Bank of Ireland Rescue Will Hit Both Bond and Share Holders

New share issue will result in 10 or 20 cents on the dollar for bondholders

Bank of Ireland is intent on raising 4.2 billion euros, or $6.1 billion, in fresh capital, the bank said on Friday, announcing plans to issue up to 2.2 billion euros in new stock as it offers to buy back debt using both equity and cash.

However, that buyback will come at a steep discount: in attempting to assure its rescue, the bank plans to offer only 10% of the value of securities if it pays bondholders in cash, or 20% if bondholders will accept an equity alternative.

Reuters reported that the move sent the bank's stock dropping by as much as 22%. The Irish government holds a 36% stake in the Bank of Ireland, which is the only lender in the country that managed to avoid a majority takeover by Dublin when most of the banking sector was nationalized to avoid collapse.

In a statement, the bank said the terms of the Liability Management Exercise (LME) reflect the Minister for Finance's “objective of ensuring subordinated debt holders contribute a significant element of the bank's core tier 1 capital requirement of 4.2 billion euros."

It added that if bondholders fail to ante up in response to the offer, it will take other "severe measures" to compel them to help the bank recover its financial health. "In these circumstances, the bank believes the level of return to the holders of the outstanding eligible subordinated debt securities may be materially below that available ... under the LME,” the bank said.

One analyst, who asked not to be identified, said of the fall in the stock's price, "The price at which new shares are issued is 10 cents, and there will be a lot of new shares being issued at the time, so current shareholders are going to be diluted massively. Plus, if there is an equity exchange for the current debt, there is another dilution to come through, so that's the reaction, which is understandable."

The bank said the actual size of the issue would be between 1.76 and 2.22 billion euros, and would depend on how many shareholders opted to exchange their securities for shares rather than cash. It added that it would announce the size of the issue after completion of the LME tender offer.

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