AIB is to offer a 12.5% annual coupon, or interest rate, on up to €2.7 billion worth of bonds it wants to issue in a bond exchange programme. The programme, announced last week, is aimed at boosting the bank's capital strength by €1 billion.
The bank is offering to exchange perpetual bonds for tier two bonds. Tier two bonds offer investors a greater level of security because, unlike perpetual bonds, they have a maturity date and if the bank fails to pay the coupon it is in default. The maturity dates for the bonds AIB is offering are in 2019, meaning they fall outside the scope of the Government guarantee.
Typically debt investors buy perpetual bonds because they attract a higher level of interest though the rules governing interest payments favour the banks.
AIB is to pay 50-67 cent on the euro - depending on the type of debt being exchanged - with the new bonds maturing ten years after the settlement date, currently expected to be June 25. The bulk of the notes AIB wants to swap are quoted at around 35-45% of their nominal value.
An analyst said last week that if the bank paid an average of 50 cent on the euro and had 100% take-up, the potential capital gain could be €1.2 billion. AIB needs to raise an additional €1.5 billion in capital on top of a €3.5 billion state injection of funds.
Banks are taking advantage of steep discounts in the secondary debt market to improve their capital cushion by buying back bonds at a discount. Bank of Ireland recently repurchased €1.26 billion worth of debt at 38-50% of face value.
