AIB bondholders can claim for losses
Last week, AIB ceased interest payments on some bonds and postponed their repayment dates — a move which led international trading watchdog the International Swap and Derivatives Association (ISDA) to declare a “credit event”.
That term relates to any event — debt restructuring, breaches of bond covenants, payment default — that casts doubt over an issuer’s ability to service its debt, and which can trigger a payout on credit derivatives (financial contracts aimed at protecting against the risk of a borrower going bust).
The ISDA judged AIB’s act to be a debt restructuring — when it suspended interest payments and extended maturities on most of its outstanding junior debt ahead of a buy-back/ bondholder burden-sharing exercise that will result in investors suffer up to 90% losses on their debt investments.
Last year, sellers of credit default swaps for Anglo Irish Bank paid out around 82% of the subordinated debt they offered insurance on after it was decided the nationalised lender would not fully meet its obligations.
AIB’s attempt to make junior bondholders share the burden of its capital raising needs aims to raise around €2bn through heavily discounted debt buybacks.
However, the move is being challenged by a New York-based investor.
Investors in 15 of the 18 subordinated securities earmarked for the discounted buyback had until midnight last night to take up the offer or risk their investment being effectively wiped out.
Investors in the remaining three securities have up to July 20 to take up the offer.
The ISDA ruling means one or more auctions will be held to settle AIB credit default swaps, which had a net notional value of $507 million (€352m) last week, according to data from the Depository Trust & Clearing Corporation.
All of the main Irish banks have in recent weeks announced plans to make bondholders contribute to their recapitalisation costs.
* additional reporting by Bloomberg
