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AIB failure to pay interest on Notes

GoSeigen
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AIB failure to pay interest on Notes

#59686

Postby GoSeigen » June 12th, 2017, 11:48 pm

Is anyone else sore about AIB failing to pay interest on its notes, while making distributions of "excess" capital to its ordinary shareholders?


Irish-Government-owned AIB (hereafter "the Bank" or "AIB") still has one or two series of dated subordinated notes outstanding which were subject to a Subordinated Liabilities Order ["SLO"] made effective by the High Court in an declaration dated 1 July 2011.

The particular series I refer to are the 12.5 per cent Subordinated Notes due June 2019 ("the Notes") of which £79 million is still outstanding. I hold some of these Notes. The effect of the SLO was to make interest payments on the Notes optional (i.e. at the discretion of the board) and extend their maturity to 2035.


Recently, AIB declared and then on 9 May 2017 paid a cash ordinary dividend totalling EUR250m. This payment was justified by the Bank's "strong profitability and capital ratios". Furthermore, the Irish Finance Minister considers the postition of AIB strong enough to have announced a sale of 25% of the State's equity holding to the public, the Prospectus having been released today:

https://aib.ie/content/dam/aib/investor ... 062017.pdf


This prospectus fails to make any disclosure about the non-payment of interest on the Notes or the risks attendant in the concommitant upending of the creditor hierarchy. The prospectus has long detailed descriptions of Policy on the Payment of [optional] Ordinary Dividends but is utterly silent on any policy regards payment of optional interest on the more senior Notes.

To date I have seen no announcement of intention to pay the forthcoming 25 June 2017 interest payment on the Notes, so can only assume that yet another payment will be missed. Failing to pay interest right after the distribution an ordinary dividend seems to me unconsionable and I think it's time to take action.


What are the thoughts of other Lemon Fools?


GS

Dod1010
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Re: AIB failure to pay interest on Notes

#59691

Postby Dod1010 » June 13th, 2017, 12:49 am

What action have you got in mind? If they have the option of paying interest or not that is up to the Directors. Shareholders or rather bondholders are at their mercy and presumably you knew that when you bought.

Dod

GoSeigen
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Re: AIB failure to pay interest on Notes

#59702

Postby GoSeigen » June 13th, 2017, 6:32 am

Dod1010 wrote:What action have you got in mind? If they have the option of paying interest or not that is up to the Directors. Shareholders or rather bondholders are at their mercy and presumably you knew that when you bought.

Dod


Hi Dod,

No, I didn't know that when I bought. As made clear in the OP interest was made optional by an Order issued in 2011 by the Irish Finance Minister, who now owns the Bank. Anyone who bought the Notes before that date was not aware of the future optional payments absent a crystal ball.

You are right that we are at the mercy of the directors, so that is clearly where any action should be aimed. They have a number of motivations and influences which any action could seek to exploit, i.e.:
1. Pressure from their prospective and new shareholders.
2. Pressure from the Irish Government.
3. Pressure from many small or from powerful large Noteholders.
4. The long legal history of creditor hierarchy.
5. Their own sense of ethics and morality and logic.
6. Pressure from the media.
7. Their public image.
8. Banking rules and the Regulators.

As a start, I would urge holders urgently to write to the CFO asking whether there will be an interest payment on 25 of June and if not, why the bank has a policy on optional dividends that results in their payment of a dividend to shareholders on 7 May 2017, but at the same time a policy on optional interest which results in non-payment on 25 June 2017.

Now is a good time to apply pressure given the Public Offer being made, when all the parties involved will be under pressure to make it successful.


GS

GoSeigen
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Re: AIB failure to pay interest on Notes

#60333

Postby GoSeigen » June 15th, 2017, 3:44 pm

If any other readers have an interest in these Notes or this topic, please post or PM me. I have written to the Bank and received a reply, and happy to discuss with others what to do next, but little point speaking to myself on this forum!!


