merrion street

The Minister for Finance notes the statement today by Allied Irish Banks p.l.c. of its intention to launch a liability management exercise (LME) in relation to the remainder of its subordinated liabilities.

The Minister said:

“This is the final market based step to ensuring appropriate burden sharing by subordinated bondholders in AIB. The offer prices and the terms of this Liability Management Exercise are fair and balanced relative to the capital requirements of the bank and the level of financial support (in the form of equity, liquidity and guarantees) which the Irish State has so far provided to AIB. It is clear that without such significant financial support, AIB would have become insolvent and subordinated bondholders’ entire investment would have been irrecoverable. The proposed LME offers those investors the final opportunity of a market based exit at a return which is reasonable and fair considering the level of Government support to date.

This offer is based on the Government’s clear decision that there should be appropriate burden-sharing with subordinated bondholders and that the levels of burden-sharing that would be provided by this LME are the minimum acceptable.”

The Minister has made it very clear that it is Government policy to provide the necessary levels of capital support to AIB, as a pillar bank in the new Irish banking structure but the Minister has similarly made it clear that such support is given only on the basis of a significant contribution from subordinated bondholders in the bank.

The Minister wants to make it clear to investors that, if the LME fails to deliver the required core tier 1 capital gain to the bank, the Government will take whatever steps are necessary under the Credit Institutions (Stabilisation) Act 2010 or otherwise, to achieve at least that level of contribution. Any further action, after investors have had an opportunity to take part in the LME, will result in severe measures being taken in respect of subordinated liabilities.

Finally, the Minister notes that the subordinated liabilities order made by the High Court under the Stabilisation Act in respect of the subordinated liabilities of AIB is the subject of a court challenge (as provided for in the Act) by two investors with holdings in only three of the eighteen affected securities. The subordinated liabilities order was sought by the Minister and was issued by the High Court in accordance with the provisions of the relevant legislation. The Minister considers that these challenges are entirely unfounded.

These challenges will be dealt with by the Courts in the normal manner and a hearing date is set for 2 June 2011. The challenges will in no way deter the Government from achieving appropriate burden-sharing of levels broadly consistent with those provided for in this LME with the subordinated bondholders of AIB and of Bank of Ireland, Irish Life & Permanent and EBS which were also subject to the 31st March 2011 stress tests.