, on BoI's balance sheet. This would serve to further boost the loss-making group's reserves.
The group, which raised €1bn of equity through a discounted buyback of €1.7bn of unguaranteed, subordinated debt last summer, said it "is examining the merits of further liability management, subject to regulatory and other approvals".
While many in the market have read this as a signal of another bond buyback, it is understood that the group is thinking more along the lines of a debt-for-equity swap deal.
NCB Stockbrokers analyst Ciaran Callaghan has estimated BoI, which still has about €1.5bn of unguaranteed subordinated bonds outstanding, could generate over €900m in a debt- for-equity transaction, depending on the level of uptake. However, informed sources say the figure is more likely to come in around the €500m mark.
Such a deal would automatically dilute existing shareholders, but market sources say it should still be taken positively, as BoI needs up to €3bn of equity capital to leave its reserves at an acceptable level at the other end of the downturn.
"The threat of the banks falling into majority state-ownership remains a live and worrying issue if (either BoI or Allied Irish Banks) are unable to raise capital privately," said a senior Dublin stockbroker. An equity capital ratio of 8pc has emerged as the global market consensus that banks should aim for -- double the previously acceptable minimum.
BoI's "liability management" signal came yesterday as it informed the market, as expected, that the European Commission has told it to stop paying discretionary coupons on subordinated debt as it considers the bank's restructuring plan.
The viability plan was filed with Brussels last September, on the back of the State's €3.5bn bailout of the lender.
Brussels made a similar demand of Allied Irish Banks early last month not to pay coupons, where legally possible, to holders of its so-called Tier 1 and Upper Tier 2 bonds.
In the meantime, as an unintended consequence of Brussels' demands on BoI and AIB, neither can pay upcoming dividends to the State, which has pumped €3.5bn into each.
Both are in talks with the Department of Finance and the European Commission to find an overall solution that will lead to the resumption and retrospective payment of dividends, totalling €560m annually.