Ireland's Banks Get $46 Billion as Senior Bondholders Escape Bailout Costs

Irish banks soared in Dublin trading as the government said it will make junior bondholders pay some of the cost of the 35 billion-euro ($46 billion) rescue package.

“The risk of immediate shareholder-dilutive wipe-out has been averted,” Ciaran Callaghan, an analyst at Dublin-based NCB Stockbrokers, wrote in a note to clients today.

Bank of Ireland Plc, the country’s largest lender, soared 16 percent to 30.7 euro cents at the 5:10 p.m. close of trading, while Allied Irish Banks Plc, the second-largest, gained 3.8 percent to 35.5 cents and Irish Life & Permanent Plc surged 59 percent to 81.9 cents. The five-member ISEQ Financial Index is still down about 98 percent from its peak in February 2007.

Finance Minister Brian Lenihan told state broadcaster RTE the government needs to impose “big haircuts” on banks’ junior bondholders after the rescue. Ireland met its two-year-old pledge that senior bondholders, typically the last investors to lose out when a bank or company founders, wouldn’t lose money.

There “wasn’t political or institutional” support in Europe for forcing losses on to senior bondholders, Prime Minister Brian Cowen told reporters in Dublin yesterday after European Union finance ministers backed the plan at a meeting in Brussels. Existing legislation requiring subordinated bondholders to share the costs can be used in “wider application,” he said.

Bank of Ireland Bonds

Bank of Ireland’s 1.47 billion euros of senior floating- rate notes due September 2011 rose 8.25 cents on the euro to 91.6 cents, a 10 percent increase, at 4:22 p.m. in London, according to composite prices compiled by Bloomberg. Allied Irish’s 1.5 billion euros of senior floating-rate securities due in September 2011 climbed 8.2 cents to 87.7 cents, a 10 percent rise, the data show.

“It is positive for senior debt holders, as any burden- sharing at senior level was deemed by EU authorities to potentially jeopardize EU-wide financial stability by imposing unsustainable wholesale borrowing costs on weaker peripheral banks,” said Jose Mosquera, who manages $41 million as a Madrid-based asset manager at Breogan Global Financial Fund.

Ireland will receive 67.5 billion euros in total from the European Union and International Monetary Fund, Cowen said. The government will meet about half the cost of the 35 billion-euro banking bailout from its own resources, including the National Pension Reserve Fund.

Capital Injections

Lenders will get an immediate 8 billion euros to bolster capital and will raise a further 2 billion euros by shedding assets, the central bank said in a statement yesterday. Banks will be able to draw on a further 25 billion euros depending on how they fare in a round of stress tests in the first half of next year, the government said in a statement.

The banks are getting the money after rising loan losses and shrinking deposits forced the government to seek the rescue. The state pledged to back all deposits in Irish banks two years ago, requiring the government to inject 33 billion euros into the lenders. The estimated cost of rescuing the banks rose to as much as 50 billion euros in September after losses from the collapse of the country’s decade-long real estate boom jumped, fueling concern Ireland couldn’t fund a rescue itself.

Lenders will use the money to boost their core capital ratios, which gauge financial strength, to at least 12 percent. Bank of Ireland and Allied Irish will also be able to transfer all their remaining “vulnerable” commercial real estate loans to the National Asset Management Agency, the so-called bad bank set up to take over lenders’ risky loans, by the end of March.

Liability Management

Ireland is “exploring” further deeply discounted liability management exercises by its banks, after Anglo Irish Bank Corp.’s “very successful” debt exchange, Ajai Chopra, deputy director of the European Department of the IMF, said at a press conference yesterday.

By buying back and exchanging their debt at prices lower than its face value, lenders can book a gain. Anglo Irish, which the government nationalized in January 2009, may raise about 1.7 billion euros from buying back subordinated debt, Dublin-based Glas Securities wrote in a note to clients on Oct. 22. Allied Irish and Bank of Ireland have generated a combined 3.37 billion euros of gains over the past 21 months from such transactions.

Bank of Ireland’s 420 million euros of subordinated 4.625 percent notes due 2019 rose 8 cents, or 20 percent, to 47.5 cents, according to composite prices on Bloomberg. Allied Irish’s 419 million euros of 10.75 percent subordinated notes due 2017 climbed 0.75 cent to 30.3 cents.

‘Marginally Improved’

The situation for subordinated bondholders holding dated securities has “marginally improved,” Mosquera said. “Burden- sharing by subordinated debt holders would take place when capital needs arise, after the initial injection provided by the package,” Mosquera said. Any potential buyback may “very well follow a non-coercive route, such as a tender at market prices,” he said.

Further capital injections will take place in the first half as needed, and a “substantial downsizing of the banking system will be achieved,” Cowen said. The government said it expects to increase its stakes in the country’s lenders as they raise capital to meet the 12 percent regulatory minimum.

“It looks like the banks will be given some leeway to raise the capital themselves,” said Emer Lang, an analyst with at Dublin-based securities firm Davy, said a note to clients.

Bank of Ireland, which is 36 percent-owned by the government, signaled yesterday it will seek to avoid majority state ownership. The Dublin-based lender needs to raise an additional 2.2 billion euros of capital by the end of February to reach the new regulatory target.

Allied Irish

“The bank intends to seek to generate the required capital through a combination of internal capital management initiatives, support from existing shareholders and other capital markets sources” before relying on further government support, the Dublin-based lender said in a statement.

The Irish government may increase its 19 percent stake in Allied Irish to about 96 percent as the bank raises 5.3 billion euros more capital, according to NCB’s Callaghan. The government had said since late September it expects to take a significant majority stake in Allied Irish.

Irish Life said today it will raise capital on its own to meet the target. That will require the company’s Permanent TSB Bank unit to raise about 100 million euros in additional capital, the lender said today.

Chief Executive Officer Kevin Murphy said the new capital targets “would reassure international investors as to the ability of the Irish banks to withstand the impact of the current recession.”

To contact the reporter on this story: Joe Brennan in Dublin at jbrennan29@bloomberg.net;

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.

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