B of I reduces State's maximum stake to 69%

BANK OF Ireland reduced the maximum stake the Government might take in the lender to 69 per cent after a majority of subordinated bondholders took up shares in a debt-for-equity-or-cash offer.

AIB, meanwhile, said it expected the State’s stake in the bank to “increase substantially” from 93 per cent, further diluting the investments of shareholders.

New shares were likely to be issued to the State at “a very significant discount” to the current share price and talks with the Government are expected to be finalised next week, the bank said.

The bank expects to remain a publicly quoted company, which would allow shareholders to continue to trade their shares.

AIB must raise €13.3 billion by the end of the month; Bank of Ireland needs €5.2 billion, including €1 billion in contingent capital.

Bank of Ireland said it expected to generate at least €2 billion from an “early bird” offer in its liability management exercise (LME) with the bondholders, based on early indicative results.

There was a 72.4 per cent take-up among eligible bondholders, of which 95.4 per cent are taking shares and 4.6 per cent are opting for cash.

“There are still a lot of assumptions to be made as to the level of dilution for the bondholders,” said Cathal O’Leary, head of fixed-income sales at NCB Stockbrokers.

“But on the face of it, it looks like a very good take-up. The bank has gone a long way to raising the amount of capital that they need.”

Bank of Ireland bondholders were offered 20 cent or 40 cent in the euro in a debt-for-equity swap, depending on the type of subordinated bond they hold, or 10 cent and 20 cent in the euro for cash.

The bank, which is 36 per cent owned by the State, is seeking to raise more than €2.1 billion from bondholders and up to €2.2 billion in a follow-up rights issue to raise a capital bill set by the Central Bank after stress tests last March.

“We are pleased with the successful outcome thus far of the LME and, in particular, the very high demand for equity in the bank,” said the company.

“This represents the first step in our capital raising proposals and significantly reduces the amount of capital we will be seeking to raise from the rights issue or other sources of capital.”

Minister for Finance Michael Noonan said he expected to generate more than €6 billion from inflicting losses on junior bank bondholders and the sale of bank assets, including the life business of Irish Life Permanent.

Bank of Ireland’s deal covers €2.6 billion of subordinated debt.

The early bird offer applied to two of 19 bonds that are subject to the deal.

Other bondholders have, with the exception of investors in a Canadian dollar bond, until Thursday, July 7th, to participate.

The bank will announce the final results and the size of the rights issue on July 8th before an extraordinary shareholder meeting on July 11th to approve the sale of shares.

The early take-up among bondholders suggests that some investors purported to be involved in a legal challenge against the bank’s deal have tendered for the offer.

Law firm White Case, which is contesting the bank’s offer in the High Court in London, has said that it represents investors with $1 billion (€700 million) of debt.