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Bank of Ireland bondholders face a haircut
Holders of the £75 million Bank of Ireland 13.375% Perpetual Subordinated Bonds are about to take a nasty haircut
Holders of the £75 million Bank of Ireland 13.375% Perpetual Subordinated Bonds are about to take a nasty haircut. Bank of Ireland announced that it will shortly launch a ‘liability management exercise’ in respect of its subordinated liabilities.
This is a bond issue which is widely held by UK retail investors as well as institutions. Subordinated bonds are amongst the last in the queue to be paid out when the issuer is in trouble. The Bank of Ireland haircuts cover some €2.6 billion of its subordinated debt in total. Virtually all the Irish banks have been bailed out by the government following the credit crunch and are now being called upon to recapitalise by restructuring debt.
Holders of Bank of Ireland 13.375% Perpetual Subordinated Bonds can expect a payout of around 20p in the pound. According to the statement, ‘the Bank's current expectation is that the cash prices under the exercise will be 10% of nominal for Tier 1 securities and 20% of nominal for Tier 2 securities, with no payment in respect of accrued interest.’
The bonds, which have been trading in the market in recent weeks at around 70p but have been as low as 50p or less, collapsed in price and today are trading at around 22p. This is approximately the expected payout under the proposals from Bank of Ireland.
The announcement says that the ‘liability management exercise’ will incorporate proposals to amend the terms of the relevant bonds. This would allow the Bank to compulsorily buy back the securities for a cash sum which would be substantially less than the cash tender terms of 10p or 20p in the pound. The Bank may also offer an equity alternative to these bondholders which would include both a premium to the cash alternative and a payment to compensate for unpaid accrued interest.
Rik Edwards of stockbroker Collins Stewart says, ‘our understanding is that the 13.375% Perpetual Subordinated Bonds (BOI) are Tier 2 securities. Therefore we expect these bonds will be offered 20p flat of accrued for each £1 nominal, or an equity alternative plus a payment in respect of accrued interest. Currently the accrued amounts to about 1p per bond.’
He points out that holders will probably have little option but to accept one of these offers, as the alternative is likely to be a compulsory cash offer at a much lower level. ‘The Irish government has shown it is prepared to legislate to assist Irish banks to aggressively manage down its subordinated liabilities. Senior bondholders, meanwhile, have been guaranteed by the Irish Government, and so far remain untouched,’ he says.
‘However, bear in mind that we do not yet know for certain whether the 13.375% bonds will be included in the liability management exercise. There is also a small possibility that these bonds fall under UK rather than Irish law, and may not be subject to the lower compulsory cash offer,’ he says.
That is what bondholders are hoping. But the outlook is not good.
As one bond expert put it, ‘this is just one tranche of subordinated debt from one Irish bank amongst many. Similar things have been happening at other Irish banks. Investors have held bonds in what has been known to be a bust bank for over two years now. They can try to lobby for a better deal but whether they will get anywhere is another matter.’
Some investors are likely to be speculators who bought after the credit crunch hit and would have paid 50p or less for the bonds in the market. Other could be long term holders who stand to lose most of their money.
The announcement by Bank of Ireland follows moves by other Irish financial institutions, including Irish Life & Permanent and EBS Building Society which was acquired by Allied Irish Bank, which have also announced plans to impose losses of as much as 90% on junior bondholders. This is all part of the Irish government’s plans to recapitalise its banks.
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