AIB said today may generate at least €1.6 billion in capital from a buyback of junior bonds, as it imposed losses of as much as 90 per cent on investors.

Some 86 per cent of notes covered by an offer to investors were tendered in preliminary results, the bank said in a statement.

Holders of three other tranches of subordinated securities have until June 20th to decide on the bank's offer for about €300 million of notes.

The Government is imposing losses on junior bank bondholders to lessen the cost of bailing out the country's debt-laden financial system.

AIB, once the country’s biggest lender, was ordered by the Central Bank in March to raise €13.3 billion to bolster its capital reserves against mounting loan losses.

"This is a positive result for AIB's capital raising," Glas Securities, the Dublin-based fixed income firm, said in a note today.

Seeking to press bondholders to accept the offer, the Government secured a court order in April changing the terms and conditions of AIB’s subordinated debt.

The order removed restrictions on buybacks of some subordinated bonds and pushed the maturities of some securities out to 2035.

Aurelius Capital Management LLP, a New York-based investment firm which owns two of the securities, is challenging the order. The International Swaps and Derivatives Association yesterday said the buyback is a restructuring credit event at AIB following the lender's debt management exercise.

AIB is seeking to pass extraordinary resolutions amending terms of bonds so that bondholders refusing to take up the offer may be paid just 1 cent in the future for every $1,000 of debt held.

Bloomberg