INTERNATIONAL INVESTORS may mount a legal challenge to the Government’s plans to buy back debt from subordinated, or junior, bondholders in AIB at a significant discount.
On Thursday, the High Court issued a subordinated liability order under the Government’s bank restructuring law, the Credit Institutions (Stabilisation) Act 2010, which will enable it to change terms, conditions and maturity dates on certain subordinate debt instruments. However, according to Bill Blain, a strategist at brokerage firm Newedge Group in London, not all bondholders may be willing to accept the offer.
“It’s quite likely that a number of international global investors will be exercising potential legal challenges,” he said, adding some hedge funds already had legal counsel on standby. In 2009, the UK government followed a similar path when it nationalised Bradford Bingley and then deferred interest on subordinated bonds, but this led to legal challenges.
According to Minister for Finance Michael Noonan, junior bondholders in AIB could be offered a discount of as much as 80 per cent, or 20 cent on the euro, but the actual figure will be up for negotiation. Indeed, some market sources say that, given that a similar haircut was applied to bondholders in Anglo Irish Bank, the 20 cent figure might be just an opening bid, with bondholders actually being offered closer to 25 cent.
It is now expected that instead of offering to buy back Bank of Ireland’s €2.7 billion in outstanding subordinated debt, a debt-for-equity swap will instead be pursued. Such a move would dilute the State’s potential ownership, and therefore possibly improve the bank’s chances of retaining a majority private listing – while at the same time helping it meet its capital raising requirements.
“Equitisation of the subordinated debt could yield over half of the bank’s outstanding €5.2 billion equity raise requirement and contribute to the objective of limiting State ownership below the 50 per cent threshold,” said Stephen Lyons, a credit analyst with Davy Stockbrokers in a report yesterday. He added such a move would also enhance the bank’s prospects of sourcing new outside equity.
However, an incentive is likely to be needed to encourage bondholders to agree to the swap.
Although the Government is stepping up its action on junior bondholders, it has reaffirmed it has no plans to impose burden- sharing on senior debt bondholders.
