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Bank of Ireland investors suffer savage haircut

Junior bond holders in the Bank of Ireland are getting a worse deal than expected, far worse than banks who hold the Irish bank's bonds.

Bank of Ireland investors suffer savage haircut

Junior bond holders in the Bank of Ireland are getting a worse deal than expected, far worse than banks who hold the Irish bank's bonds.

Just 20p in the pound

Holders of Bank of Ireland 13.375% perpetual subordinated bonds face a savage haircut on their investments. They are being offered just 20p in the pound – with worse to come if they don’t accept. Bank of Ireland calls it ‘burden sharing’ but holders can, no doubt, think up far more graphic terms for this drastic reduction in their investments – the burden of which is definitely not being shared by all bond holders. Holders of senior Bank of Ireland debt – mostly other banks – have not been called upon to accept any reduction in the value of their bonds.

Bank of Ireland 13.375% Perpetual Sub. Bond (BOI) is an upper tier two security and holders are being offered either 20p in the pound cash, with no payment for accrued interest or 40p in the pound in Bank of Ireland ordinary shares based on a conversion price between € 0.1130 and € 0.1176. This is worse than bondholders had expected. The exact equity conversion price will be announced on 23 June. This offer will include a payment for accrued interest. Bondholders who accept the debt-for-equity offer and sell their ordinary shares should bear in mind that delivery of ordinary shares is not scheduled to take place until 12 August.

The details were laid out in two announcements by Bank of Ireland yesterday: an announcement of further capital raising and a second on 'exchange offers and consent solicitations'.

These are the ‘early bird’ offers available to early accepters. Those accepting later will have terms reduced by 20% to 16p in the pound cash or 32p in the pound in the equity offer. No deadline has yet been announced for acceptance, but the circular and prospectus are due to be sent out on Friday 17 June. As the results of the early bird exchange offer are due to be announced on Thursday 23 June, this suggests there will be a very short window of opportunity in which to accept these offers. Holders should therefore be ready to respond quickly after the documents are sent out.

Should bondholders accept?

Should holders accept these offers? Given where the bonds have been trading – around 69p less than a month ago – they don’t look attractive. But what is likely to happen if the proposals are rejected by bondholders? Bank of Ireland is seeking approval from bondholders to grant the bank a call option (option to buy) at only 1p per £1,000 nominal of relevant securities. The Irish minister of finance has stated that he is prepared to take ‘whatever steps are necessary’ in respect of subordinated liabilities to ensure this ‘burden-sharing’ takes place. A law passed in December allows Ireland's government to force restructurings upon subordinated bank creditors – that is the holders of junior bonds.

The bond offer is part of the government’s plans to recapitalise Bank of Ireland which it effectively nationalised following the credit crisis and the bank is estimated to need €4.2 billion of core tier one capital. The scheme also includes proposals to amend the terms of the relevant subordinated liabilities to grant a call option. This will allow Bank of Ireland to acquire the securities for a cash amount less than the terms already offered to bond holders. Holders of ‘subordinated’ bonds stand at the end of the queue when it comes to pay outs.

This probably means that if holders do not take up these offers, they will most likely be forced out of their investments at an even lower level. Bondholders will have little choice but to accept these offers, and should be ready to act promptly from 17 June.

Other bondholders

Bank of Ireland bondholders are not the only ones suffering. The Irish government is hoping to cut around €5 billion from a €70 billion bill for bailing out its banking sector which collapsed following the credit crunch by imposing losses of up to 90% on junior bonds in AIB, Bank of Ireland, Irish Life & Permanent, and EBS building society.

Finance minister Michael Noonan has faced widespread criticism for not imposing losses on banks' senior bondholders, widely held by other banks throughout Europe, due to opposition from the European Central Bank. The ECB is afraid of the domino effect this would have on other banks. The Bank of Ireland's move has also angered hedge funds. The bank has responded that the Irish government may have to increase its stake to 87% if bond holders do not accept the proposals. 

