Firms challenge bondholder order

A Cayman Islands investment firm representing some junior bondholders in Allied Irish Banks has told the Commercial Court that a debt buyback scheme announced by the State last April is a "final solution" to "get rid" of those bondholders.

Aurelius Capital Master and linked firms have also disputed the State's claim the buyback scheme was required in the context of AIB's recapitalisation requirements being revised upwards by the Central Bank to €13.3 billion.

Mr Justice John Cooke today began hearing a challenge by Aurelius to a Subordinated Liabilities Order (SLO), obtained by the Minister from the High Court on April 14th as part of efforts to achieve some burden sharing by bondholders in AIB.

The order allows the Minister change terms, conditions and maturity dates on AIB’s subordinated bonds, lift restrictions on buybacks and reduce the value of the bonds so as to encourage bondholders to take up the buyback offer.

Last Friday, another investment firm representing junior bondholders in AIB withdrew its legal challenge to the April order.

British Virgin Islands registered Abadi & Co Securities Ltd also said it had agreed to participate in the latest AIB debt buy-back exercise, announced on May 11th with a June 13th deadline for take-up.

In its action, Aurelius claims it was excluded from an earlier debt buyback exercise of January 2011 which offered better terms and the Minister is seeking to coerce it into the less favourable April order, made under the provisions of the Credit Institutions Stabilisation Act.

Aurelius "has no difficulty with the concept of burden sharing" but the Minister is using "emergency laws" to coerce bondholders into disposing of their holdings for "derisory" sums of money unnecessarily, John Gordon SC, for Aurelius, argued today.

The order would contribute to a situation where AIB would "soon be over-capitalised", counsel said. It was also made without any or any adequate consultation with affected parties in breach of the requirements of the relevant EU Directive, the Seewood Directive, he argued.

Counsel also complained of "a tendency" to politicise or personalise his clients' legal challenge and to make "denigratory comments" about them. It was irrelevant whether his clients were "distressed gentlefolk", "trust funds for orphans" or hedge funds, they were entitled to the same protection against unwarranted and unlawful interference with, or expropriation of, their rights, he argued.

The State has disputed the claims and also indicated today it will apply shortly to the court for an order that, irrespective of the otucome of the case, the SLO is effective for 16 of 18 categories of securities specified within it.

The State claims the Aurelius challenge relates only to two categories of bondholders. Aurelius disputes that claim and says the outcome of the case should affect the entire order.

Mr Gordon also said his side had looked over the weekend for an undertaking from the State concerning how the latest deby buyback would affect its euro notes but the State had refused to give that undertaking.

Under the latest buyback proposals, AIB will impose losses of as much as 90 per cent on subordinated bondholders. The bank is offering between 10 and 25 cent in the euro to AIB’s lenders across 18 subordinated bonds with a face value of €2.6 billion and just 1 cent for every €1,000 of debt held if they refuse to accept it.

Most of the debt is subject to an offer at a 75 per cent discount, while holders of the undated subordinated bonds are being offered 10 per cent of its face value.