GS

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Re: AIB failure to pay interest on Notes

#60350

Postby dspp » June 15th, 2017, 4:23 pm

GS,
I am very happy to learn. Please post if you can.
Regards,
dspp

johnhemming
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Re: AIB failure to pay interest on Notes

#60452

Postby johnhemming » June 16th, 2017, 7:02 am

It is an interesting issue. What proportion of the equity is held by the Irish government?

GoSeigen
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Re: AIB failure to pay interest on Notes

#60656

Postby GoSeigen » June 16th, 2017, 7:51 pm

First I'll say that it is pretty much certain the Bank will not make the next payment on 25 June, because under the terms of the Notes they have to give a month's notice of payment and have not done so. Therefore:

ap8889 wrote:WTF?

So a dividend for the ords was declared and paid, but the coupon on the bonds was skipped, despite capital being available?

Yes, that's exactly what has happened.

How is that even legal? I thought bond holders were senior in the credit hierarchy, and many bond agreements preclude distribution of dividends if the coupon cannot be paid...

Noteholders are indeed senior in the creditor hierarchy -- however these bonds do NOT have any blocker or pusher language that I am aware of, which weakens the contractual position of holders.

Whether it is legal to do what they are doing I am not sure. They will surely have some sort of legal advice on the matter. I have consulted my own legal advisor, but it would be great if knowledgeable Fools could point to any close precedents. I say close, because this is a nearly unique case AFAICS where a bond has optional, non-cumulative coupons. Many preference shares have this feature, but they are NOT classed as debt, and amny of those that are non-cum have the sort of blocking language that ap8889 alluded to. So I'd not be surprised if this was the first time a problem of this nature had arisen.

However, like you I find the fact that they can pay dividends but not coupons exceedingly strange: one inevitably suspects the hand of the controlling shareholder! [See my next reply on this thread...]

Where is Mark Tabor when you need him? The fixed income forum he runs may be able to help.


Mark to the best of my knowledge was not involved in the AIB situation; further, I don't view him as the magic bond-problem-solving fairy; thirdly, holders of this bond with a minimum 50,000 shape are unlikely to be the pensioner/widows and orphans class that Mark was keen to represent.

Having said that, I'm sure Mark would welcome discussion on his site, though I myself am not a member there yet. Please feel free to post there pointing to this thread or raising the issue afresh.

Thanks ap8889 for your input.

GS

GoSeigen
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Re: AIB failure to pay interest on Notes

#60658

Postby GoSeigen » June 16th, 2017, 7:54 pm

johnhemming wrote:It is an interesting issue. What proportion of the equity is held by the Irish government?


John, thanks for your interest. The Irish Government is the controlling shareholder with IIRC 98% of the shares, maybe more. They are about to sell 25% of their holding to the public in a massive IPO.

Any thoughts?

GS

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Re: AIB failure to pay interest on Notes

#60692

Postby UncleEbenezer » June 16th, 2017, 10:54 pm

GoSeigen wrote:Irish-Government-owned AIB (hereafter "the Bank" or "AIB") still has one or two series of dated subordinated notes outstanding which were subject to a Subordinated Liabilities Order ["SLO"] made effective by the High Court in an declaration dated 1 July 2011.


GoSiegen wrote:No, I didn't know that when I bought. As made clear in the OP interest was made optional by an Order issued in 2011 by the Irish Finance Minister, who now owns the Bank.


An order by the Minister or by the High Court? Surely one is accountable and can always be challenged (with a suitable offering of Gold to the other), while the other can only be challenged on pretty specific/technical grounds and by feeding a Higher Court?

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Re: AIB failure to pay interest on Notes

#60711

Postby GoSeigen » June 17th, 2017, 7:06 am

UncleEbenezer wrote:
GoSeigen wrote:Irish-Government-owned AIB (hereafter "the Bank" or "AIB") still has one or two series of dated subordinated notes outstanding which were subject to a Subordinated Liabilities Order ["SLO"] made effective by the High Court in an declaration dated 1 July 2011.


