ANGLO IRISH Bank, the State-owned bank, plans to buy back about €3.2 billion worth of its bonds from investors at sharp discounts on their face value in an attempt to boost the bank’s reserves of loss-absorbing capital.

The bank has said it has offered bondholders between 27 per cent and 55 per cent of the face value of the bonds to redeem certain tier one and tier two securities – rankings of debt that sit above pure equity. Analysts said it could generate capital of up to €2 billion, which will help reduce the State’s exposure to the loss-making bank.

Allied Irish Banks and Bank of Ireland each generated €1 billion in capital in recent debt swap and buy-back deals respectively in an attempt to boost their capital.

Banks have taken advantage of the steep discounts on offer in the markets to improve the quality of their capital by buying back or swapping debts that are regarded by the market as almost worthless protection against losses.

Anglo announced plans to raise its capital levels this month after it posted a loss of €4.1 billion in the six months to the end of March – the largest Irish corporate loss ever recorded – which wiped out the bank’s capital reserves.

The Government has so far invested €3 billion of State funds to recapitalise the bank. Anglo Irish has said that it faces loan losses of €7.5 billion over the three years to September 2011, but that losses could rise to €11 billion.

One investor in Anglo Irish bonds queried whether the bank’s offer was sufficiently high.

He said that investors may take the money amid concerns about the future of the bank and whether interest payments on the bonds will be delayed, either for a period of time or indefinitely.

“If investors think it has a future, they won’t want to tender for the debt transaction, as I don’t think it has been pitched high enough,” he said.

The European Commission forced Anglo Irish to defer interest payments to investors on its tier one securities as a condition of the State’s €3 billion recapitalisation.

However, Anglo Irish may be contractually obliged to pay coupons to investors in the bank’s £200 million sterling (€231 million) and £250 million tier one bonds under terms of the securities. The bond agreements state that if the bank cannot meet a coupon payment it must issue ordinary stock. Given that the stock is worthless, following the bank’s nationalisation, Anglo may ultimately have to pay the loans in full in the event of coupon deferral.