Banks to burn junior bondholders

Bank of Ireland, Irish Life & Permanent and EBS have confirmed plans to make subordinated bond holders help with the cost of recapitalising the institution.

Bank of Ireland said it will offer subordinated bond holders a debt for equity swap at discounts of up to 90 per cent. The liability management exercise affects about €2.6 billion of subordinated liabilities.

"The terms of the liability management exercise will reflect the Minister for Finance's objective of ensuring subordinated bondholders contribute a significant element of the bank's Core Tier 1 capital requirement of €4.2 billion," Bank of Ireland said in a statement.

The bank's said it expects the cash prices will be 10 per cent of nominal value for Tier 1 securities and 20 per cent for Tier 2 securities. There will be no payment in respect of accrued interest.

The scheme also includes proposals to amend the terms of the relevant subordinated liabilities to grant a call option. This will allow Bank of Ireland to acquire the securities for a cash amount less than the terms already offered to bond holders.

"The bank may also offer an equity alternative to subordinated bondholders incorporating both a premium to the cash alternative and a payment in respect of interest accrued," it said.

In respect of debt not acquired or exchanged, the bank said it understood the Government would take "whatever steps it considers necessary to maximise burden sharing".

"People were playing them for a debt-for-equity swap so with the uncertainty over that some investors are getting out,"said Oliver Gilvarry of Dolmen Securities. "We were expecting that was going to be a key part of the whole deal."

In separate statements, Irish Life & Permanent and EBS Building Society also said they would impose losses
equivalent to around 80-90 per cent of the face value of some €1.1 billion in junior bonds.

"These financial institutions are remaining solvent due to the ongoing overwhelming financial support of the state,
without this support subordinated bondholders' entire investment would have been irrecoverable," Minister for Finance Michael Noonan said in a statement.

Additional reporting: Reuters