Subordinated debt holders to face squeeze

ALLIED Irish Banks and Bank of Ireland are expected to put the squeeze on the holders of €9 billion of subordinated debt to help part-fund an extra €7.5bn in capital the Central Bank wants the country’s two biggest banks to put in place.

AIB needs to raise an additional €5.3bn to ensure it has sufficient capital to meet potential losses. It has €4.8bn in subordinated debt, which is trading at 35 cents. BoI needs to raise about €2.2bn and has about €4bn in subordinated debt trading at close to 50 cents in the euro.

Any cash raised will be on top of the €8bn to be pumped into Irish banks under the €85bn emergency loan package agreed with the IMF and the EU.

Bank of Ireland said it intends to seek to generate the required capital through a combination of internal capital management initiatives, support from existing shareholders and other capital markets sources.

Irish Life & Permanent also said it will raise an extra €100m to bring its Core Tier 1 capital rations above the new 12% target set for it, Allied Irish Bank and Bank of Ireland, by the Central Bank. The old target was 8%. AIB made no comment on their future capital needs and the loan package to Ireland.

Group chief executive of Irish Life & Permanent, Kevin Murphy, said that this further review confirmed the capital strength at the group and its unique position in the Irish financial marketplace. Irish Life has not availed of the state bailout and has not transferred bad loans to NAMA.

Mr Murphy expressed confidence that this strengthening of the capital position of the Irish banks would reassure international investors as to their ability to withstand the impact of the current recession.

Taoiseach Brian Cowen has indicated that AIB and BoI could like Anglo Irish Bank raise fresh capital by buying back subordinated bank debt at a discount.

Head of capital markets at Dublin-based Glas Securities, Fergal O’Leary, told Reuters: “The likelihood of a subordinated debt buyback or exchange is pretty much a certainty, along a similar basis to the Anglo Irish Bank debt buyback/exchange. They could generate a substantial amount of the capital required there.”

Credit Suisse analyst Niall O’Connor said the one problem with buying back your subordinated debt is that at some point you will need to reissue debt and the interest you pay on that will probably be higher.

“So a short-term capital-raising does have a long-term negative impact on profitability. It gets you off the hook now but the solution does have costs attached.”