* AIB back in covered bond market for first time since 2007
* Issue four-times oversubscribed, 95 pct foreign bought
* Vital step in returning banks to independence-fin min
By Lorraine Turner and Conor Humphries
DUBLIN, Nov 28 (Reuters) - Allied Irish Banks raised 500 million euro ($646.55 million) through a three-year bond issue on Wednesday and intends to build on a resurgence in Irish capital markets with up to three more issues next year.
Emulating the debt market success of peer Bank of Ireland and Irish utilities Bord Gais and ESB earlier this month, the state-owned lender sold the paper at mid-swaps plus 270 basis points. The issue was four-times oversubscribed.
It follows the Irish sovereign's gradual market return from a near two-year absence after Ireland and its banks were locked out of capital markets, forcing the state into a bailout and lenders to turn to the European Central Bank (ECB) for funding.
"This bond issuance by AIB comes at the end of a very successful month for Ireland on the international bond markets which has seen significant demand for Irish debt," finance minister Michael Noonan said in a statement.
"The raising of 500 million euros marks another important step in our goal of returning our banks to full independence."
AIB - which set the state back over 20 billion euros during the financial downturn, the most handed out to any lender still open - said over 95 percent of demand came from outside Ireland, with 170 international investors expressing interest.
It was the first time the bank issued a bond backed by Irish mortgages and without the assistance of a state guarantee since 2007 and AIB Chief Executive David Duffy said he hoped to tap the covered bond market again two or three times next year.
He said it was hard to say when the bank would be able to raise unsecured funding and that the timing depended on how the euro zone debt crisis plays out.
"It's a very successful entry ... Really this was about credibility today, is a sovereign-owned Irish bank able to access the market without the guarantee so we were less concerned about quantum in this case," Duffy told reporters.
Bank of Ireland, which reopened the country's bank debt market in mid-November, raised 1 billion euros from its three-year covered bond, the bank's most significant bond issue in over three years.
Ireland's Electricity Supply Board (ESB) raised 500 million euros worth of seven-year debt that attracted around 6 billion euros of demand in mid-November and was followed up by Bord Gais that sold five-year debt that was 13 times subscribed.
Ireland's debt agency first took advantage on the sharp fall in Irish yields earlier this year by launching two bond swaps, a maiden amortising bond issue and new long-term debt sales. The market now awaits its next move.
"The big four with the Irish sovereign somewhat stamped on them are out of the way so the NTMA would certainly be the logical step," Owen Callan, a bond dealer at Danske Bank, said, referring to recent string of corporate issuance.
"I suspect that they can rest easy knowing that the start of 2013 should open up in relatively decent form and that therefore there's no need for them to rush to the market to try and take something off the table."