A “MARKET-based solution” to “taking out” junior bondholders in AIB should have been adopted by the Government rather than seeking a court order forcing them to sell at huge losses, a Cayman Islands investment firm representing some bondholders has argued before the High Court.
Mr Justice John Cooke heard yesterday that the AIB bonds at the centre of the case were acquired only last January by Aurelius Capital Master Ltd along with some linked firms, which are challenging the Subordinated Liabilities Order obtained by the Minister from the court last April.
The order allows the Minister to change terms, conditions and maturity dates on AIB’s subordinated bonds, lift restrictions on buybacks and reduce the value of the bonds so as to encourage bondholders to take up a debt buyback offer with a take-up deadline of June 13th. Under the buyback, AIB will impose losses of as much as 90 per cent on bondholders.
John Gordon SC, for Aurelius, said yesterday that JP Morgan, in documents advising AIB on a strategy for taking out junior bondholders, had advised it to go first to a “market-based solution”, perhaps accompanied with a “government health warning” that this might be followed by a order.
Instead, he added, the Minister for Finance secured the order under the Credit Institutions Stabilisation Act in April without engaging in any consultation with subordinated bondholders.
Mr Gordon read from a number of documents, discovered by the State, which included documents from JPMorgan advising AIB in relation to liability management exercises. The documents showed that AIB was advised last December not to make an offering of January last available to US bondholders, Mr Gordon said. There was also advice as to how that January exercise should be pitched.
It was clear from the documents that the take-up – about 50 per cent – of the January exercise met AIB’s highest expectations, not the impression given to the High Court last April that the operation was “not particularly successful”.
Another document from February referred to a JPMorgan draft proposal for another “conclusive” liability management exercise, Mr Gordon added. The advice noted the majority of remaining bondholders were likely to be “fast money funds”. JPMorgan also referred to a large amount of “real money exiters” from AIB and a market expectation that the Government was likely to take some statutory action.
For reasons of which Aurelius was not aware, the Government, instead a market-based solution, went for the “large unexpected step” – an order – without the intermediate step, Mr Gordon said.
Another document referred to some investors who held out from taking part in the January exercise having taken “a legal view rather than a credit-based view” and being prepared to take “a legal bet”.
Brian Murray SC, for the State, said the document was saying some people were “taking a bet” on whether the order would be invoked by the Government.
Earlier yesterday, Mr Gordon complained that the State’s approach to discovery was “disgraceful” and asked the judge to stop the case and order the State to comply with discovery orders.
Mr Murray argued that the State had complied with discovery orders. Aurelius “from the start, has been a litigant in search of a case and they still haven’t found one”, he said.
The hearing continues today.
