The bank’s hand was forced after rumours it would miss a payment led its subordinated bonds to lose nearly a third of their trade price.
ALLIED IRISH BANKS is set to pay a coupon of €80m this week to a group of subordinated bondholders who held out on a buy-back last January. The coupon or interest payment is due on bonds that were the subject of exchange tender last January when holders were offered just 30 cents on the euro.
The exchange offer was taken up by just half of the holders of the €3.9 billion subordinated debt under tender. There was speculation that the bank might seek to re-tender for the outstanding bonds, but at an even lower rate, under tough new bank legislation.
Under the credit stabilisation act, the bank is able to miss coupon payments and bond market sources say AIB could have used any subsequent weakness in price after the coupon miss to later tender for the bonds cheaply in the market.
The strategy now looks unlikely.
AIB was forced to issue a statement last week when rumours emerged that the bank was planning to miss a coupon payment on a separate tier 2 bond debt.
The subordinated bonds, which had traded at 30 cents, fell to just over 20 cents on the market whispers.
The rumours also pushed the premium that investors demand to hold two-year Irish gilts to a record 842 basis points above German benchmark bonds, rising 80 points in a single day.
Market sources say the coupon paid last week was less than €250,000 and the bank had never had any intention of not paying. AIB said last week it had “no plans not to make future payments”.
The National Treasury Management Agency was also forced to issue a statement quelling any suggestion that Ireland will miss coupons on sovereign debt.
The contagious effect on Irish sovereign bonds and the entire eurozone of withholding a coupon means the bank will press ahead with Tuesday’s €80m payment.
The proximity of this week’s coupon payment to the results of the Central Bank’s prudential capital assessment review (Pcar) and prudential liquidity assessment review will also deter any aggressive action by the bank.
The results of the reviews will be released after the stock market closes on Thursday.
Bank of Ireland, Educational Building Society and Permanent TSB were given sight of the stress test results for the first time on Friday.
The taoiseach, Enda Kenny, said on Friday that talks with the European Central Bank on fixing the banking system would resume after the results of the stress tests were known. The government is pushing the ECB for a medium- to long-term solution to the bank problems.
The results would also make it clear whether senior debt holders would be affected, Kenny added.
Davy estimated that the Pcar could flag up the need for additional capital of up to €27 billion for the Irish banks.
The broker estimated that AIB faced loan impairment of almost €18 billion over the course of the downturn.