AIB debt exchange will improve quality of capital in reserves

ALLIED IRISH Banks (AIB) has bolstered the loss-absorbing capital in its reserves by approximately €1 billion following a debt swap.

Under the exchange, the bank will issue €1.3 billion worth of new, lower tier 2 debt in exchange for €2.4 billion of bonds which were discounted at between 50 per cent and 67 per cent of their face value.

Effectively the bank is swapping discounted riskier debt for more secure debt.

Demand from investors was higher than had been expected and analysts estimated the take-up at around 80 per cent.

The exchange is part of the bank’s strategy to raise an additional €1.5 billion in capital, on top of the €3.5 billion recapitalisation from the State in return for a 25 per cent stake, to help it absorb losses from property lending.

In April, AIB said it would consider disposing of its 24 per cent stake in US bank MT Bank and its 70 per cent share in Poland’s Bank Zachodni to boost its capital reserves.

The debt exchange will improve the quality of the capital in AIB’s reserves, but will not increase its overall capital.

The 12.5 per cent coupon on the new, lower tier 2 debt will cost the bank an estimated €90 million per annum, according to brokers.

NCB Stockbrokers analyst Ciarán Callaghan said the disposal of its stake in MT could generate an additional €300 million, leaving AIB only €200 million short of its €1.5 billion target.

“This raises the prospect that with potential property and asset disposals the group may raise its planned €1.5 billion prior to the end of 2009 without having to sell its prized Polish asset BZ WBK.”

Davy analyst Scott Rankin said AIB may have to write down €6 billion on an estimated €30 billion of assets that it will hand over to National Asset Management Agency at a discount.

That writedown would send the bank’s core equity ratio so low that even after disposing of assets it would likely end up below the level required by regulators, he said.

“Assuming a minimum requirement of say 5 per cent, AIB would need to raise €1.3 billion of equity,” he said.

“If the provider of this capital was the Irish Government, rather than existing shareholders, this would give it a stake of 51 per cent.”

Shares in AIB closed down 13 per cent at €1.74 in Dublin last night, giving the bank a market value of €1.5 billion.

Irish and British banks are taking advantage of steep discounts in debt markets to buy back bonds or exchange them for more secure debt.

Bank of Ireland recently bought back debt in a similar deal, although in this case the take-up among investors was 55 per cent and the buy-back was cash-based.