Dal WSJ
Hedge Fund vs. Ireland, Round 2
Aurelius Capital Battles Over Its Allied Bond Holdings
By MATT WIRZ
Activist hedge fund Aurelius Capital is again in dispute with the Irish government, this time over its investment in bonds of now-nationalized Allied Irish Banks.
The hedge fund on Wednesday appealed an Irish High Court order handed down last week that allows the Irish Department of Finance to extend the maturity of Allied's subordinated bonds, while suspending interest payments, according to an Aurelius spokesman.
The order will help Ireland force the banks' junior, or low-ranked, bondholders to take part in efforts to reduce the banks' debt, even if it means they accept some losses.
Aurelius alleged in a letter to the Irish Department of Finance that the order is unjust because Allied blocked U.S. bond investors from participating in a January tender offer. It also said the order will wipe out interest that has already accrued on the bonds.
The Finance Department responded in a letter that "the order was correctly granted by the High Court in accordance with applicable law and procedure, which includes safeguards for bondholders," according to a copy of the letter, which was reviewed by The Wall Street Journal. Allied didn't immediately return calls seeking comment.
The Irish High Court will hear arguments concerning Aurelius's appeal on May 9, the Aurelius spokesman said.
The subordinated bonds are quoted around 27% of their face value, according to a report by Bank of America Merrill Lynch.
Aurelius owns bonds with a face value of £90 million ($147 million), according to a person familiar with the matter.
Allied in January offered to buy back £3.9 billion of subordinated bonds at 30% of face value. Investors tendered £2 billion to the bank.
The Department of Finance said it will begin a new offer to buy back Allied's outstanding junior bonds, at a reduced price. Aurelius contends the tender will pay 20%, citing statements by the Department of Finance.
The January tender offer barred all "persons located or resident in the United States," from participating, according to the documents detailing the tender offer.
Aurelius specializes in distressed-debt bets, often using legal arguments to try to extract better deals from embattled borrowers. The New York-based fund first entered the Irish situation late last year when it bought subordinated bonds owed by Anglo Irish Bank and negotiated for a higher recovery before agreeing to the bank's terms.
By challenging the Irish government in the High Court, Aurelius is picking a more high-profile fight, but the end result may be the same.
"The government has a pretty decent case on Allied," said Nomura credit-desk analyst Soumya Sarkar. "Given the amount of capital required by the bank, it would be difficult for anyone to argue that the subordinated bonds would recover anything meaningful without the bailout."
Ireland has accepted a £67.5 billion bailout in order to recapitalize its banking system. A stress test conducted in March by the government determined that Allied will need 13.3 billion of fresh funds on top of 3.7 billion the government injected in December.
Restructurings remain ongoing at the two other major banks the Irish government intervened last year,
Bank of Ireland and Anglo Irish Bank Corp.