GoSiegen wrote:No, I didn't know that when I bought. As made clear in the OP interest was made optional by an Order issued in 2011 by the Irish Finance Minister, who now owns the Bank.


An order by the Minister or by the High Court? Surely one is accountable and can always be challenged (with a suitable offering of Gold to the other), while the other can only be challenged on pretty specific/technical grounds and by feeding a Higher Court?


Well spotted Uncle! The process laid down by the relevant law was that the Minister made the Order but it had to be brought before the High Court to be made effective. Various parties opposed the order in the Court, but the Judge eventually ruled in favour of the Minister.

So, your answer is both the Minister AND the Court!

GS

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Re: AIB failure to pay interest on Notes

#60715

Postby johnhemming » June 17th, 2017, 8:07 am

I think the Prospectus for the IPO is probably the best place to look when it is published as it is a material fact that should require some form of reference to. The burden sharing provisions at the EU level may also be relevant. Personally I would not be surprised if they decided to part pay on the debt at some rate or other (under 12.5) using burden sharing as a justification. However, I don't hold any of these and am not tempted at the current price. I may, of course, be wrong.

It might be worth looking through the papers on the ILP litigation to see what the Commission's detailed view is.

hiriskpaul
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Re: AIB failure to pay interest on Notes

#60820

Postby hiriskpaul » June 17th, 2017, 6:38 pm

I have just checked my accounts and found that I held these - bought for 34 plus quite a lot of accrued, threw in the towel 3 months later for 25 and no accrued. Subject to crappy LME and an SLO by the Irish Government. Thankfully I was only in for the minimum 50k. Have not touched any Irish paper since, apart from BOI due its special status.

What are they trading at now by the way?

GoSeigen
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Re: AIB failure to pay interest on Notes

#60824

Postby GoSeigen » June 17th, 2017, 7:04 pm

hiriskpaul wrote:I have just checked my accounts and found that I held these - bought for 34 plus quite a lot of accrued, threw in the towel 3 months later for 25 and no accrued. Subject to crappy LME and an SLO by the Irish Government. Thankfully I was only in for the minimum 50k. Have not touched any Irish paper since, apart from BOI due its special status.

What are they trading at now by the way?


Sorry to say, they are at around 70p having risen to 90p or more just before the 2016 Banking Sector equity crash. Restoration of coupons would bring them close to BOI levels IMO.


GS

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Re: AIB failure to pay interest on Notes

#60830

Postby johnhemming » June 17th, 2017, 7:47 pm

What is odd about the market is that it tends over time to ignore the nature of the contracts and only take into account whether payments are being made. This in essence ignores the risk of one contract over another although the entity risk is considered. This was most obvious over the RBS alphabet soup (one of the instances where the precursor board was very helpful - I made a profit out of the one set of USD bonds (the equity ones) and transferred it into the other set (the debt ones) which then produced another profit. I was quite surprised that hedgies had not spotted this.)

There would be a difference from the yield and I think it is possible that part of the coupon would be paid initially. (perhaps based on the then market price and a market yield on that. BOI 13.375 are at the maximum capital value at the moment. An increase in general sterling interest rates could cause a shock to that. However, I have no knowledge beyond my various experiences with various bonds etc and various legal actions over these - including the current ILP/PTSB one and some knowledge of how practical politics operates.

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Re: AIB failure to pay interest on Notes

#60842

Postby GoSeigen » June 17th, 2017, 8:39 pm

There would be a difference from the yield and I think it is possible that part of the coupon would be paid initially. (perhaps based on the then market price and a market yield on that.


The terms don't permit partial payments: it's all or nothing.


