JUNIOR bondholders in AIB have been offered 10%-25% of the value of their investment, in the first of a series of moves to force investors to share the burden of bailing out local banks.
The Government is pushing on with a plan to generate around €5 billion by imposing losses on subordinated bondholders in the banks despite a legal challenge by investors in state-owned AIB.
If the AIB offer were fully subscribed it would generate around €2bn, the bank said.
Finance Minister Michael Noonan said holders of the AIB securities, which have a nominal value of €2.6bn, were getting a reasonable deal.
“The offer prices and the terms of this liability management exercise are fair and balanced relative to the capital requirements of the bank and the level of financial support, which the Irish state has so far provided to AIB,” Mr Noonan said.
AIB has also said it will not pay any interest on the securities. If bondholders do not accept the offer they will get 1 cent for every €1,000 of debt they hold.
“There is no great shock here,” Dolmen Securities bond trader Gavin Curran said. “They had been talking about trying to get about €2bn from AIB from this and, looking at this, it looks like they are going to come in somewhere around that.”
Junior Irish bank debt is trading at a heavy discount in the secondary market, with lower tier two bonds in Bank of Ireland trading in the mid-60s percentage points amid speculation the lender will offer a debt for equity swap.
Bank of Ireland is battling to remain outside majority state control and there has been speculation that, in addition to a debt for equity swap, it is also considering a rights issue and a private placement.
Dealers said the market did not expect Bank of Ireland subordinated bondholders to be treated as harshly as other lenders.
“Bank of Ireland is the only one hanging in there. They have come off about 1 or 2 points on this news,” said Mr Curran. “It seems unlikely that they are going to give them a haircut that low (around 80%).”
The High Court will hear a challenge to the Government’s moves against AIB’s junior bondholders on June 2 by two investors who hold three of the 18 liabilities covered by the state’s order.
Mr Noonan said the legal action was unfounded and would not deter the Government seeking contributions from private investors in AIB as well as Bank of Ireland, EBS and Irish Life & Permanent.
Ireland has until the end of July to pour another €24bn into the banks on top of €46bn already swallowed by the lenders.
Irish Life & Permanent said it had hired Deutsche Bank to advise on the sale of its life business as part of efforts to reduce its own capital bill of €4bn.