AIB repayment to cut national debt

Finance Minister Michael Noonan has insisted the €1.7bn AIB is to return to the State will be used to reduce the national debt.

Mr Noonan made the comments after AIB received approval from the European Central Bank’s supervisory arm for its plan to begin repaying the money.

EU budgetary rules mean there is no other use that the money can be put to other than to pay down the debt, Mr Noonan said.

“As a consequence, of course, it will have a small impact on the total interest we pay on the national debt,” he said.

“But principally since the money was borrowed in the first instance to allow the taxpayer to bailout AIB, the money will be paid back to alleviate that borrowing burden.”

The bank will redeem part of the State’s €3.5bn of preferred stock, with the rest converted to equity, AIB said.

Update-Ireland sees surplus on AIB bailout as repayments begin https://t.co/OZw53SsG0W via @ReutersDublin

— Padraic Halpin (@padraichalpin) November 6, 2015

The payment will be partly funded by AIB issuing subordinated bonds for the first time since the 2008 crisis led to its €20.8bn bailout. The lender will sell at least €750m of Tier 2 bonds and €500m of Additional Tier 1 notes.

“This is a key step on the path to the Government realising its investment in AIB in full and is a real success story ahead of an upcoming national election early next year,” said John Cronin, analyst with Investec.

Mr Cronin described it as a “significant milestone for AIB in advance of a much-awaited share sale transaction in 2016”.

The repayment will be the lender’s first step toward its goal of returning the entire amount to the Government.

The initial amount will be delivered “in the coming months”, the Department of Finance said.

Junior bondholders in the bank suffered €5bn of losses between 2009 and 2011 as the bank’s bad loans surged following a real-estate collapse.

“With AIB back to profitability and recording strong growth in lending to Irish businesses and consumers, I am confident that the bank can play a vital role in facilitating the continued growth in the Irish economy,” Mr Noonan said.

“The changes announced today also lay the groundwork for the Irish taxpayer to ultimately recover the full value of their €20.8bn investment in AIB.”

The State will recover an additional €1.6bn from AIB in July as its 2011 investment in contingent convertible notes matures.

Mr Noonan said the timing of a share sale in the 99.8% state-owned bank will be a decision for the next government, following national elections due in the first quarter of next year.

The State could raise over €3bn next year through the sale of a 25% stake in the bank, said Fiona Hayes, an analyst at Cantor Fitzgerald.