Bank of Ireland makes €405m capital gain in debt swap

BANK OF Ireland has made a €405 million capital gain in a debt swap by offering existing bondholders the same type of securities in exchange for their old bonds but which pays them a higher rate of interest for a longer period.

The exchange means that the bank makes an upfront capital gain but faces a higher interest bill on its debt over a longer period.

The bank made the offer to investors across five lower-tier-two securities with a face value of €2.9 billion. Investors holding €1.62 billion accepted the exchange, representing a take-up of 56 per cent. It offered two new lower-tier-two bonds worth €1.2 billion making the capital gain. The bank exchanged the bonds at an average discount of 26 per cent.

The swap represented “a meaningful step in strengthening Bank of Ireland’s balance sheet and capital position”, the bank said.

The new bonds will pay a coupon of 10 per cent and mature in 2020 compared with an interest rate of 9 per cent on the old bonds.

The bank said the exchange would have increased its core tier-one ratio, a gauge of a bank’s loss-absorbing capital, to 7 per cent at September 2009, compared with the 6.6 per cent reported.

Ciaran Callaghan, analyst at NCB Stockbrokers, said that it was unusual for the same type of bonds to be swapped to generate capital.

“It is an unexpected gain for shareholders and limits the potential for a cash call,” he said.

He estimates the bank will require a further €2.05 billion to reach a 7 per cent ratio after taking losses on €16 billion in loans moving to the National Asset Management Agency. The bank owes €3.4 billion on 10 lower-tier-two bonds after repaying a €750 million 10-year bond this week.

The bank generated €1 billion of capital last year buying back debt at steep discounts, while AIB made €1.1 billion exchanging different types of debt in a bond swap.

Davy stockbrokers has estimated that Bank of Ireland can make another €600 million on further liability management deals to help generate €2.2 billion in capital the firm believes the bank requires, while AIB could generate a more modest €200 million from liability management out of the €4.1 billion required by the bank.