BANK OF Ireland has wasted little time in trying to plug a further capital hole of €2.2 billion and avoid Government control by seeking to agree a discounted debt swap with subordinated bondholders.
The bank is offering subordinated bondholders shorter-term senior bonds guaranteed by the Government at “haircuts” varying from 46 cent to 57.5 cent in the euro, netting a gain for the bank.
The offer price reflected current market levels, the bank said.
To improve the chances of a high take-up, the bank is offering the deal to subordinated bondholders with €3.1 billion of debt but it will only accept the offer from investors up to €1.5 billion.
The bank is offering to swap the unguaranteed subordinated bondholders – some of whose loans are not due for repayment until 2020 – Government-guaranteed senior bonds falling due in 13 months.
The bondholders would forgo longer-term coupon payments but would earn a 6.75 per cent coupon on the more secure new debt.
On the basis of a probable 50 to 60 per cent take-up among the subordinated bondholders, the bank could make a gain of between €360 million and €450 million.
This would leave the bank with up to €1.8 billion to raise by its own means to avoid the Government’s shareholding rising above the current level of 36 per cent.
Ciaran Callaghan, analyst at NCB Stockbrokers, described the move as “strategic”, saying that it came a day after the Government said legislation on sharing bank losses with subordinated bondholders would be ready next week.
The Bank of Ireland bond offer would “come as some relief to investors that a coercive, more penal approach has not been adopted”, according to Dublin fixed-income firm Glas Securities.
The initiative came as the yield on German bonds, traditionally the most stable of the euro zone’s sovereign debt, rose to more than 3 per cent yesterday, signifying a worrying development in the euro zone sovereign debt crisis.
The yield on 10-year government German bonds hit a high of 3.033 per cent yesterday, before retreating to 3.01 per cent last night. This compares to a 2.4 per cent yield in early November. Yields on Spanish and Portuguese debt also rose, while Irish bond yields – which had fallen in morning trade as the markets welcomed the budget – climbed higher throughout the afternoon.
The rise in the cost of borrowing for euro-zone countries took place against a background of continuing uncertainty about Europe’s response to the debt crisis. Disunity among member states persisted yesterday, with German chancellor Angela Merkel reiterating Germany’s resistance to the proposal to issue common euro bonds.
Euro group chief Jean-Claude Juncker criticised the German dismissal of his suggestion about the introduction of so-called e-bonds.
