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Bank of Ireland Plc and Allied Irish Banks Plc, the country’s two biggest lenders, plan to ask subordinated bondholders to share more of the cost of their bailout as officials race to conclude an international rescue, three people familiar with the situation said.
Talks with the central bank have focused on how the two may buy back or exchange subordinated debt at close to market prices rather than the punitive 80 percent discount to par offered by Anglo Irish Bank Corp., said the people, who declined to be identified because the discussions are private.
In the talks with the central bank, there have been no discussions about senior bondholders sharing the burden, the people said. European Union and International Monetary Fund officials are taking legal advice on how senior bondholders can share the cost of Ireland’s 85 billion-euro ($113 billion) bailout without triggering lawsuits, the Irish Times reported today, without saying where it got the information.
If the authorities tried to force losses on owners of senior debt “before shareholders and subordinated bondholders had been fully written down, it would be a hard sell,” said Simon Adamson, an analyst with CreditSights Inc. in London, in a note to clients today. It “would presumably contradict previous indications by the European Commission that it would want to preserve the ranking of creditors in a bail-in.”
Bond Prices
Allied Irish has about 4.8 billion euros of senior and junior subordinated debt as well as preferred stock. The lender’s 1.1 billion pounds ($1.7 billion) of 11.5 percent senior subordinated notes due 2022 fell 3.15 pence on the pound to 27.8 pence, according to composite prices on Bloomberg today. The notes traded as high as 103.5 pence as recently as Aug. 3.
Bank of Ireland has about 4 billion euros of senior and junior subordinated debt, as well as preferred shares, Bloomberg data show. The lender’s 1 billion euros of 10 percent senior subordinated notes due 2020 fell 6.9 cents to 44.8 cents today, according to composite prices on Bloomberg. The notes closed at 100.25 on Sept. 21, Bloomberg data show.
By buying back and exchanging debt at a lower price than its face value, the lenders can book a gain. Allied Irish and Bank of Ireland have generated a combined 3.37 billion euros of gains over the past 21 months from such transactions.
Anglo Irish, which the government nationalized in January 2009, may raise about 1.7 billion euros from buying back subordinated debt, Dublin-based Glas Securities wrote in a note to clients on Oct. 22. That would cut the cost to the state of rescuing the bank, which Finance Minister Brian Lenihan has said may total as much as 34.3 billion euros.
Central Bank Involvement
The central bank has been the intermediary with Ireland’s banks as officials continue talks with the EU and IMF on aid.
Both Allied Irish and Bank of Ireland will strongly resist any attempt to force losses on bondholders, as it would make lenders rely more on the European Central Bank for emergency funding because they remain frozen out of wholesale debt markets, the people said. Still, the decision on restructuring linked to the bailout is out of the banks’ hands, they said.
Officials at the finance ministry, central bank, Bank of Ireland and Allied Irish all declined to comment
