EU orders BoI to stop paying interest on its borrowings

BANK OF Ireland has been ordered by the EU Commission to stop paying interest on some of its borrowings, pending a review of its restructuring plan by Brussels.

The move means that the Government may not be paid its first dividend of €280 million due on February 20th under the €3.5 billion recapitalisation by the State. This will, in turn, trigger the State taking an equity stake in lieu of the cash dividend.

However, the bank said that this was “not certain” as there were ongoing discussions with the Department of Finance and the commission on this matter as part of the bank’s restructuring plan.

The bank signalled that it may buy back more debt to generate additional capital, which would help absorb losses on loans moving into Nama next month.

The loans to the top 10 developers are expected to be transferred to Nama by February 12th.

Shares in Bank of Ireland fell 2.3 per cent yesterday to close at €1.48, valuing the bank at €1.48 billion.

The commission has stopped the bank from paying interest due on February 1st and 4th to investors on $1.2 billion in bonds, following a similar condition set on AIB last month, halting interest payments on some of its bonds.

Credit rating agency Moody’s downgraded some of Bank of Ireland’s bonds yesterday, placing them on a negative outlook, meaning they could be downgraded further.

The agency said the downgrade also took account of the bank’s financial strength beyond two years and uncertainty over future coupon payments.

The EU has forced banks to stop dividends on some securities as a condition of the State bailouts.

Bank of Ireland submitted the restructuring plan in September under EU state aid rules to show how the bank would reduce its reliance on Government support.

The commission has triggered a “dividend stopper” on the ordinary stock, the Government’s €3.5 billion preference shares and borrowings comprising €2.1 billion of securities, for a year, pending the EU review of the restructuring.

The bank said that it recognised that the stopping of coupon payments was “unfavourable” and that it was “examining the merits of further liability management subject to regulatory and other approvals”.

The lender freed up €1 billion in capital last year from buying back some of its debts.

Kevin McConnell, analyst at Bloxham Stockbrokers, said that the move was expected following the AIB decision, but that the commission was unlikely to want to trigger the State taking a larger equity stake.

Analysts queried whether the commission would sign off on the bank’s restructuring plan before the coupon is due to the Government on February 20th and said that the bank could defer the payment until the plan was approved.

The commission is expected to respond to the restructuring plan before the end of February.