AIB 'may avoid' £21m payment

Allied Irish Banks has secured an interim High Court order which may allow it to avoid making a £21 million payment to junior bondholders.

That coupon payment was due to be made tomorrow but following a decision by Mr Justice John Cooke today the funds will instead be lodged in court pending the outcome of a challenge by a Cayman Islands investment firm to an order secured by the Minister for Finance last April.

That subordinated liabilities order, if upheld by the court, will permit AIB not to pay the coupon at all.

The order allows the Minister to change terms, conditions and maturity dates on AIB’s subordinated bonds, lift restrictions on buybacks and reduce the value of the bonds so as to encourage bondholders to take up a debt buyback offer which had a take-up deadline of June 13th. Under the buyback, AIB will impose losses of as much as 90 per cent on subordinated bondholders.

Aurelius Capital Master Ltd, along with some linked firms, has challenged the order in proceedings against the Minister for Finance which opened earlier this month before Mr Justice Cooke. AIB previously consented to the making of the order.

Earlier this week, Paul Gallagher SC, for AIB, asked the judge for permission to apply to the court for liberty to bring an application to suspend the June 25th coupon payment pending the outcome of the Aurelius case.

If the Aurelius challenge fails, the bank could avoid making the coupon payments but, as the case was continuing, the bank wanted directions from the court as the payments were due, counsel said. The bank was prepared to consider paying the relevant sum into an escrow account pending the outcome of the case, he added.

Mr Justice Cooke allowed Mr Gallagher bring the application today when it was strongly resisted by Aurelius. Bondholders represented by Aurelius stood to gain about half of the £21 million coupon payment.

Moving the application, Mr Gallagher argued provisions of the Credit Institutions Stabilisation Act 2010 provide that no event of default arose if a coupon payment was suspended and paid into court pending the outcome of the legal challenge to the order.

He agreed with the judge the best way to approach the matter was to join AIB as a notice party to the Aurelius action.

Counsel also agreed, if the coupon was paid and Aurelius lost its challenge, the coupon monies would in the interim have been diversified to a number of unidentified people.

Declan McGrath, for Aurelius, argued AIB had no legal standing to bring the application and the court should refuse to join it as a notice party to the proceedings. AIB had a contractual obligation to pay the coupon and was seeking the court order in an effort to be "immunised" against an event of default, he said.

Counsel also submitted the order did not require AIB not to pay the coupon. All the order did was to alter "must pay" to "May pay", he said. Even if the coupon money was paid into court, AIB would be in breach of contract with the bondholders and would commit an event of default, he also argued.

Maurice Collins SC, for the Minister, supported AIB's application, and also disputed Mr McGrath's argument that, if the April order was upheld, it would only come into effect from the fate of the court's decision on the Aurelius case. If Aurelius lost its case, the order was affective from April 22nd last, counsel said

In his decision, Mr Justice Cooke said he would join AIB as a notice party to the case and was also satisfied to make the order for the coupon monies to be paid into court.

There was a live dispute between the sides about whether the monies were recoverable and it was clear, if Aurelius lost its case, the liability to pay the coupon would have been extinguished on April 22nd, the judge said. It would meet the interests of both sides to direct that the coupon amount be paid into court pending the outcome of the proceedings.

He added he would give a full reasoned judgment on Tuesday. He noted Aurelius was only representative of some of the affected bondholders and directed the other bondholders affected by his order be given notice of it. Citibank London was an agent for other bondholders, the court heard.

When Mr Gallagher asked the judge to also rule his order was effective for the purposes of the EU CIWUD (Credit Institutions Winding Up) Directive, meaning AIB's position would be protected across other EU states, this was strongly opposed by Mr McGrath who said his side had no notice of such an "audacious" application.

Mr Gallagher said he was "alarmed" by Aurelius' attitude which appeared consistent with an intention to take action in other EU member states. This made him all the more anxious that the court's order was effective for the purposes of CIWUD.

The judge said he wanted the consider the CIWUD issue further and would rule on that next week but would make a provisional CIWUD protection order returnable to Monday next.

Aurelius had argued its action prevents the coming into effect of the entire order but on June 9th last, Mr Justice Cooke agreed with lawyers for the Minister the challenge was limited to those parts of the SLO relating to the Aurelius bonds - two categories of securities out of 18.

The case continues on Monday.