AIB exchange adds €1bn to capital base

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

The bank will issue €1.3 billion worth of new, lower tier 2 debt in exchange for €2.4 billion of debt that was bid for, a higher-than expected take-up.

"The securities will be exchanged for between 50 per cent and 67 per cent of their face value in line with the previously announced exchange prices," AIB said in a statement.

“The equity accretion for AIB Group arising from the exchange offers is expected to be circa €1 billion.”

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 the US bank M&T 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 two debt will cost the bank an estimated €90 million per annum.

According to NCB Stockbrokers analyst Ciaran Callaghan the disposal of its stake in M&T 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 knock the bank's core equity ratio so low that even after disposing of assets in both the US and Poland 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 51per cent.”

At 3pm shares in AIB were down 11.5 per cent at €1.77, 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.