By Sharlene Goff in London and John Murray Brown in Dublin
Published: May 31 2011 19:30 | Last updated: May 31 2011 19:30
Three of Ireland’s lenders revealed plans to impose losses of up to 90 per cent on bondholders in attempts to make them shoulder some of the cost of recapitalising the country’s banks.
Bank of Ireland said it would shortly announce a cash offer for €2.6bn ($3.7bn) of its subordinated debt, with discounts of either 80 per cent or 90 per cent depending on the type of bond. Two smaller lenders, Irish Life & Permanent and EBS, planned to impose similar losses on holders of about €1bn of debt.
The moves follow calls from the government for bondholders to take their share of the pain sparked by Ireland’s bail-out.
Bank of Ireland said the government would “take whatever steps it considers necessary to maximise burden sharing” if bondholders did not take up the offer.
Michael Noonan, the Irish finance minister, said the burden sharing now being proposed was the “the minimum acceptable to the government”.
If bondholders declined to take up the offer, he said the government would use legal powers that would “result in severe measures being taken in respect of the subordinated liabilities”.
Analysts said the haircuts on the Bank of Ireland debt exchange were harsher than they had expected. The bank expects to offer 20 cents in the euro for holders of tier-two securities, which account for the bulk of its €2.6bn of outstanding subordinated bond debt. Holders of tier-one securities – a riskier form of debt – will receive just 10 cents in the euro.
The terms are more aggressive than the 22½-25 cents offered to the tier-two junior bondholders at Allied Irish Banks, which is already 93 per cent owned by the state.
However, Bank of Ireland, whose shares dropped 28 per cent on Tuesday, said it was also considering offering bondholders an equity alternative. That would be priced at a premium to the cash offer and include a payment for interest accrued.
Analysts believe the bank would be keen to encourage as many bondholders as possible to take up this option as it would dilute the government’s shareholding, currently 36 per cent.
But they were concerned that a debt-for-equity swap at such unattractive terms could limit the bank’s chances of launching a rights issue further down the line.
“The dilution is horrible if you are an equity holder,” said Simon Maughan at MF Global.
Analysts calculate that the liability management exercise could raise just over €2bn, which would leave Bank of Ireland having to raise another €2.2bn to fill a €4.2bn capital hole revealed earlier this year.
The bank said it was looking at range of other initiatives to raise further capital including seeking additional support from existing shareholders, from the state and other sources. The government has promised to provide any capital the bank cannot raise privately.
But Stephen Lyons, an analyst with Davy stockbrokers, said “it is not obvious what sales they can execute, and within the next two months as required.
Bank of Ireland said it would shortly announce a cash offer for €2.6bn ($3.7bn) of its subordinated debt, with discounts of either 80 per cent or 90 per cent depending on the type of bond. Two smaller lenders, Irish Life & Permanent and EBS, planned to impose similar losses on holders of about €1bn of debt.
Bank of Ireland said the government would “take whatever steps it considers necessary to maximise burden sharing” if bondholders did not take up the offer.
Michael Noonan, the Irish finance minister, said the burden sharing now being proposed was the “the minimum acceptable to the government”.
If bondholders declined to take up the offer, he said the government would use legal powers that would “result in severe measures being taken in respect of the subordinated liabilities”.
Analysts said the haircuts on the Bank of Ireland debt exchange were harsher than they had expected. The bank expects to offer 20 cents in the euro for holders of tier-two securities, which account for the bulk of its €2.6bn of outstanding subordinated bond debt. Holders of tier-one securities – a riskier form of debt – will receive just 10 cents in the euro.
The terms are more aggressive than the 22½-25 cents offered to the tier-two junior bondholders at Allied Irish Banks, which is already 93 per cent owned by the state.
However, Bank of Ireland, whose shares dropped 28 per cent on Tuesday, said it was also considering offering bondholders an equity alternative. That would be priced at a premium to the cash offer and include a payment for interest accrued.
Analysts believe the bank would be keen to encourage as many bondholders as possible to take up this option as it would dilute the government’s shareholding, currently 36 per cent.
But they were concerned that a debt-for-equity swap at such unattractive terms could limit the bank’s chances of launching a rights issue further down the line.
“The dilution is horrible if you are an equity holder,” said Simon Maughan at MF Global.
Analysts calculate that the liability management exercise could raise just over €2bn, which would leave Bank of Ireland having to raise another €2.2bn to fill a €4.2bn capital hole revealed earlier this year.
The bank said it was looking at range of other initiatives to raise further capital including seeking additional support from existing shareholders, from the state and other sources. The government has promised to provide any capital the bank cannot raise privately.
But Stephen Lyons, an analyst with Davy stockbrokers, said “it is not obvious what sales they can execute, and within the next two months as required.
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