Bank of Ireland has a "good chance" of avoiding State control by offering junior bondholders an opportunity to convert to equity, according to Harris Associates LP, its largest institutional investor.

Investors would prefer to see junior bondholders swap debt for equity to help the lender reach its capital target than the government increasing its 36 per cent stake to a majority holding, Robert Taylor, director of international research and portfolio manager with Chicago-based Harris Associates, said in a telephone interview.

Harris, which owns about 6 per cent of the bank, manages more than $65 billion in assets for clients.

"Right now, even looking at another round of dilution from share issuance, Bank of Ireland is still attractive," Mr Taylor said. "With the flexibility the bank has in converting subordinated debt investors into equity investors, there's a good chance the bank will avoid majority State ownership."

The Central Bank ordered four lenders on March 31st to raise a combined €24 billion following a third round of stress tests. Bank of Ireland must raise €4.2 billion of equity and €1 billion of contingent capital by the end of July as regulators seek to shore up confidence in the country's financial system. The government has said it is prepared to invest any money the bank can't raise privately.

Bank of Ireland said on April 14th it would outline its capital-raising plans in the coming weeks. The bank's subordinated bondholders may be interested in debt-for-equity swaps as they are required to share the burden of bailing it out, Minister for Finance Michael Noonan said the following day.

The bank had €2.8 billion of junior debt outstanding at the end of December, according to its annual report.

The lender raised €2.9 billion of capital in June, following regulators' first set of stress tests.

Bloomberg