Just over a week ago Irish Life & Permanent and EBS building society also said they would impose losses equivalent to around 80% to 90% of the face value of some €1.1 billion in junior bonds. ‘These financial institutions are remaining solvent due to the ongoing overwhelming financial support of the state,’ said Noonan. ‘Without this support subordinated bondholders' entire investment would have been irrecoverable.’

13 comments so far. Why not have your say?


Jun 09, 2011 at 19:05

Courtesy of avidya on Motley FoolFor those wondering exactly what BKIR has done “wrong” in relation to the proposed LME for BOI 13 3/8% bonds, here are some things I can think of:

1. The BKIR Board owes a fiduciary duty to all stakeholders. By attempting to impose a coercive tender which will transfer value from BOI to ordinary shareholders, they are acting in breach of that fiduciary duty.

2. They are conspiring to void the terms of bonds which were sold to retail investors on the basis of a full prospectus, and which they undertook to honour when the UK courts allowed them to transfer that liability from Bristol & West to themselves.

3. In so doing they are allowing themselves to be improperly influenced by one shareholder, the Irish State, who is not even on the Board of the company.

4. The terms of the tender are calculated to “force” a severe reduction in value upon the sub debt holders, to the improper benefit of the Irish State as ordinary and preference shareholders who rank junior to them.

5. BKIR is proposing to make a payment to incentivise a majority of bond holders to vote to confiscate the bonds of a dissenting minority. This constitutes oppression by the majority and in encouraging and promoting such a course of action the BKIR Board is in breach of securities legislation as well as its fiduciary duties.

6. The proposed form of the tender contains an unreasonably short time scale for acceptance and due to that and to size limitations prevents the majority of retail investors from participating in the higher equity swap offer. The offer thus discriminates against smaller bond holders, which is contrary both to the trust deed of the bonds and listing rules.

7. The BKIR Board has not explored with bond holders alternative courses of action to achieve its financing aims, and is instead launching a complex and devious offer who clear intent is to confiscate the bonds without prior discussion or negotiation. In particular, it is not at all clear why an offer to switch bonds at par into ordinary shares has not been made, as that would achieve the financing requirement which the LME is purportedly aiming to achieve.

8. The confiscatory terms of this offer, taken together with the refusal to consider reasonable alternatives, is clearly political in intent and aimed not at strengthening the balance sheet of BKIR, but rather at achieving the Irish government’s aims of being seen to enforce “burden sharing” on sub debt holders and at the same time enhance the value of the ordinary and preference shares which the Irish government owns. It is not for the BKIR Board to enhance those political aims, as the Irish Government has the legislative power to try and enforce such a haircut by an SLO if it so chooses.

9. The actions BKIR is now taking will irreparably damage its standing amongst bond investors and severely restrict any future access to external financing. In so doing the Board is acting recklessly and in breach of its fiduciary duty to promote the health of the business.

10. The bonds concerned are governed by UK law. Yet the BKIR Board has chosen to highlight threats from the Irish Government to impose even more sever haircuts and has not provided any advice as to whether or not such actions would legally be possible or enforceable.

11. What the BKIR Board should have done, in the light of the above, is to refuse to bow to political pressure and invite the Irish Government to seek to change the terms of the bonds by an SLO if they were so minded. By instead launching the LME in the form proposed, the BKIR Board have shown themselves not to be fit and proper persons to be in charge of a major financial institution.

12. This is of grave concern, not only because of the plight of BKIR sub debt holders (particularly smaller retail holders), but also because via its deal with the Post Office BKIR is responsible for £ billions of UK retail deposits. In showing themselves willing to aid and abet improper confiscation of debt holders’ money, they have also shown themselves not to be proper people to protect retail deposit holders money. If these retail deposits are subsequently compromised, then in allowing BKIR’s continued operation in the UK savings market the UK FSA would come under unprecedented censure. It should be a clear tenet of the UK regulatory environment that if an organisation deliberately acts in a way which recklessly disadvantages and oppresses one class of UK savers, then it should not be allowed to continue to operate in the UK savings market.

