Irish taxpayers… 0?
For your perusal — a letter sent on Monday by Brown Rudnick to Bank of Ireland, challenging some (coercive) terms in its debt buyback.
Click image for the full letter:
Also, and not coincidentally, for your perusal — ‘an amendment to exchange offer’ sent out by the bank on Tuesday afternoon:
The Bank hereby amends the terms of the 13.375% Securities Exchange Offer only such that a holder who offers to exchange its 13.375% Securities at any time up to 4.00 a.m. (New York time) on 5 July 2011 will be eligible to receive the Early Option 1 Consideration Amount or the Early Option 2 Consideration amount (being, respectively, £400 and £200 per £1,000 in principal amount of 13.375% Securities), as applicable, in respect of its 13.375% Securities accepted for exchange…
Under the original terms of the 13.375% Securities Exchange Offer, a holder who participated in the 13.375% Securities Exchange Offer prior to the Early Participation Deadline of 5.00 p.m. (New York time) on 22 June 2011 would be eligible to receive [etc etc]…
A tiny change of timing, a minor victory in the legal battle against BOI by the UK pensioners that Brown Rudnick represents, and a small problem for the need for Ireland’s banks to bail-in their bondholders. It’s only a small one, but it’s tricky.
The instrument in question for both documents is £75m of unsecured perpetual subordinated debt (technically, permanent interest-bearing shares) originally issued under English law by the building society Bristol & West in 1991, before a takeover by Bank of Ireland in 1997. For the bank, it’s chump change compared to the €2.6bn of bonds being bought back through its various exchange offers. But it has been income for hundreds of UK pensioners who bought the bonds off Bristol & West.
They’re now being represented by a firm that specialises in leading cases for hedge funds and distressed debt specialists (and led and lost the bondholder challenge to Anglo Irish’s earlier subordinated debt exchange). This is an unusual case.
But in any case, Brown Rudnick is arguing for the shares to be excluded from the exchange, citing bias against small investors holding these securities.
Right. This is a tricky request to say the least. Bank of Ireland is bust without burning subordinated bondholders, and otherwise the cost is going onto the Irish taxpayer. This is why the bond recoveries now being offered to investors have come out so harsh, and any kind of attempt to claw back recoveries would be doomed not to say quixotic. Indeed the Pibs currently trade –illiquidity– at around 24 to 26 per cent of par value.
This claim is however about the structure of the offer for small investors.
Bank of Ireland has rebuffed the challenge by arguing that any investor should have known the credit risks, basically. Quite obviously yes — the Pibs are subordinated capital instruments and this was always clear in the prospectuses. Bank of Ireland has also pointed to the shares’ interest payments (13 per cent plus) as evidence of this risk, although Bristol & West originally issued them at a period of generally high interest rates. So the argument gets bogged down a bit.
But it’s also strictly irrelevant if this is about structure. The challenge to the offer revolves around two points, really:
– First (and which the bank has now addressed, however adequately or not) the bonds’ investors can’t be reasonably expected to respond to the exchange offer in time, or even by using the specified clearing systems. Some investors have literally just been left holding pieces of paper by this point.
– Second (and a lot harder to sort out), the basic argument is that it’s been made impossible to tender small amounts of the sub bonds (smaller than €50,000 – see page 23 of this Bank of Ireland capital update) on equitable terms to large holders. The latter could get a 40 per cent recovery and receive any unpaid accrued interest by accepting the offer, whereas small investors who can’t tender enough securities will be stuck with the other option of 20 per cent and no accrued interest. As the FT reported at the weekend, at issue here is a European Union directive on securities prospectuses which allows the €50,000 threshold.
So this is all, properly, a mess and a clumsy structure for a bail-in which is simply unavoidable by now, and also largely unchallengeable in the terms of its coercive nature overall, as based in the Irish government’s subordinated liabilities orders under the Credit Institutions (Stabilisation) Act.
It’s going to be interesting to see how far this one goes, however.
Related link:
Will the last Irish bank to leave the market please turn out the lights – FT Alphaville
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