Healy O'Connor

Investors Must Pay Out Over AIB Debt Default

Investors selling insurance to subordinated bondholders protecting against an AIB debt default will have to make a pay-out arising from the Government-forced changes to the terms of the bonds.

The International Swaps and Derivatives Association, the trade body that monitors the credit default swaps market, ruled yesterday that a credit event had occurred.

This means one or more auctions will be held to settle the swaps in AIB, which had a net notional value of $507 million (€353 million) earlier this month.

Investors in the bank’s subordinated bonds who took out default insurance will be covered for their losses as a result of the cancellation of interest payments and changes to the debt securities.

A credit event is the financial market term for a default on payment or other event that raises doubts about the issuer of a debt to serve their borrowings.

AIB suspended interest payments and extended the due date on 16 of the bank’s 18 subordinated bonds which are the subject of a Subordinated Liabilities Order aimed at forcing losses on the bank’s subordinated bondholders by the Government.

The order was secured in April by the Minister for Finance but a stay was put on the order pending legal challenges taken by two subordinated bondholders.

The High Court ruled last week that the order could apply to 16 of the bank’s subordinated bonds that are not subject to the action taken by one of the bondholders, Aurelius Capital Management.

Following the ruling, AIB changed the terms of the 16 bonds which the derivatives association ruled was a credit event.

The terms of the bonds were changed ahead of the bank’s debt buyback under which subordinated bondholders are being offered as little as 10 cent in the euro for their debt or virtually nothing if they decline the offer.

The deal was open to investors in 15 of the bank’s subordinated bond until earlier this morning (midnight New York time).

(The Irish Times, 14th June 2011)

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