And that’s just the first few things I thought of! This is a scandal, and BKIR’s banking licence in the UK should be removed forthwith and its UK deposits transferred to a reputable UK bank such as RBS or Lloyds.

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Garth Nicholson

Jun 09, 2011 at 20:02

So well put. The Irish Government's actions are vicious, unnecessary and politically motivated. I sold my holdings in BOI, BKIR and Irish Life and Permanent some weeks ago when I saw the way this was heading and took a reasonably small loss 'on the chin'. The situation with Irish Life and Permanent is equally horrifying. The directors here depart to pastures and salaries new whilst allowing the Irish Government to steal the Company.

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Jun 09, 2011 at 21:25

Let's add to this a few more things:

1. The Irish government is forcing completely unnecessary losses on bondholders willing to exchange their bonds for shares: the profit booked by the bank as a result of the extinguishment of debt that follows it is exactly the same whether they give us 2 shares or 20 shares. So why why not give us 20 shares then? or 200 shares? after all, only a year ago City exchanged all of its prefs and trust prefs at par without imposing haircuts. well, they are doing this in part to protect their own shares in the bank from being diluted -- the fewer shares they give us, the more of the bank they keep for themselves, but this is not a significant issue (if you do the math on how much the irish government has already received from BoI in pref coupons, interest payments, special fees, stock and so on). the significant issue is -- the government wants to be seen **burning somebody. they tried to burn senior bondholders in anglo and were told by the EU to get lost; so, like a man fired from his job and henpecked by his wife then going out to kick a dog, they rob us. To look good.

2. The LME is accompanied by loud threats from the government to the effect that "accept what we give you or else". In civilized countries, public tenders normally require a quiet period so as not to put unfair pressure on buyers. Not here. Here we are told that the minister will do whatever is necessary -- black helicopters and guys in baklavas come to mind.

3. The treatment of some issues -- like the 13.375% -- is in violation of any rules of fairness and its contractual terms. For instance, its contractual terms of the bond require that in the event of any buyback all bondholders must be given the same opportunity to tender. But in this case, those holding 112K can tender at a better price for shares, while those holding below 112K (0ver 90% of all bondholders) cannot. Further, the structure of the LME completely ignores the way most of the holders of the bond hold it -- in certificate form or through Crest. Many will not be allowed to vote (cant vote through Crest); many won't even hear of the LME (undelivered mail, moved address). because of the sweeper clause, whereby those who accept agree that those who do not accept (or do not even respond) should receive 1 penny, these people will be wiped out. they can only be wiped out. they are not even given the 20 cents which your article quotes. we have raised the issue with the Bank and they -- shrugged.

Now, don't get me wrong. I don't mind doing my bit for the bank. I will take the shares. I will even take a reasonable haircut. But isn't there room for fairness? For due process? Consultation? Niceties of a civilized law-abiding society?

Yet, the amazing things is -- nobody cares. Regulators don't care -- we have been after the FSA for weeks now; press don't care -- it's a non-story (just a few old retirees); lawyers don't care (because of cross-damages rules, retail holders are too small to sue and in any case cannot afford fancy QCs); institutional holders don't care (they have been given the nod and the wink months ago to get out); and ordinary citizens think it is right that *we should burn because *banks overborrowed. Well, just wait: first, we get burnt in violation of contracts, due process, and securities laws. Then it will be somebody else's turn. Like yours.

Then you will remember our case and how you shrugged.

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Jun 09, 2011 at 21:54

William, why single out the Irish. This is political, so it the politicians you should vent your spleen on. They are the same the world over, some just worse than others..........

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Long Gone Expat

Jun 09, 2011 at 22:47

Well said Snoekie.

