COMPLEX MOVE BY AIB TO BOOST FINANCIAL STRENGTH - More moves in the banking industry were announced this morning as Irish Nationwide Building Society announced a new chief executive and AIB said it was looking at a complex process to bolster its financial strength.
AIB is offering to exchange perpetual bonds held by international debt holders for more secure bonds. Perpetual bonds allow the bank not to pay interest and they are never ending. The offer is to exchange that type of debt instrument for a different type of debt which ensures the interest is paid and has a time limit. The bank is offering to buy back the perpetual bonds for between 50-67 pence in the pound. The benefit of that discount will improve the bank's capital ratio, or its financial strength. This will make it more attractive to investors.
The head of research at Bloxham Stockbrokers, Kevin McConnell, says the latest move from AIB is a wise one. He says a lot of the bonds AIB had issued in this class had fallen quite considerably in value as they are not protected by the Government's guaranteed scheme and are trading well below their par value of 100 cent at 35 cent.
He says that AIB will have to pay a premium on the current market price to buy back the bonds and then exchange them for the new type of debt. He says today's announcement will result in a straight boost for AIB's capital by between €750m and €900m. This is turn will boost its core equity tier one ratio by about 10% - this is a key ratio which people would look at when they are assessing the strength of a bank's capital base and gives it more financial stability.
Today's planned move by AIB follows similar moves at Bank of Ireland recently to bolster their financial strength. Mr McConnell points out that Bank of Ireland paid for their bonds in cash, however, while AIB are exchanging one type of bond for another.
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UK OVER THE WORST? - The UK has passed the bottom of the recession with a return to economic growth in April and May, a leading think tank claimed yesterday. The National Institute of Economic and Social Research (NIESR) - the equivalent to Ireland's ESRI - said the economy hit a 'trough' in March, but estimated there had been growth in gross domestic product (GDP) in the past two months in a sign the recovery is in sight.
Richard Hunter, of Hargreaves Lansdowne in London, says the NIESR's growth figures for the second quarter will not be confirmed until the end of July. However, he says there is an increasing number of economic indicators which are pointing to a bottoming out of the recession. He says that, no doubt, there will be other shocks in store for the UK economy, but for the moment it does appear that the country has passed the low point.
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MORNING BRIEFS - On the currency markets, the euro is worth $1.4039 and 85.6 pence sterling.
