Action of bondholders ‘entirely unfounded’

A HIGH Court challenge by holders of a portion of €2.6 billion worth of Allied Irish Bank (AIB) subordinated bonds, to prevent the Irish Government “burning” 80% of their holdings, is “entirely unfounded” according to Finance Minister Michael Noonan.

Sat, 23 Apr, 2011 - 01:00

Conor Keane, Business Editor

Abadi & Co and Aurelius Capital Management have filed challenges in the High Court after the securing of a court order on April 14 by the Government changing the terms and conditions of subordinated securities in AIB. It is understood that Aurelius holds €100 million in subordinated AIB bonds.

The court gave the Government the power to force massive losses on AIB subordinated bondholders. The challenge is scheduled to open in the High Court on May 9. A spokesman in the Finance Department said yesterday: “Two challenges from subordinated bondholders have been received. The minister considers that these challenges are entirely unfounded. They will be dealt with by the High Court in due course.

“The Government remains fully committed to its previously stated goal of burden sharing with subordinated bondholders, ideally in a market-based manner, as part of the overall process of recapitalisation of the banks.”

The Abadi & Co and Aurelius challenge will be a landmark case and will be closely watched by the holders of €6.94bn outstanding subordinated bonds in the six guaranteed lenders. Central Bank figures indicate there are €2.6bn in subordinated bonds at AIB and €2.75bn at Bank of Ireland.

The Government is hoping to increase the covered banks’ capital by about €5bn by wiping out up to 80% of the €6.94bn in outstanding subordinated bonds. AIB subordinated bonds have recently traded at levels that suggest the Government goal of discounts of as much as 80% will be achieved.

However, Bank of Ireland subordinated bonds were trading at much higher levels, indicating the market feels another arrangement, such as an equity- for-debt swap, might be agreed between bondholders and the bank, instead of a Government/court imposed solution.