Banks plan ‘bail-in’ bond sales ahead of new European rules

The State’s banks are putting plans in place for the sale of billions of euro of bonds where investors can suffer losses during a crisis, as European authorities set targets for euro area lenders in the coming weeks.

AIB subsidiary EBS has acknowledged in a bond prospectus that it and the parent group may have to sell a "significant amount" of such notes, to be calculated as a percentage of banks' total liabilities, under the incoming rules. The bank made the comments under a list of risks facing the group in the document.

"The basic idea is the banks will be required in future to have debt, both junior and senior, that can be 'bailed in' without depositors being hit," said Owen Callan, an analyst with Investec in Dublin. "While the rules are being phased in between this year and 2020, we'd expect banks to start putting the legal structures in place next year and start issuing eligible bonds from the middle of the year."

Irish banks imposed about €15 billion of losses on junior bondholders during the crisis as they shared the cost of soaring loan defaults with taxpayers. However, they were unable to "burn" senior bondholders given opposition from the European Central Bank and the fact that there was no framework in place to do so without also hitting depositors.

Collapsing banks

Under new EU rules that came into effect in January, all kinds of creditors could face losses to save a bank from collapse – and ensure taxpayers’ money will be used as a last resort. The Single Resolution Board, a new authority in charge of resolving ailing euro zone banks in future, is expected to give banks final targets in the coming weeks of how much debt that must hold that can be “bailed in” in future.

Analysts see Irish banks setting up so-called holding companies at the top of their group structures that will issue equity and debt in future, whereas deposits would be held in operating companies below that level, giving them more protection. Of the Irish banks, Permanent TSB already has a holding company in place.

“Banks will have to issue billions of euro of this new bail-in-able debt, though it’s likely they’ll sell more senior bonds, as these are less expensive in terms of coupons than junior debt,” said Mr Callan.

A spokeswoman for AIB said it had received an “indicative” target for bonds that could be bailed in, known as minimum requirement for own funds and eligible liabilities (MREL), and that it was “manageable”.

A Bank of Ireland spokesman said it would "update the market at the appropriate time," while a spokesman for PTSB said it was awaiting its MREL requirement and would "formulate its funding strategy accordingly".