AIB and other lenders can make plans to refinance after EU ruling

The nationalised Allied Irish Banks and rival lenders can make plans to refinance some €3 billion in costly debt after a favourable ruling from European regulators.

In long-awaited guidelines, the London-based European Banking Authority made it clear that lenders have the right to take on “higher quality” debts in exchange for debt instruments which are more costly and inefficient to serve.

The EBA issued the new guidelines yesterday in a formal response to questions submitted as far back as September 2013.

They cover €3 billion in contingent capital notes issued by Ireland’s banks, an expensive form of debt known as “CoCos”.

On foot of the guidelines, banks which issue such debt are free to call, redeem, repurchase, repay, or reduce them within five years. This can be done only in exceptional circumstances, however, and approval would be required.

Observers in Dublin were quick to conclude Irish banks would benefit from the ruling.

Although Merrion Capital analyst Ciarán Callaghan said it cleared the way for AIB to restructure its capital, there was no comment from the bank.

A spokesman for the Department of Finance said officials were examining the guidelines but had no immediate comment on the EBA intervention.

“Regulatory clarification on the ability to replace capital instruments within five years of issuance is a significant boost to the Irish banking sector,” Mr Callaghan said in a note.

AIB has €1.6 billion of such debt, Bank of Ireland has €1 billion and Permanent TSB has €400 million.

“AIB’s CEO has previously stated that the bank was in discussions with the EBA to help improve its capital structure,” said Mr Callaghan.

“EBA clarification should pave the way for an early repayment of AIB’s €1.6 billion State Aid contingent capital notes before year five and replacement with higher quality [debt].”

He went on to say Bank of Ireland’s capital optimisation would be similarly enhanced.

“However, these non-call notes are privately owned and according to the prospectus, ‘shall only be redeemed on the maturity date at their principal amount plus accrued interest’. So we believe the bank would have to offer a voluntary tender at a premium to market prices in order to refinance the notes early.”

The notes were already trading with a high cash price, so any repurchase would be likely to erode the bank’s capital. “We still see merit in a potential bond swap,” Mr Callaghan said