Burden-sharing move fails to excite markets

REACTION:THERE WAS a relatively muted reaction on bond markets yesterday to the announcement that the Government will have the power to make holders of the subordinated debt of Irish banks take a writedown on their investment.

The imposition of burden-sharing had been mooted in the memorandum of understanding drawn up between Ireland and the IMF- EU and, to an extent, had been “priced” in by the market.

Michael Symonds of Daiwa Capital Markets in London said yesterday’s legislation was not unexpected. However, he pointed out that it was questionable whether the decision to impose losses on subordinated bondholders would bring much economic benefit to the State in the long run, considering the relatively small amount of Irish bank subordinated debt in existence relative to banking system assets.

There is approximately €10 billion of Irish bank subordinated debt in existence, comprising about €4.75 billion in AIB and just over €4 billion in Bank of Ireland subordinated debt.

Last week, Bank of Ireland announced a debt exchange tender for up to €1.5 billion of its lower tier two debt, at a discount of between 46 and 58 per cent, which will help the bank to meet its capital requirements.

AIB has yet to announce such a scheme, but analysts said yesterday’s legislation implied that if some kind of debt exchange exercise was not implemented voluntarily, it would likely be imposed.

The value of Irish bank’s subordinated debt has fallen dramatically recently.

Last night, AIB’s 12.5 per cent subordinated debt due in 2019 was trading at 28.65 cent on the euro down from 29.33 the previous day. The debt was trading at just over 90 cent to the euro six weeks ago.

Similarly, Bank of Ireland’s 10 per cent debt, due in 2020, was trading at 55.27 yesterday, down from 55.36 the previous day. This compares to a price of 94 cent in the euro two months ago.