Lenders agree to AIB's debt buyback

LENDERS WITH more than 86 per cent of the face value of debt on 15 AIB subordinated bonds have agreed to the bank’s debt buyback, which is expected to raise at least €1.6 billion towards the bank’s €13.3 billion capital bill.

AIB announced preliminary results for the buyback in relation to 15 of the 18 securities with a face value of about €2.3 billion.

Investors in the remaining three bonds, which have a face value of about €350 million, have until July 20th to tender for the offer.

Minister for Finance Michael Noonan welcomed the level of take-up among investors. “This high level of participation is encouraging,” he said.

The bank is imposing losses of as high as 90 per cent on subordinated bondholders and virtually nothing – one cent for every €1,000 of debt held – if they decline.

Mr Noonan said the majority of the remaining amount not tendered related to one bond, which is subject to a legal action.

Just 19 per cent of debt was tendered in a £368 million sterling bond due for repayment in June 2019. A major investor in the bond is New York fund Aurelius Capital Management, which is challenging the Government’s plans to impose losses on bondholders in the courts.

Aurelius is contesting the Subordinated Liability Order on April 14th that wipes out the value of the bonds to encourage investors to take up the coercive debt buyback.

“The take-up by bondholders is a positive result for the Government despite the ongoing legal challenge from Aurelius,” said Michael Cummins, director of fixed-income firm Glas Securities.

The Minister said he expected further capital gains from the second phase of AIB’s debt buyback when it is completed next month. The Government aims to raise about €5 billion from deals with subordinated bondholders in which they will be forced to take heavy write-downs on the debt.

Mr Noonan repeated that it was Government policy to achieve “appropriate burden-sharing from holders of bank subordinated debt, not only in AIB but also in Bank of Ireland, EBS Building Society and Irish Life Permanent”. He said the Government would use the Credit Institutions Stabilisation Act, the State’s onerous banking legislation, to ensure “the required level of burden sharing” is achieved.

Rating agency Standard Poor’s said changes to the terms of 16 of the 18 subordinated bonds, following a court ruling last week, were “tantamount to an immediate default” on the bonds.

AIB’s “hybrid” debt was lowered by the agency to a “D” rating denoting a default on the bonds.

Sellers of insurance on the bank defaulting have had to pay out to investors following a ruling that this constituted a “credit event” or default by the trade body which monitors the insurance contracts.

AIB, which is 93 per cent owned by the State, was ordered to raise €13.3 billion by the Central Bank following stress tests of the banks.

Standard Poor’s also lowered the ratings on Bank of Ireland’s subordinated debt, which is the subject of a cash or share offer, saying that the proposal amounts to a “distressed exchange”.

The bank must raise €4.2 billion in cash after the bank stress tests.