Bank of Ireland tests market after bail-in

Thu Dec 13, 2012 12:25pm EST

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LONDON, Dec 13 (IFR) - Bank of Ireland on Wednesday became the first bank to sell subordinated debt after imposing severe haircuts on junior bondholders in the wake of the eurozone crisis.

Those involved said the deal showed that banks can still have (expensive) access to the capital markets even after controversial bail-ins.

The bank sold a EUR250m 10-year Tier 2 transaction via sole lead Deutsche Bank, defying the widely held perception that investors would shun issuers that had burned them in the past.

Bank of Ireland's subordinated bond holders lost as much as 90% of their investments when they were forced to share the cost of recapitalising the bank after the banking crisis. The bail-in took place 18 months ago.

The final order book for the Single B rated transaction was more than three times subscribed, with a combination of UK, US and European accounts taking part in an offering that gave investors a juicy 10% coupon.

"A deal like this would have been perceived to be impossible earlier this year," said Vinod Vasan, head of European FIG CMTS at Deutsche Bank.

"But there was a huge reception for the bond which shows that there is a lot of demand for Irish credit and investors are keen to put money to work."

However, some market observers were less than impressed by the marketing of the deal, with one banker saying the transaction does not represent the turning point people are hoping for because of a relatively limited distribution.

"It was slightly cheeky to present this as a public deal that was placed in the market," said the banker.

"There is a lot of talk that EUR200m of this went to Bank of Ireland's largest investor and only EUR50m was placed with investors on a syndicated basis."

Another banker had heard about the significant lead order and said that, while it is good to see Bank of Ireland issuing capital, the tight nature of the deal undermines its landmark status.

"The jury is still out on Ireland. So we'll just have to see how they fair in the future," he said.

Deutsche Bank declined to comment on distribution.

BELOW PAR

Bank of Ireland carried out voluntary below par tender offers on its junior debt as a way of bolstering its capital as part of a state-backed recapitalisation and also used so-called exit consents from 2010 as a way of forcing bondholders' hand in taking losses on their investments.

Former investors in Bank of Ireland and Allied Irish Banks are now seeking compensation for being forced to take just one cent for every EUR1,000 of subordinated bonds they held.

In the summer, the English High Court ruled that exit consents used by Anglo Irish Bank to forced bondholders to take huge losses were illegal and now a group of Bank of Ireland bondholders are now believed to be in discussions with the institution about a possible settlement.

The group has also lodged letters with the Irish Ministry of Finance, alongside a number of bondholders in Allied Irish. The latter are at an earlier stage of proceedings and have yet to engage fully with the bank. The Ministry did not respond to a request for comment from IFR.

Unlike other Irish banks, Bank of Ireland escaped being nationalised after a last-minute EUR1.1bn investment by US investors - led by Fairfax Financial, WL Ross, Capital Research and Fidelity - restricted the state's stake in Bank of Ireland to 15%.

Bank of Ireland has been improving its franchise in recent months as the credit story surrounding Ireland is being viewed more favourably by global investors.

The bank managed to sell EUR1bn through a covered bond in November that reinforced hopes that the bank is on a road to recovery. The bond offered investors a 3.125% coupon for three-year debt and managed to attract orders of EUR2.5bn.

But while certain investors seem to be warming to the prospect of an Irish rehabilitation, many remain unconvinced.

"There is still a lot of restructuring work to be done in Ireland and the country has a long way to go before it will be perceived as a credible place to invest in," said one investor who refused to take part in Bank of Ireland's Tier 2 bond.

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