Holders of Bank of Ireland 13.375% perpetual subordinated bonds face a savage haircut on their investments. They are being offered just 20p in the pound – with worse to come if they don’t accept. Bank of Ireland calls it ‘burden sharing’ but holders can, no doubt, think up far more graphic terms for this drastic reduction in their investments – the burden of which is definitely not being shared by all bond holders. Holders of senior Bank of Ireland debt – mostly other banks – have not been called upon to accept any reduction in the value of their bonds.
Bank of Ireland 13.375% Perpetual Sub. Bond (BOI) is an upper tier two security and holders are being offered either 20p in the pound cash, with no payment for accrued interest or 40p in the pound in Bank of Ireland ordinary shares based on a conversion price between € 0.1130 and € 0.1176. This is worse than bondholders had expected. The exact equity conversion price will be announced on 23 June. This offer will include a payment for accrued interest. Bondholders who accept the debt-for-equity offer and sell their ordinary shares should bear in mind that delivery of ordinary shares is not scheduled to take place until 12 August.
The details were laid out in two announcements by Bank of Ireland yesterday: an announcement of further capital raising and a second on 'exchange offers and consent solicitations'.
These are the ‘early bird’ offers available to early accepters. Those accepting later will have terms reduced by 20% to 16p in the pound cash or 32p in the pound in the equity offer. No deadline has yet been announced for acceptance, but the circular and prospectus are due to be sent out on Friday 17 June. As the results of the early bird exchange offer are due to be announced on Thursday 23 June, this suggests there will be a very short window of opportunity in which to accept these offers. Holders should therefore be ready to respond quickly after the documents are sent out.
Should bondholders accept?
Should holders accept these offers? Given where the bonds have been trading – around 69p less than a month ago – they don’t look attractive. But what is likely to happen if the proposals are rejected by bondholders? Bank of Ireland is seeking approval from bondholders to grant the bank a call option (option to buy) at only 1p per £1,000 nominal of relevant securities. The Irish minister of finance has stated that he is prepared to take ‘whatever steps are necessary’ in respect of subordinated liabilities to ensure this ‘burden-sharing’ takes place. A law passed in December allows Ireland's government to force restructurings upon subordinated bank creditors – that is the holders of junior bonds.
The bond offer is part of the government’s plans to recapitalise Bank of Ireland which it effectively nationalised following the credit crisis and the bank is estimated to need €4.2 billion of core tier one capital. The scheme also includes proposals to amend the terms of the relevant subordinated liabilities to grant a call option. This will allow Bank of Ireland to acquire the securities for a cash amount less than the terms already offered to bond holders. Holders of ‘subordinated’ bonds stand at the end of the queue when it comes to pay outs.
This probably means that if holders do not take up these offers, they will most likely be forced out of their investments at an even lower level. Bondholders will have little choice but to accept these offers, and should be ready to act promptly from 17 June.
Other bondholders
Bank of Ireland bondholders are not the only ones suffering. The Irish government is hoping to cut around €5 billion from a €70 billion bill for bailing out its banking sector which collapsed following the credit crunch by imposing losses of up to 90% on junior bonds in AIB, Bank of Ireland, Irish Life & Permanent, and EBS building society.
Finance minister Michael Noonan has faced widespread criticism for not imposing losses on banks' senior bondholders, widely held by other banks throughout Europe, due to opposition from the European Central Bank. The ECB is afraid of the domino effect this would have on other banks. The Bank of Ireland's move has also angered hedge funds. The bank has responded that the Irish government may have to increase its stake to 87% if bond holders do not accept the proposals.
Just over a week ago Irish Life & Permanent and EBS building society also said they would impose losses equivalent to around 80% to 90% of the face value of some €1.1 billion in junior bonds. ‘These financial institutions are remaining solvent due to the ongoing overwhelming financial support of the state,’ said Noonan. ‘Without this support subordinated bondholders' entire investment would have been irrecoverable.’
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