THE STATE’S largest bank, Allied Irish Banks (AIB), could raise up to €400 million in fresh capital from an exchange of bonds announced by the bank yesterday, according to analysts’ estimates.
AIB has offered investors the chance to exchange euro, sterling and dollar subordinated bonds worth €2.9 billion for new, longer-dated bonds that pay a higher coupon but at a discount to the face value of the existing bonds.
Under the proposed exchange, investors are being offered new bonds at between 74 per cent and 91 per cent of the face value of the existing bonds which the bank is offering to exchange.
The existing AIB bonds are trading at discount to their face value in the bond markets.
Bank of Ireland made a capital gain of €405 million in a similar exchange of subordinated bonds last month when there was a 56 per cent take-up among investors.
Interest from investors in AIB’s bonds may be higher, analysts say, as the bank is offering a higher coupon than Bank of Ireland.
AIB is offering coupons of between 10.75 per cent and 11.5 per cent on its new lower tier two bonds, compared with the 10 per cent offered by Bank of Ireland.
The exchange, if successful, means AIB will make an upfront capital gain of between €300 million and €400 million but faces a higher interest bill on its debt through the longer-dated bonds.
A 75 per cent take-up would net AIB a capital gain of €429 million.
The purpose of the planned exchange was “to optimise the capital base of the bank”, AIB said.
Investors have until this Friday to decide to participate. The bank will announce the results of the debt swap next Monday.
“This is one of the obvious ways to raise capital in the short-term but they still have more to do,” said Sebastian Orsi, analyst at stockbrokers Merrion Capital.
Mr Orsi said AIB needs about €4.5 billion in further capital to boost its core equity ratio to 8 per cent, the percentage of assets that has become the capital threshold for banks internationally.
AIB has said that it will look at “self-help” measures such as selling businesses and seeking a strategic investor in the bank in order to raise capital before tapping shareholders in a rights issue of new shares in the bank or seeking a further State bailout.
The bank will transfer €23 billion in loans to the National Asset Management Agency (Nama) at a discount estimated at 35 per cent by analysts, leaving a capital hole to fill on the bank’s balance sheet.
AIB generated €1 billion in capital in a bond exchange last year.
