ALLIED IRISH Banks (AIB) is expected to bolster the loss-absorbing capital in its reserves by between €700 million and €900 million under a plan to buy back as much as €2.8 billion of bonds from investors at a discount in return for more secure debt.
The move by the bank will improve the quality of capital within the bank’s reserves but will not increase its overall capital.
The bank, like rival lender Bank of Ireland and their counterparts in the UK, is taking advantage of the steep discounts on offer in the debt markets to improve capital by buying back bonds.
Financial institutions are trying to bolster their core tier-one capital, regarded as the loss-absorbing capital, in debt swap or buy-back deals that reduce lower quality loans that are regarded by the market as almost worthless for protection against losses.
AIB is offering to buy back the bonds at between 50 and 67 per cent of their face value, at a premium above the current indicated price of 35 to 55 per cent of their face value in the debt markets.
Investors will sell out of perpetual notes in return for dated bonds in what the bank calls a “liability management exercise”.
The offer will appeal to some investors who are seeking to cash out on investments in illiquid and heavily discounted debt markets.
The profit generated by the transactions will go to the bank’s capital reserves and will be treated as core tier-one capital, the type of reserves that regulators insist banks must hold to protect depositors against unforeseen losses.
“It could boost capital by between €700 million and €900 million, depending on pricing and take up,” said, Kevin McConnell, analyst at Bloxham Stockbrokers.
Investors who want to participate in the deal must apply by next Friday which means the bank may able to post within the first half of its financial year improving its capital reserves in its half-year results.
Bank of Ireland bought back debt in a recent cash deal, with a take-up of 55 per cent among investors. A similar level of interest in AIB’s deal would generate a gain of €760 million. A 66 per cent take-up could leave AIB with a profit of €900 million.
Bank of Ireland bought back at a discount subordinated bonds with a face value of €1.26 billion in the transaction earlier this month.
Shares in AIB rose 12.6 per cent, or 25 cent, to €2.23, its highest level since January 13th, two days before the Government nationalised Anglo Irish Bank.
Yesterday’s closing share price values AIB at €1.9 billion, €300 million lower than the value of Bank of Ireland.
AIB said in April that it may sell assets to raise a further €1.5 billion in capital – in addition to the €3.5 billion invested by the State in the recapitalisation deal – after Government stress tests showed that the bank needed to strengthen its capital reserves further against losses.
The debt deal will contribute to the additional capital-raising exercise. The bank is expected sell its stakes in Polish subsidiary Bank Zachodni and US bank MT.
“We see today’s announcement as a good start to the group’s plans, with the remainder of the required gains expected to be realized through disposals in the second half of 2009,” said banking analysts at London firm Keefe, Bruyette Woods.
The new bonds, which will count as lower tier-two capital, are expected to be rated A1 by Moody’s and A- by Standard & Poor’s. Fitch assigned a BBB+ rating to the bonds.
