BANK OF Ireland is formulating a plan to allow its junior bondholders exchange €2.8 billion in debt for shares in the bank.

The plan would require approval from the Department of Finance. Neither the bank nor the Department of Finance would comment on the matter yesterday.

Any deal is expected to initially be offered to junior bondholders on a voluntary basis. Bondholders who do not accept could, however, have losses forced upon them.

The voluntary approach would allow the bank to avoid Minister for Finance Michael Noonan, seeking changes to the terms of the bonds in court, as he did for AIB’s subordinated debt. The AIB court order has since been challenged by two bondholders.

Davy analyst Stephen Lyons said he doesn’t expect subordinated bondholders to be offered advantageous terms, given the extent of burden-sharing demanded by the Government on debt investors at AIB. In that case, a discount of as much as 90 per cent of face value was imposed.

“Optics matter and the politics will play out strongly on this,” Mr Lyons said. “I can’t see how bondholders are going to get a very favourable outcome on this.”

Bank of Ireland is striving to raise as much capital as possible before resorting to funds from the Government, which already owns slightly more than a third of the bank. The Central Bank’s March stress tests left the bank with a €5.2 billion capital bill to meet by the end of July.

Tom Jenkins, an analyst at Jefferies International in London, said a debt-for-equity swap would probably be a better deal for the taxpayer than a straight cash tender. “It’s going to be very difficult to structure, given that some bondholders won’t be able to hold equity but it has the advantage of respecting the seniority of the various levels of investor,” he said. – (Additional reporting, Bloomberg)