AIB bondholder withdraws challenge to state’s burdening-sharing scheme

A JUNIOR bondholder in AIB withdrew its challenge to a state-backed burden-sharing scheme yesterday as the Government forged ahead with plans to recapitalise the state-owned lender.

The Government is bidding to impose losses of up to €5 billion on junior bondholders across the sector to help fund a €24bn bill to recapitalise struggling lenders.

New York-based firm Aurelius Capital withdrew its High Court challenge against a Government order to impose losses of up to 90% on subordinated bondholders in AIB, which the Government said will bring in more than €1.6bn.

AIB later released a statement detailing how the Government would put in the remainder of the €14.8bn of capital the bank is required to raise, increasing the state’s holding in the bank to 99.8% from 93.5%.

Aurelius said it had reached an “amicable resolution” with the state, but both sides said they would not release the terms of the settlement.

The withdrawal marks a successful completion of the Government’s burden-sharing plans for AIB, but the lack of a comprehensive legal victory may leave the door open for legal challenges by bondholders in other banks.

“This outcome may encourage subordinated bondholders in Bank of Ireland on the basis this investor was treated more favourably because they took a more aggressive approach,” said Michael Cummins, a director at Glas Securities.

“But as we don’t know any details of the amicable resolution, all we can do is speculate.”

Aurelius was challenging a new financial law the Government is using to impose losses on junior bondholders in Bank of Ireland, EBS Building Society and Irish Life & Permanent.

A large group of Bank of Ireland bondholders have said they are considering legal action against the government plans.

The Government last week took over Irish Life & Permanent and is winding down failed lenders Anglo Irish Bank and Irish Nationwide, meaning Bank of Ireland has one month to avoid making it a clean sweep of state-controlled banks.

The bank has raised nearly half of its €4.2bn in required capital from a debt-for-equity swap, but analysts say that it will struggle to avoid majority state ownership. A rights issue this month is expected to get a muted response.

The Government, which effectively nationalised AIB late last year in the face of mounting property losses, had squeezed the €1.6bn out of investors holding AIB’s junior paper before Friday’s order.

Any losses suffered by Aurelius are not expected to increase that figure significantly.