Wednesday 13 December 2017

Doherty and Boucher try not to look like desperate men on bonds

If they ever tire of banking, Richie Boucher of Bank of Ireland and Colm Doherty of AIB could find a fulfilling role selling off ponies at the Ballinasloe Horse Fair every October.

Both executives have been engaging in their own form of horse trading with bondholders since the year began. While not quite donning flatcaps and wellies, the two bankers have been forced to do the kind of mucky quick-fire deals that normally get done in the equine world.

Both bankers need the same thing -- precious capital -- but the trick is not to look too desperate as you fumble your few remaining wads of cash.

Both banks have been exchanging subordinated bonds, at less than face value, for new longer dated bonds with higher coupons. In order to entice bondholders, many of whom are concerned about Ireland's intentions towards them, the two banks offer higher coupons on the new instruments, hoping the bondholders will come out to play and the bank can book the difference between the face value and the exchange price they are prepared to cough up.

All this sounds very simple, but it remains a nerve-jangling game of chance from the perspective of the banks.

Offer too low a coupon and too few bondholders come forward to take up the offer.

Offer too high a coupon and the bank puts a hole through its future profits, as it will be stuck paying out the new higher coupon in the years ahead.

Nevertheless the key in the current climate is to pique the interest of the bondholders in the first place.

In that context Colm Doherty this week was offering coupons of between 10.75pc and 11.5pc compared with the 10pc offered by Bank of Ireland.

Boucher got a 56pc take-up for his exchange offer, but Doherty would hope for more and hence is paying more.

If Doherty's slightly higher offer flushes out a few more bondholders than Bank of Ireland managed, he could make a gain of €340m.

Despite all the pain and horse trading, it is worth remembering that the €340m would represent just 7pc of what AIB needs to raise in fresh capital over the next few months, based on figures from NCB Stockbrokers.

The sale of M&T and the Polish operations have still to come for AIB and, based on bond exchanges, expect a lot of horse trading and quick deals when those assets enter the viewing ring.

Irish Independent

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