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AIB among Europe’s worst bond performers

Additional tier 1 notes ‘agressively’ underperforming those of Bank of Ireland

In March AIB’s chief financial officer Mark Bourke said its capital levels were “massively and comfortably” above the minimum ECB target

AIB’s riskiest bonds are among the worst performing in Europe this year as investors fret over the bank’s failure to disclose a key regulatory capital target and allegations it overplayed progress on dealing with soured loans.

AIB sold €1.25 billion of subordinated debt in November, making it the last bailed-out Irish lender to return to this market. Between 2009-2011 the bank imposed €5 billion of losses on junior bondholders as taxpayers stumped up €21 billion.

With more than 99 per cent of AIB’s shares in the hands of the State, its most junior bonds – some €500 million of additional tier 1 (AT1) notes – are seen by analysts as giving the clearest market view of AIB. Holders of these securities, which European banks started selling in 2013, stand at the front line, after equity, to suffer losses if a bank succumbs to financial trouble.

Bottom quarter

The market interest rate, or yield, on AIB’s AT1 notes have increased by about 50 per cent so far this year to 11 per cent, based on the date when the bank has the first opportunity to buy them back. That puts them in the bottom quarter of performance of European banks’ AT1s and more than twice the increase seen by similar Bank of Ireland bonds.

AIB’s bonds are trading at 86 cents on the euro, compared to 100 cents when first issued. Bank of Ireland’s are at 96 cents, giving a comparable yield of 8.4 per cent.


While AIB’s bonds started to “aggressively” underperform Bank of Ireland when the wider market was concerned about Europe’s largest investment bank Deutsche Bank’s capital position in February, they have been hit by issues closer to home, according to Fiona Hayes, an analyst with Cantor Fitzgerald in Dublin.

Misguided

AIB’s failure to disclose a minimum capital reserves target set by the European Central Bank for the lender this year was misguided, according to Ms Hayes. Rivals BoI and Permanent TSB disclosed theirs, at 10.25 per cent and 11.45 per cent, respectively.

In March AIB’s chief financial officer Mark Bourke said its capital levels are “massively and comfortably” above the minimum ECB target.

Ms Hayes said: “I don’t understand the decision not to disclose, because it only creates doubts where there should be none.”

The emergence of a whistleblower allegation last month that AIB has overstated progress on resolving problem loans has also impacted sentiment towards the bank’s most junior notes, according to Stephen Lyons, an analyst with Davy in Dublin. The allegations are the subject of an investigation by the ECB’s banking supervisory arm.

Mr Lyons says the fact yield on AIB’s AT1 bonds has widened to three percentage points above BoI’s similar notes from 1 point three months ago suggests market fears “are overdone”. He says the performance of AIB’s bonds need to improve before the Government goes about selling down its stake in the bank on the market.

Minister for Finance Michael Noonan said a new Government would need to make a call early in its lifetime if a long-awaited 25 per cent AIB stake is to take place this year.

My Lyons said: “If the yield is too high on the AIB coming into an IPO, then equity investors will apply a greater discount to the price that they’re willing to pay.”