Anglo Irish mulls buyback as scraps Tier 1 interest

* Anglo Irish says not paying Tier 1 coupons on EU ruling

* Lender reiterates possibility of buyback/exchange offer

By Natalie Harrison

LONDON, July 9 (Reuters) - Nationalised lender Anglo Irish Bank [ANGLLN.UL] said on Thursday it would not pay interest on its lowest-ranked Tier 1 debt, but said it was considering an offer to holders of $4.4 billion of its subordinated bonds.

Anglo Irish was bailed out by the Irish government earlier this year to the tune of up to 4 billion euros ($5.6 billion) and has been a factor in the sovereign ratings downgrades of a nation that before the financial crisis basked in the sobriquet "Celtic Tiger".

As a condition of that state rescue, the European Commission has ruled that the lender cannot pay interest on its Tier 1 bonds -- the lowest-ranked debt that sits just above equity -- which is next due in September, the lender said.

In addition, the bank reiterated that it was still considering a "Liability Management Exercise" that would involve an offer for five Tier 1 bonds, one Upper Tier 2 bond and one Lower Tier 2 bond.

"Anglo Irish is trying to smooth over the very bad news that it will not be paying coupons any more with this buyback comment, but it has been mentioned before, and we still haven't see anything," said a trader.

"A buyback or exchange does not make sense. They are better off not paying the Tier 1 bonds, which is what these bonds are designed to do, rather than lose 100 percent of innovative Tier 1 capital," the trader said.

Anglo Irish Tier 1 bonds are currently trading at around 25 to 30 percent of face value, the trader said, adding that investors assuming a buyback offer at around 35 percent of face value risked getting stung.

"I am bearish. I'm not sure what the chances are of getting even that much. The bank is not going to turn around in three months, and it's likely to be under state control for a long while yet," the trader said.

Others, however, said a buyback was likely and could come soon.

"To me it makes sense. If it buys back 1 billion euros of these bonds at 30 cents, it can book an immediate gain of 700 million euros," said Phil Milburn, a fixed-income fund manager at Aegon Asset Management.

"They can book a gain now and get rid of the risk of having to pay interest three or four years down the road if they start paying dividends again," he added.

Analysts at CreditSights said it was the fourth time the European Commission had insisted on deferral of interest on Tier 1 debt as part of state aid approval, following similar calls on Bayerische Landesbank (BLGGgh.F), HSH Nordbank [HSH.UL] and Commerzbank (CBKG.DE).