Lenihan to inflict pain on investors

FINANCE Minister Brian Lenihan is about to inflict more pain on bank investors. Unless they take it, analysts say worse may follow.

Junior bondholders in Dublin-based Allied Irish Banks Plc will decide this week on an offer to buy back more than $5 billion of subordinated debt at 30% of face value.

Analysts at BNP Paribas SA recommend investors accept the package or risk getting “the stick” after the Government passed laws allowing it to reduce payments to bondholders.

“The draconian powers granted to the Irish finance minister in December are a game-changer for subordinated bondholders in Irish banks,” said Ivan Zubo, a London-based credit analyst at BNP Paribas. “Clearly, there is a risk that the more drastic powers could be used, if Allied Irish needs more capital in the future.”

Costs to insure the subordinated debt of Allied Irish, the country’s second-biggest bank, was 63.5% upfront and 5% a year as of January 14, meaning it cost €6.35 million in advance and €500,000 annually to protect €10 million of debt for five years, CMA prices in London show. That compares with 21.7% upfront three months ago.

The country is taking control of Allied Irish, making it the fourth lender seized by the state as bad debts threaten to topple the country’s financial system. Lenihan said on January 12 in the Dáil that after Allied Irish bondholders take “whatever pain is inflicted upon them”, it will have a “material bearing” on the cost of saving the bank.

European leaders and regulators worldwide are considering steps that would force bondholders to share a larger proportion of costs from any future banking bailouts. European Union leaders agreed last month to set up a permanent crisis resolution system in 2013.

Mr Lenihan introduced laws last month allowing it to force junior bank bondholders to share losses. The new legislation allows the minister to issue orders to change interest and principal payments to bondholders and suspend their rights to payment.

The Government “has shown its willingness to enforce losses,” Alexander Plenk, a Munich-based analyst at UniCredit SpA said in a January 14 note to clients, urging debt holders to accept Allied Irish’s offer. “We recommend accepting the offer, as a second offer will be made under worse conditions.”