As reported on here two weeks ago, a group of subordinated bondholders in theUK is unhappy at Bank of Ireland’s proposals to buy back its bonds at discounts of up to 90%. And I have now seen what appears to be the group’s application to England’s High Court on Friday last – attached here.
The application essentially claims that Bank of Ireland is in fine fettle as a bank and that the agreement, under which the bondholders bought the bonds from Bank of Ireland in the first place, means that before haircuts are imposed on subordinated bondholders, contributions should be sought from other classes of stakeholder.
In practice this means that Ireland’s National Pension Reserve Fund (NPRF) being the only preference shareholder with some €1.8bn of preference shares should be wiped out first, and then the ordinary share capital and share premium and revenue reserve – the NPRF owns 36% of all that, so would be a loser to the tune of €2bn there. And only then should subordinated bondholders be burned. Or at least that is my interpretation. The application itself is worth reading.
The application is interesting because it will potentially test the legality of draconian Irish banking law in the English courts – still no word on the Fir Tree Capital v Anglo case in New York which appears to be held in abeyance; in the Irish courts the Aurelius v AIB case continues at Dublin’s High Court and we await a conclusion there. Bank of Ireland is the healthiest of the six Irish state-guaranteed financial institutions which makes the English application all the more interesting, and should the case reach a hearing it might be amusing to hear the bank justify some of its rosier pronouncements in recent times.
There has not been any comment yet from the Department of Finance on the application.
UPDATE: 28th June, 2011. Bank of Ireland has backed down in the face of the above application and withdrawn the offer to the €75m PIBS holders. This is the Bank of Ireland press release which states “the Bank currently intends to instigate a new offer to holders of the £75,000,000 13.375 per cent. Unsecured Perpetual Subordinated Bonds at a future date. In so doing, the Bank will seek to address the unique difficulties that have been highlighted to the Bank to date with regard to participation in the terminated Offers by the holders of the £75,000,000 13.375 per cent. Unsecured Perpetual Subordinated Bonds.”
NAMA Wine Lake 
I honestly haven’t the stomach for them winning this fight. I’d honestly change laws here to make that happen.
Can the Government liquidate its shares, burn the bondholders and then buy the shares again? Seems to be the kind of technical crap they are pulling.
The government were really making it up as they went along in relation to the recaps. In the 2 years that the guarantee was in place it is astonishing that no resolution mechanism was put in place for failing banks.
It would be tempting to let these guys take their equity stake in the bank and then remove all outstanding government support for the BoI and see how long it survives on its own two feet
Why don’t the bondholders sue the European Parliment, that is where the money is? As least there is one Irishman with cojones: http://www.independent.co.uk/news/world/europe/europe-braced-for-meps-expenses-storm-2300806.html
@Rob
“I honestly haven’t the stomach for them winning this fight. I’d honestly change laws here to make that happen.”
1) The BoI bondholders are arguing that they do not deserve treatment worse than AIB bondholders, but better one.
2) They are also arguing that since they have offered to recapitalize the bank entirely with their own money, there is no need at all for the government to put any money in; and therefore for the bonds to be haircut. What they are in fact saying is: why is the Irish government wasting its time and money on trying to disposses BoI bondholders when it is simply not necessary for any reason at all? (It does not save the government any money; it does not save the bank any money; the only reason to do this to BoI bondholders is so that Mr Noonan can appear tough). They are arguing that Mr Noonan has better things to do.
3) The government could change the laws to make this legal. Why don’t they? They don’t because to do so will change the last 400 years of legal and financial practice and make Irish laws so completely out of line with the rest of the world that ireland might as well forget being an offshore center for global corporations.
@NWL
your summary isn’t quite correct; the lawsuit you reference does not recommend burning shareholders or NRPF; it only references the fact that normal insolvency procedure would require burning those guys first. (insolvency laws are designed precisely for emergency situations like this one; what could possibly be the argument for not applying them?) note that the bondholders have offered to refinance the bank with their own money and that under their plan it is not necessary for the Irish taxpayer to put another penny into the bank. yet, Mr Noonan prefers a plan under which the irish tax player injects another 1.6 billion into the bank but burns the BoI bondholders. in other words, you are being asked to stomp up 1.6 billion so that Mr Noonan can look tough? think about it, it does not make any sense.
@Reg, any views on the assessment by Dublin-based Glas Securities today that “Based on this result today, we would suggest that it is 1-0 to Bank of Ireland at half time, with those who are seeking to block the bank’s” liability management exercise “finding that there is a strengthening wind blowing against them as we await the result of the ‘late bird’ tenders in early July,”
http://www.irishtimes.com/newspaper/breaking/2011/0623/breaking61.html
Bank of Ireland was reporting what it considered a strong response from subordinated bondholders to its debt-for-equity swap offer.
“What the Irish authorities are doing here is infuriating, but it is also very sad from the point of view of the Irish. The stated aim of the latest capital raising exercises is to make the Irish banks so strong in capital terms that they will be able to re-enter the loan markets for balance sheet funding. However, the means by which the capital is being raised is itself irreparably damaging the banks’ reputation and standing in the markets and hence is acting directly against this stated aim. The tragedy is that it would have been relatively easy to achieve these aims via voluntary tenders to sub debt holders to swap into equity nearer par, without severely jeopardising the banks’ ability re-enter funding markets eventually. The Irish government has chosen not to do this for short term political reasons, to be seen to be “burning the bond holders” and to prefer the earlier mistaken equity investments of the State in the banks. I’m not sure they yet understand the huge implications of what they’ve done.”
http://boards.fool.co.uk/apologies-to-those-whom-this-is-teaching-to-12290980.aspx
@Reg
“The BoI bondholders are arguing that they do not deserve treatment worse than AIB bondholders, but better one.”
Because BoI is in a better position then AIB? So what? Would they have survived without the Government, us? No.
“They are also arguing that since they have offered to recapitalize the bank entirely with their own money, there is no need at all for the government to put any money in; and therefore for the bonds to be haircut.”
? The (subordinate) bondholders are willing to purchase another 5.2bn in bonds? Or another 5.2bn in shares? Really?