GS

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Re: AIB failure to pay interest on Notes

#61321

Postby hiriskpaul » June 20th, 2017, 10:37 am

GoSeigen wrote:
hiriskpaul wrote:I have just checked my accounts and found that I held these - bought for 34 plus quite a lot of accrued, threw in the towel 3 months later for 25 and no accrued. Subject to crappy LME and an SLO by the Irish Government. Thankfully I was only in for the minimum 50k. Have not touched any Irish paper since, apart from BOI due its special status.

What are they trading at now by the way?


Sorry to say, they are at around 70p having risen to 90p or more just before the 2016 Banking Sector equity crash. Restoration of coupons would bring them close to BOI levels IMO.


GS


Well done for holding on!

With 18 years to go a price of 70 implies a CAGR of about 2%, so there is clearly some market expectation/hope of a resumption of coupons. I deplore the payment of dividends whilst not paying more senior paper, but I am not convinced coupons will ever be paid. The SLO made the coupons "optional", which I have always assumed meant "cancelled".

It would be very hard for the Board to justify to shareholders any entirely optional (i.e. in absence of kickers) payments to bondholders. The only grounds I can see for doing so would be if AIB's business was suffering as a result, for example if it was difficult for them to issue T2 at reasonable rates. I don't know whether that is the case or not, but although I would not touch their paper, unfortunately most institutional investors have short memories so I suspect that not paying on SLO'ed debt is unlikely to cause them much of a problem.

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Re: AIB failure to pay interest on Notes

#62659

Postby johnhemming » June 25th, 2017, 9:19 am

I had a glance at the IPO prospectus:
https://aib.ie/content/dam/aib/investor ... 062017.pdf

The bonds appear to be valued on the basis that no coupons will be paid (ie at just over 10% of the nominal value) and it appears that the bank is subject to a recovery plan that requires them not to pay coupons. Hence I would assume that it is only once the agreement with the Irish government on non-payment of coupons ceases that there is any chance of coupons being reinstated.

This is the part that refers to this:
12.9 Restructuring Plan
Details of AIB’s Restructuring Plan are contained in ‘‘Part X: Relationship with Government and State Aid—
State Aid’’. The Restructuring Plan Term Sheet contains the terms of the Commitments undertaken by AIB
in connection with the decision of the EC of 7 May 2014 to approve the state aid received by AIB
(including EBS) as restructuring aid compatible with the internal market pursuant to Article 107(3)(b) of
the TFEU. Some of the Commitments have expired whilst the others will expire in the course of 2017 or on
31 December 2017. These commitments which remain operable may restrict AIB’s ability to operate its
business as it would otherwise have done so. These commitments relate to: (i) subject to receipt of all
regulatory and other approvals, the repayment of state aid prior to the end of the Restructuring Period,
(ii) limitation of exposure to Irish sovereign bonds; (iii) behavioural commitments, which include
restrictions on advertising, marketing and sponsorship in Ireland and a ban on discretionary coupon
payments on instruments issued prior to 7 May 2014; (iv) measures to enhance competition in the Irish
banking market (called competition measures and comprising a Services Package and a Customer Mobility
Package, in each case as further described in ‘‘Part X: Relationship with Government and State Aid—State
Aid’’ and a commitment to contribute A500,000 per annum for a period of three years from 1 July 2014 to a
public awareness campaign to raise awareness and promote customer mobility); (v) expenditure caps on
marketing, advertising and sponsorship, and (vi) the imposition of criteria for assessing most appropriate
restructuring solution for non-performing SME loans and loans to corporates.

I read this as indicating that the non-payment of coupons commitment remains operable after the end of 2017. Hence a bit more research on this particular agreement is needed before being clear as to what might happen with coupons.

An important factor, however, is that if coupons were reinstated the fair value of the liability would go up by something like EUR300m which I would think would hit the bottom line. (Coming off CET1 as well) Hence I would not seem them as being in a rush to reinstate coupons. I may, of course, be wrong and I don't hold any of these. DYOR (although the link above should help).


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