Government eyes BoI junior debt

THE Government is considering wiping out the value of some junior bonds in Bank of Ireland (BoI) to ensure the lender generates €350 million in additional capital by the end of this year.

Finance Minister Michael Noonan said he was considering applying to the courts for an order forcing losses of up to 100% on over €400m worth of subordinated debt.

He has asked interested parties to make submissions on the possible move by the end of November.

The Government has used emergency powers before to impose losses on junior bondholders in state-controlled Allied Irish Banks and had signalled it would seek junior debtors in BoI to swallow more losses after some of them refused to take up previous discounted buyback offers.

Some analysts said a complete wipeout of the bonds’ value would be an aggressive move.

“The surprise is potential losses of up to 100%. I would be very surprised at that. You would think they would come in instead at the 80% mark,” said Ryan McGrath of Dolmen Securities.

“The size is quite small and the precedent has already been set on junior debt. Investors may just view it as the final stages of the haircuts on the junior debt. I don’t think they will be shocked by it,” he said.

While Ireland has refused to force losses on banks’ senior bondholders for fear of triggering contagion in other eurozone countries, billions has been raised towards the cost of bailing out the banks by imposing losses on junior debt.

BoI has generated around €4.5bn of capital since 2009 by exchanging junior debt for cash or equity at discounts of up to 90% of face value. About €600m of BoI’s subordinated bonds remain outstanding.

The lender offered on Monday to buy back up to €1bn worth of mortgage debt at a significant discount to help meet its capital targets under an EU-IMF bailout.

Stress tests in March showed BoI needed to raise an additional €4.2bn in core Tier 1 capital to bullet-proof its balance sheet against future property-related losses.

So far, it has generated €3.85bn towards that goal, most of it by imposing losses on junior bondholders and through a €1.1bn investment by a group of North Americans who now own 35% of the bank.

Relations between the Government and BoI have deteriorated in recent weeks after the lender, in which the state holds a 15% stake, refused a request from Taoiseach Enda Kenny to pass on a recent European Central Bank (ECB) rate cut to holders of its variable mortgage products.

BoI is the only Irish lender to avoid falling into state control after a disastrous property crash and was the only domestic bank in receipt of government support to refuse Mr Kenny’s request.

One analyst, who declined to be named, said Mr Noonan’s announcement on BoI’s junior bonds, coming on the heels of the spate over mortgage rates, might be interpreted by some as the state flexing its muscles.