Burden sharing for European bondholders is something the market has become extremely familiar with in recent months.
So Allied Irish Bank’s announcement on Tuesday morning, that it has agreed to the European Commission’s request that it should not make discretionary coupon payments on its Tier 1 and Tier 2 capital bonds, should not come as a major surprise.
The request is in line with the EC’s intention to force bank bondholders to share some of the pain of government bailouts — which we’ve seen previously with banks including RBS and KBC — but it also comes with a bit of extra `burdensharing’ in the form of an AIB dividend stopper.
From the statement:
AIB has agreed to this request by the EC and announces that under the terms of the Stg £350,000,000 Fixed Rate/Floating Rate Guaranteed Non-voting Non-cumulative Perpetual Preferred Securities of AIB UK 3 LP which has the benefit of a subordinated guarantee of AIB (“the LP3 Preferred Securities”) that the non-cumulative distribution on these securities, which would otherwise have been payable on 14 December 2009 will not now be paid. The decision is entirely without prejudice to all of AIB’s entitlements under the state aid rules and the EU Treaties.
The effect of this decision by AIB will be to trigger the “Dividend Stopper” provisions of the LP 3 Preferred Securities, so that AIB will be precluded, for a period of one calendar year from and including 14 December 2009, from declaring and paying any distribution or dividend on its “Junior Share Capital”, an expression which, at the moment, comprises AIB’s ordinary shares (“the Ordinary Shares”) and the Irish Government €3.5bn preference shares (“the Preference Shares”) issued on 13th May 2009 to the National Pensions Reserve Fund Commission of Ireland (“NPRFC”). AIB is similarly precluded, for the same period of time, from declaring and paying any distribution or dividend (or, where applicable, is bound to procure that no distribution or dividend is declared or paid) on any “Parity Security”, an expression which at the moment, comprises AIB’s 7.5% Step-up Callable Perpetual Reserve Capital Instruments (“the RCIs”) on which an annual Coupon Payment would otherwise be due on 28 February 2010, the Fixed Rate/Floating Rate Guaranteed Non-Voting Non-Cumulative Perpetual Preferred Securities issued by AIB UK I LP (“the LP 1 Preferred Securities”) on which an annual non-cumulative distribution would otherwise be due on 17 December 2009 and the Fixed Rate/Floating Rate Guaranteed Non-Voting Non-Cumulative Perpetual Preferred Securities issued by AIB UK 2 LP (“the LP 2 Preferred Securities”) on which an annual non-cumulative distribution would otherwise be due on 16 June 2010.
Which means that the government — by virtue of the terms of the AIB preference shares it acquired this year in exchange for state support of the Irish bank — might end up increasing its stake:
Were the Dividend Stopper to remain in force, AIB would be precluded from paying the dividend due on the Preference Shares on 13 May 2010. Under these circumstances, in accordance with the terms of the Preference Shares, the NPRFC would become entitled to be issued, at a date in the future, a number of Ordinary Shares related to the cash amount of the dividend that would otherwise have been payable.
Importantly, however, it looks like neither the Irish government, nor the EC nor AIB want that to happen:
However, consistent with the stated objective of the Minister for Finance of not taking majority stakes in the banks (including in AIB) the preference of each of the Minister for Finance, and AIB is for AIB to pay the dividends normally on the Preference Shares. In furtherance of this objective, the Department of Finance and AIB are in continuing discussions with the EC in respect of AIB’s restructuring plan (which is required in compliance with state aid rules), one element of which would allow AIB to resume declaration and payment of dividends and distributions as normal, including the retrospective payment of 14th December dividend on the LP3 Securities to permit payment of the Preference Share dividends in cash.Related link:
Burden sharing for bondholders lives! – FT Alphaville