AIB offers to buy back €4bn batch of debt at 70 per cent discount

AIB HAS offered to buy back a €4.1 billion batch of debt at a 70 per cent discount as part of its efforts to reduce the amount of capital it needs to raise this year.

The bank, which is effectively being nationalised, has said it will pay 30 per cent of the face value of the subordinated debt as it seeks to raise €6.1 billion in funds by the end of February.

AIB’s 30 per cent offer is slightly above where the debt, denominated in euros, sterling and US dollars with due dates between 2015 and 2030, is trading on the market. The bank’s proposal is described by market watchers as “non-coercive” because any investors who decide to refuse the offer will be able to hold on to their debt.

Ratings agency Fitch has warned, however, that if the tender attracts a low take-up, a “coercive” exchange will become more likely. Losses could also be “forced” on to subordinated debt holders by “other legislative means”, the agency said.

The Credit Institutions (Stabilisation) Act 2010, enacted before Christmas, would allow for such measures.

“This is because of the European Commission’s requirement that subordinated debt holders make a significant contribution to the bank’s restructuring costs as a condition of approval of AIB’s recapitalisation by the Government,” Fitch noted.

It was unclear yesterday how much appetite the attempted buyback would generate, but a comparable initiative by Bank of Ireland last year had a 45 per cent take- up. The Bank of Ireland tender was made at between 46 per cent and 57.5 per cent, which was also at a premium to the market price at the time.

The scramble for capital comes as both banks strive to meet stringent new funding requirements set by the Central Bank.

AIB said yesterday that the rationale of its offer was to “optimise the capital base of the bank”, both by crystallising the difference between the debt issue price and its market price and to save on the interest the debt carries with it.

Davy analyst Stephen Lyons noted in research that a 50 per cent acceptance rate for AIB’s tender would generate €1.37 billion of capital up front, while also saving the bank about €200 million in annual interest payments.

Mr Lyons said such a saving would be “very significant” in the context of basic, pre-provisions, profits for AIB this year, which he believed may be as low as €500 million.

“Every 10 per cent increase in take-up adds a further €137 million in capital and further reduces the interest bill by €20 million.”

He added that the outlook for State ownership of AIB would not change after the buyback.

The bank’s destiny as a nationalised entity became clear just before Christmas when the High Court approved a €3.7 billion injection of State funds. This will see State ownership of AIB rising to 92.8 per cent.

The AIB discount of 70 per cent compares well with the more punishing 80 per cent writedown applied by Anglo Irish last month. In accepting Anglo’s plan, investors agreed to wipe out those who did not take part.

Fitch said the tender would not affect AIB’s rating because of its non-coercive nature.