High Court backs burden-sharing move

FINANCE Minister Michael Noonan has welcomed the backing of the High Court to take whatever action is needed to force AIB’s subordinated bondholders to share the burden of debt with the bank.

This is part of his stated aim to recoup between €5 billion and €6bn on Irish bank debt, forcing bondholders to take an 80% hit.

A High Court hearing yesterday approved Mr Noonan’s order aimed at ensuring burden sharing by bondholders in the re-capitalisation of AIB. Mr Justice Brian McGovern said it would be possible to issue a subordinated liability order under the Credit Institutions (Stabilisation) Act 2010.

This act provides for changes to be made to subordinated debt coupon terms and maturity dates for subordinated liabilities of the bank. It will also permit the purchase by AIB of debt instruments.

The intention of the move is that subordinated debt holders will share in the capitalisation of AIB and reduce the burden on the taxpayer, the court heard.

In the case of “dated” subordinated bondholders, the date when they have to be repaid has been extended to 2035, rather than at various dates from 2017 under the old arrangement, Brian Murray, counsel for the minister, said.

It is expected that Mr Noonan will extend this ruling to other banks in the near future, including Bank of Ireland, Irish Life and possibly Anglo Irish Bank.

The Subordinated Liability Order gives the minister the clout to force subordinated bondholders in AIB to take a substantial hit on their loans.

In effect it should force bondholders to sit down and negotiate better terms on their bonds with AIB which has over €2.5bn outstanding in subordinated bonds.

To date, the banks have negotiated on a voluntary basis on certain debt due to bondholders and Bank of Ireland in the past has recouped about €2.5bn as a result of some of its lenders voluntarily agreeing to take a loss on their bonds.

The order amends certain subordinated debt coupon terms and maturity dates and permits the purchase by AIB of bonds issued to the bank by big lenders in recent years.

This should force bondholders to sit down and negotiate with AIB on what they will accept in payment for outstanding bonds.

If they refuse, the finance minister can change the rates being charged by the lenders to the bank and also lengthen the payback terms.

The minister said: “The Government’s announcement of March 31 set out that the Government will take all the steps it can to reduce the high level of capital required by the financial institutions from the taxpayer.

“Today’s action is intended to ensure that AIB’s subordinated debt holders share the burden of the capital position of AIB and reduce the level of capital sought from the taxpayer.”

Previously, the minster said he believed between €5bn and €6bn could be saved if bondholders were forced to share the burden of debt now imposed on the taxpayer since the collapse of the Irish banks in September 2008.

This exercise will result in subordinated bondholders “making an appropriate contribution to the cost to the state of providing additional capital to AIB while providing them with an additional opportunity to voluntarily exit their investment in AIB in a way that will generate material capital for AIB,” Mr Noonan said.

He threatened those bondholders that the Government will take “whatever other action is necessary to ensure appropriate burden sharing by remaining subordinated bondholders.”

Mr Noonan has, however, backed off from his threat to burn senior bondholders when it became clear that the EU would not support such a move.

It is expected that bondholders in Bank of Ireland and Irish Life & Permanent and possibly Anglo will suffer the same treatment now planned for AIB’s subordinated bondholders, if the Government is to achieve the savings on bank debt repayments it has targeted.

The judgment has been made at a time when AIB, which is effectively 92.8% owned by the state, is unable to raise capital from the equity markets as a result of the performance of its underlying business.

Its options for doing so are to further sell off some of its assets, financial arrangements with bondholders, or to attempt to receive more money from the taxpayer, the Department of Finance has stated.

While further help will be needed from the taxpayer, which has already put €7.2m into the bank, the object of the SLO is to achieve more burden sharing from the holders of AIB’s subordinated liabilities, the Government’s financial arm has argued.

If this exercise is not successful, the Government also intends “to take whatever other action is necessary to ensure appropriate burden sharing by remaining subordinated bondholders.”