Forced sale of AIB bonds unfair, investor group tells High Court

A “MARKET-BASED solution” to taking out junior bondholders in AIB should have been adopted by the Government rather than seeking a court order forcing them to sell at huge losses, a Cayman Islands investment firm representing bondholders has told the High Court.

Mr Justice John Cooke heard yesterday that Aurelius Capital Master Ltd, which, along with some linked firms, is challenging the Subordinated Liabilities Order (SLO) obtained from the court last April, bought its AIB bonds in January.

The SLO allows Finance Minister Michael Noonan to change terms, conditions and maturity dates on AIB’s subordinated bonds, lift restrictions on buybacks and reduce the value of bonds to encourage bondholders to take up a debt buyback.

Under the buyback, AIB will impose losses of as much as 90% on subordinated bondholders.

John Gordon SC, for Aurelius, said JP Morgan had advised to go first to a “market-based solution”, perhaps accompanied with a “government health warning” that such a solution might be followed by an SLO.

Instead, Mr Noonan secured an SLO under the Credit Institutions Stabilisation Act in April without engaging in any consultation with subordinated bondholders, he said.

Mr Gordon read from a number of documents, discovered by the state, including documents from JP Morgan advising AIB on Liability Management Exercises (LMEs).

Those documents showed AIB was advised in December 2010 not to make an upcoming LME of January 2011 available to US bondholders, counsel said. There was also advice as to how the January LME should be pitched to bondholders.

It was clear from the documents that the take-up of the January LME — about 50% — met AIB’s highest expectations, counsel said. This was contrary to the impression given to the High Court last April that the January LME was “not particularly successful”.

Another document of February 2011, compiled after the January LME was completed, referred to a JP Morgan draft proposal for another “conclusive” LME, counsel said. The issue was whether AIB should pursue a stronger “take it or leave it” LME.

The advice noted that the majority of remaining bondholders in AIB were likely to be “fast-money funds”. JP Morgan also referred to a large amount of “real-money exiters” from AIB and a market expectation that the Government was likely to take some statutory action.

JP Morgan, Mr Gordon said, was proposing the “small measured step” of going first to a market-based solution. For reasons Aurelius was unaware of, the Government went instead for the “large unexpected step” — an SLO — without the intermediate step.

Another document referred to some investors who held out on taking part in the January LME, having taken “a legal view rather than a credit-based view” and being prepared to take “a legal bet”. When the judge asked what that meant, Brian Murray SC, for the state, said the document was clearly stating some people were “taking a bet” on whether an SLO would be invoked by the Government.

Earlier, Mr Gordon had complained that the state’s approach to discovery issues was “disgraceful” and asked the judge to stop the case and order the state to comply with discovery orders.

His side was being treated “very unfairly” as documents were being discovered and being unredacted even as he was opening the case. He was left wondering “what is going to happen next”, he said.

Mr Murray said he took the gravest exception to this “splenetic criticism” of the state’s approach to discovery and argued the state complied with discovery orders.

Aurelius “from the start, has been a litigant in search of a case and they still haven’t found one”, Mr Murray said.

Mr Justice Cooke said he would deal with discovery matters as the issues became clearer, he said.