EU politicians are screwing the Irish people too. The EU say they are bailing out Ireland and are so beneficent whereby in truth the Irish tax payer is bailing out the French and German banks. Okay so subordinated debt holders are now feeling some pain but if not Ireland will end up defaulting anyway. Due to mainly the French, they are between a rock and a hard place.

This is a very good article too and reveals the US also stabbed the Irish in the back at the last minute. The author is a heavyweight commentator who rarely speaks out, so when he does its worthy of note

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William Phillips

Jun 09, 2011 at 23:03

What a dismal tale the blood-stained nonsense of 'Irish independence' has turned out to be. Now the legatees of Griffith and Collins are the beggars of Europe, shafting one another and cheating their creditors. Gombeens rule.

If only Southern Ireland had accepted devolution after 1914 and stayed in the UK, as almost every Irishman except a small bunch of traitorous fanatics and gangsters wanted, the island would be united under the Crown and punching above its weight like Scotland.

Silly, silly Irish. They will be celebrating the centenary of the Easter Rising in five years, trying to pretend that it has all been for the best. How big a party can they afford?

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Jun 09, 2011 at 23:04

Why was the BOI allowed to take over B&W when they clearly were not in a position to do so ? Either the British authorities or the directors of the BOI acted fraudulently. is anyone going to be prosecuted ?

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John McCarthy

Jun 10, 2011 at 08:52

Now the legatees of Griffith and Collins are the beggars of Europe, shafting one another and cheating their creditors. Gombeens rule.

I guess we Irish are just feeling what the legatees of Disraeli and Churchill felt 35 years ago when Britain went to the EMF with thier own begging bowl. Who should they have handed the country back to? The Romans? As for shafting and cheating, who in the UK has paid for the banking crisis? The poor, the unemployed , the sick and the old that is who. The 7 savers for every one borrower that is who. The UK government is a one-trick pony. in times of crisis, it devalues the currnecy to export its way out of trouble. Remember the ERM fiasco in 1992? Ireland is gorwing at 6% of GDP a year while the UK has seen negative growth in one quarter and 0.5% in the following one. The simple fact is control over its own interest rates and printing money is what is propping up the UK while the government tries to inflate away its debt.

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Jun 10, 2011 at 09:49

Can these people do this? i thought the definition of these bonds was "A bond with no maturity date. Perpetual bonds are not redeemable but pay a steady stream of interest forever". The word FOREVER seems important here. I am one of these unfortunate investors. Does them being UK bonds make any difference? Do they come under UK law? Are we being scared into acting quickly or does anyone think they won't get away with it and will have to revise their plans?

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Robin Cregeen

Jun 10, 2011 at 10:14

so what is the advice? accept offer or just sit tight and hope for justice? could one turn this to profit by buying the bonds cheap now and accepting the share offer?

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Tim K

Jun 10, 2011 at 12:38

Robin we are putting together a site to protect small investors. We expect to put up more news here.

My advice is don't panic a lot will be done about this. Don't tender just yet but wait and see. By tendering BKIR are claiming a vote to change the terms and screw anyone that doesn't tender. This is clearly terrible practice and it will be stopped.

Bank of Ireland need to realise that they depend heavily on UK investors/savers for their Post office deposits. If we start withdrawing our deposits en-mass then they will sit up and take notice.

Why trust them with our deposits when they have shown readiness to steal savings bonds?


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colin knights

Jun 15, 2011 at 18:55

I dont mind the terms of the bond what hurts me is the fact our regulators agreed the take over in the rirst place without adequate regard to the interests of UK investors and now I find my tax payers money being given to the Irish and they respond with this massive hit on UK investors.I suggest some of the loan should be withheld to compensate uk bondholders/taxpayers.

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James Wilson

Dec 15, 2011 at 09:44

There is much more information on the Bank of Ireland / Bristol & West issue at:

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