Burned Bondholder Sees ‘Slam Dunk’ in AIB: Corporate FinanceJoe Brennan and John Glover
New York investment banker Carlos Abadi was among the losers when Allied Irish Banks Plc imploded, wiping out $6.3 billion of junior bonds. Two years later, he’s willing to buy the lender’s debt again.
The president of Abadi & Co. said the restructuring of Allied Irish, which cost taxpayers $27.6 billion, has restored capital to levels acceptable to bondholders. The nation’s second-biggest lender posted a core Tier 1 capital ratio of 17.3 percent in June, compared with the 10.5 percent required by Irish regulators as a buffer against losses.
Allied Irish has 3 billion euros ($4 billion) of debt due this year, according to data compiled by Bloomberg, and is planning its biggest fundraising since a government bailout forced investors to accept as much as 90 percent less than they were owed, after a property bubble burst, triggering $155 billion of loan losses. The bank now wants to sell senior unsecured and subordinated debt after issuing its first covered bond in more than five years in November, Chief Executive Officer David Duffy said in Dublin last month.
“Senior debt would be a slam dunk and sub debt is also credible for the right clientele at the right pricing level,” said Abadi, whose expects his ACGM Inc. broker-dealer unit to be a likely buyer of the debt. “I’m prepared to extend new financing to AIB. Post restructuring it has a very strong capital position.”
Abadi said his company “suffered a significant loss” on its Allied Irish debt holdings. He started a legal challenge to the burden sharing which was withdrawn in June 2011, days before it was due to go to court, with the Irish government making a contribution to his legal costs.
New York-based Aurelius Capital Management LP, which reached a settlement with the government after a court hearing, said at the time that bondholder losses “would chill foreign investment in Ireland for years to come.”
Officials at Aurelius didn’t respond to a phone call and e-mails seeking comment on the planned bond sales.
Allied Irish, which is 99.8 percent state-owned, returned to public debt markets in November for the first time since March 2010, selling 500 million euros of covered bonds backed by home loans to yield 270 basis points to the benchmark mid-swap rate. That spread has since narrowed to 164 basis points, compared with a 36 basis-point decline to 93 in the average spread on the bonds in Bank of America Merrill Lynch’s Euro Covered Bond Index.
The bank issued a second 500 million-euro covered bond in January, this time at 185 basis points over midswaps. The spread on the notes, which typically get the highest ratings because they are guaranteed by issuers as well as having real estate as collateral, was 166 basis points.
“Although the debt markets are open to them, and improved sentiment toward Ireland suggests that the time is right for opportunistic financing, this needs to be balanced with the ambition of restoring profitability” at Allied Irish, said Stephen Lyons, an analyst at Dublin-based securities firm Davy. “Investors may well bite their hands off for new issuance, but the bite may be keenly felt by the bank for years” if it offers too much in yield to sell the bonds, he said.
Offering a 500 million-euro, three year unsecured bond “would make sense” at current market prices “to further illustrate the recovery story, but any more that that would be too costly,” said Lyons. Allied Irish may sell as much as 2 billion euros of covered bonds this year, he said.
The lender posted combined net losses of 16.2 billion euros between 2009 and the first half of last year, according to the most recent company reports, and Allied Irish’s Duffy doesn’t forecast the bank returning to profit until 2014.
The bank’s deposits rose 5 percent in the first half of last year to 63.6 billion euros, the first underlying increase since outflows started in Irish banks in 2009. Its loan-to-deposit ratio fell to 120 percent at the end of October from 165 percent in December 2010, according to stock exchange announcements, and is now lower than a 122.5 percent target set for the end of 2013 under Ireland’s international bailout.
Fitch Ratings ranks Allied Irish at BBB, the second-lowest investment grade. Standard & Poor’s grades it BB, the second-highest junk grade, and Moody’s Investors Service assigns an equivalent Ba2.
Ireland’s government, which re-entered debt markets last year for the first time since before its 67.5 billion-euro international bailout in November 2010, said Feb. 26 it plans to lift its banking guarantee by the end of March. After seizing five of its six largest lenders in the past four years it plans to rebuild the financial system around Allied Irish and Bank of Ireland Plc, the so-called pillar banks.
For those two, “the government will step in to support senior unsecured debt holders in case of need” even after the guarantee is lifted, Claudia Nelson, an analyst at Fitch in London, said in an e-mailed response to questions. “The bank has changed its funding structure in such a way that it is has reduced its need to access the capital markets. However, it is still reporting large losses,” she said.
Taking advantage of sentiment that Fitch calls “mildly improving,” Bank of Ireland, the nation’s largest bank, in December raised 250 million euros in subordinated bonds. Yields on the 10 percent bonds due 2022, part of the lender’s Tier 2 capital, have fallen to 8.52 percent from 10 percent. Average yields on notes in Bank of America’s Euro Lower Tier 2 Corporate Index dropped to 3.44 percent from 4.25 percent in the period.
“AIB were in a worse position than Bank of Ireland, so they will need favorable conditions as well as a high coupon to issue subordinated bonds,” said Simon Adamson, an analyst at CreditSights Inc. in London. “Everything has its price, it’s just that it’s going to be more difficult for AIB.”
The lender lost about 29 billion euros on soured loans between 2008 and the end-June 2012, according to data compiled by Bloomberg, based on the company’s annual and interim reports. The figure includes loan impairment provisions and losses on loan disposals, including the sale of risky real-estate assets to the National Asset Management Agency, the nation’s so-called bad bank, three years ago.
The government plans to conduct another round of stress tests later this year. Allied Irish’s Duffy said that while he doesn’t expect the bank to need more capital, the prospect may induce potential investors to hold back as they await the outcome of the review. Finance Minister Michael Noonan said Feb. 21 that he would prefer the assessments to take place alongside Europe-wide tests, which he “understands” are likely in 2014.
“We, in our plan, want to be able to continuously access the marketplace” this year, said Duffy, who was appointed CEO 14 months ago. “It’s very difficult for investors if there’s a domestic banks stress test in the middle of all that. They may just wait. So you could shut yourself out of the markets.”
Joe Brennan in Dublin at +353-1-5239-522 or firstname.lastname@example.org;
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