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On being thankful

June 2nd, 2011

Even though there was a huge vote in favour of accepting the PMS rescue package, I have received some emails and phone calls from those who continue to be unhappy about the resolution. The more I think about it, the more thankful I am for what has been achieved. Other savers in Ireland have lost 80% and 90% of their savings, as this story from the Irish Times illustrates.

BANK OF Ireland, Irish Life & Permanent and EBS have joined AIB in announcing plans to impose losses of as much as 90 per cent on junior bondholders.

Minister for Finance Michael Noonan said the move to “burn” the junior, or subordinated, bondholders was in line with Government policy to achieve “appropriate” contributions to the recapitalisation of the banks from investors.

“These financial institutions are remaining solvent due to the ongoing overwhelming financial support of the State. Without this support, subordinated bondholders’ entire investment would have been irrecoverable,” he said.

The offers propose bigger haircuts on bondholders than had been expected by market analysts.

Although the offers are voluntary, Mr Noonan warned that the levels of burden-sharing proposed by the banks were “the minimum acceptable”. If they did not help recapitalise the banks as expected, the Government would take alternative steps under the existing legislation to ensure that haircuts were imposed on the bondholders. This would result in “severe measures” being taken in respect of the subordinated debt, he warned.

Mr Noonan is already facing a High Court challenge by two investors against a subordinated liability order in relation to AIB. The order allows him to change terms, conditions and maturity dates on its subordinated bonds.

The case taken by Aurelius Capital Management and Abadi Co – both New York-based fund managers – will be heard tomorrow. Yesterday, Mr Noonan reiterated his view that the challenges were “entirely unfounded”.

Bank of Ireland said it would launch a liability management exercise covering €2.6 billion of its subordinated debt. The plan will be structured so that subordinated bondholders contribute around €2 billion of its regulatory requirement to maintain Core Tier 1 capital of €4.2 billion.

The bank was ordered earlier this year to raise €5.2 billion, including €1 billion in contingent capital. The bank said its expectation was that it would offer subordinated bondholders 10 per cent of the nominal value of Tier 1 securities and 20 per cent of the nominal value of Tier 2 securities, in exchange for cash, with no settlement for accrued interest.

The bank said it might also offer an equity-swap alternative at a premium to the cash offer, with a payment of accrued interest.

“We were expecting the terms of the offer to be bad, but this is worse than expected,” said Stephen Lyons, fixed-income analyst with stockbroking firm Davy.

“Another approach would have to been to engage with subordinated bondholders and not leave such a bad taste in the mouths.”

The Irish Life & Permanent plan involves a cash offer in respect of €840 million of its subordinated debt. It said it expected to offer 20 per cent of the nominal value of most of the securities, with no settlement for accrued interest. Holders of one security will be offered just under 9 per cent. The lender needs to raise €4 billion to satisfy regulatory thresholds.

EBS Building Society, which must raise €1.5 billion, said it would offer to buy back €160 million in junior securities due in 2014 and 2016, as well as £30 million in fixed-rate subordinated securities due in 2019. The haircut imposed will be 80 per cent.

EBS said it will seek to pass an extraordinary resolution to amend terms of bonds so that holders who refuse to take up the offer may be paid just 1 cent in the future for every $1,000 of debt.

The success of the exchange offer will determine how much banks need to raise from a share sale.

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