Banks unveil plans to make bondholders share burden

BANK of Ireland, Irish Life & Permanent (IL&P) and the EBS Building Society have announced plans to make bondholders contribute to their recapitalisation needs, thus reducing the amount of extra funding likely to be needed from the state.

The institutions — which need to raise €5.2 billion, €4 billion and €1.5 billion, respectively, in order to meet the most recent Central Bank stress test/capital requirements — are basically adhering to Government wishes.

Finance Minister Michael Noonan has said he wants to see holders of subordinated/high interest rate-linked bonds in the banks share a considerable amount of the burden associated with the overall recapitalisation effort.

Bank of Ireland is looking for holders of its subordinated bonds, which are at most risk of not being repaid, due to their higher rates of interest, to contribute “a significant element” of its capital requirements and incur losses of as much as 90% on their investment in some cases.

It is hoping to raise around €2bn from junior bondholders. This would be done by buying back debt at between 10% and 20% of its original value.

The bank said it may also offer a debt-for-equity deal with bondholders; a move which would also lower the state’s current 36% shareholding.

IL&P is hoping to raise around €670 million from buying back debt from junior bondholders at an 80% discount.

The EBS, meanwhile, is also looking to buy back around €260m of subordinated bonds for 10%-20% of their original value.

The banks said they will launch their liability management exercises (LMEs) shortly.

It is too early to forecast the actual combined monetary losses for bondholders until the full take-up of deals are known.

Some experts have suggested that bondholders could take legal action against the banks.

However, in response to yesterday’s moves, Minister Noonan said the levels of burden-sharing are the minimum levels acceptable to Government and action will be taken if they are not successful.

He said: “If these LMEs fail to deliver the expected core tier-1 capital gains to each of the banks, the Government will take whatever steps are necessary under the Credit Institutions (Stabilisation) Act, or otherwise, to ensure that burden sharing is achieved.”

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