Junior bonds hold key to AIB hitting target

AIB’s chances of raising the remaining €4.7bn of its end-of-February capital requirement may rely on holders of undated junior subordinated bonds in the bank being forced into a deal, according to new analysis from Davy Stockbrokers.

“In its authorisation of the €3.7bn recapitalisation of AIB, in December, to satisfy regulatory minimum capital requirements, the EC expressly indicated that subordinated bondholders must make a significant contribution to the bank’s restructuring cost,” Davy said.

AIB’s recent €2bn subordinated bond buyback leaves the bank with €4.7bn to raise in order to meet revised capital guidelines. Davy has suggested that the bank’s €775m worth of undated subordinated debt “will need to make a contribution towards this target”, adding that a debt-to-equity offering appears to be the only option and “coercive action” may be unavoidable.

“We believe that a non-coercive equity offering would attract a low take-up and isn’t supported by enticing equity valuation fundamentals, given the bank’s significant step-up in share count,” Davy said.

“A coercive action on undated sub-debt is a credible real threat, although the fate of the remaining lower-tier 2 instruments is less threatened after cumulative losses of up to 85% in this space,” it added.

Meanwhile, AIB’s first day on the ISEQ’s secondary exchange, the ESM, ended with it making a small 4% (1c) gain to close at 26c.

The ISEQ’s main exchange, the MSM, crept up by 0.9% yesterday to 2,935 points. Bank of Ireland shedding more than 6% to close at 32c and Irish Life & Permanent (IL&P) regaining nearly 3% to close at 85c.