AIB plans to impose 90% loss on its junior bonds

ALLIED IRISH Banks will impose losses of as much as 90 per cent on subordinated bondholders in a debt buyback that may raise up to €2 billion to meet the bank’s additional €13.3 billion capital bill.

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 virtually nothing – 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 just 10 per cent of its face value.

AIB’s subordinated debt traded down at these levels yesterday.

Minister for Finance Michael Noonan said the terms of the offer were “the minimum acceptable”. This was “the final opportunity of a market-based exit at a return which is reasonable and fair considering the level of Government support to date”.

He warned bondholders would face bigger losses if they didn’t accept the offer. Any further action against subordinated bondholders who refused would result in “severe measures”, he said.

The Minister is facing a High Court challenge by two investors against a subordinated liability order which allows him to change terms, conditions and maturity dates on AIB’s subordinated bonds and lift restrictions on buybacks.

The effect of the court order is to reduce the value of the bonds so as to encourage bondholders to take up a voluntary buyback offer.

The case taken by Aurelius Capital Management and Abadi Co will be heard on June 2nd.

Mr Noonan said that the actions were “entirely unfounded”.

The challenges would not deter the Government from “achieving appropriate burden-sharing of levels broadly consistent” with the offer to subordinated bondholders at AIB and in Bank of Ireland, Irish Life and Permanent and EBS.

Stephen Lyons, analyst at stockbrokers Davy, said the Government was on track to hit its target of a €5 billion to €6 billion gain from burden-sharing with subordinated bondholders at the banks.

Bank of Ireland’s €2.6 billion of junior debt could be swapped for equity, generating a €2.6 billion capital saving, he said, pushing the Government closer to its target.

“They are not far off their target. They should get it,” he said.

The Government has injected €7.2 billion of State cash into AIB, taking a 93 per cent stake.

A merged AIB and EBS will form the “second pillar” in a restructured banking system under the Government’s plans.

The Central Bank ordered AIB to raise a further €13.3 billion after stress tests in March.

The bank made a pretax loss of €12 billion after taking €13 billion in provisions to cover loan losses.

The Government has ruled out forcing losses on senior bondholders but is pressing for “appropriate burden-sharing” with subordinated bondholders. The AIB offer is similar to “coercive” debt buybacks at Anglo Irish Bank and Irish Nationwide.

For some investors, this will be the second loss they face on the AIB debt. The bank raised €623 million in 2009 from a debt swap with subordinated bondholders where they received new debt.

This will be subject to further haircuts under AIB’s latest offer.

BURDEN-SHARING: INVESTORS' VIEW

INVESTMENT FIRM Aurelius Capital Management, which is challenging the Government’s burden-sharing with subordinated bondholders, will see at least €51 million wiped off the value of its loans to AIB under the debt buyback offer.

New York-based Aurelius holds debt with a face value of €68.6 million in a 2019 subordinated sterling bond in AIB, according to court papers filed in its action.

The fund claims that it is due an interest payment of €8.6 million on the debt in June and that €84 million was paid to subordinated bondholders last March.

Aurelius and another New York investor, Abadi and Co, are challenging last month’s subordinated liability order, which allows the Government to change the terms and conditions of their AIB bonds.

Abadi has not disclosed how much debt it holds in AIB bonds.

Under AIB’s voluntary deal to subordinated bondholders, the offer is to repay them between 10 and 25 cent in the euro or virtually nothing if they do not accept.

Three Aurelius funds invested in the AIB bond. The par value of their debt is £32 million (€36.5 million), £24 million (€27.4 million) and £4 million (€4.7 million). The company argues that the April 2011 debt buyback at AIB will be “less advantageous” than a similar buyback in January.