DUBLIN/LONDON, June 3 (Reuters) - Dublin moved closer to inflicting big losses on bondholders in Ireland's banks after one angry investor dropped a court challenge and Bank of Ireland (BKIR.I) unveiled plans that will also hurt shareholders.
The Irish government has told bondholders they must help get a crippled banking sector back on its feet and Bank of Ireland on Friday showed how holders of both its debt and equity will help raise 4.2 billion euros ($6.1 billion) in fresh capital.
In a move that sent its shares tumbling by a fifth, the bank said it would issue up to 2.2 billion euros ($3.2 billion) in new stock as part of an offer to buy back debt at a steep discount using both cash and equity.
The bank, in which the Irish government holds a 36 percent stake, is so far the country's only lender to avoid falling into majority state control after a nationalisation of most of the sector to stop it collapsing under the weight of loan losses.
Oliver Gilvarry, analyst at Dolmen Securities, said that could soon change, however, given that the government is underwriting the rights issue by Bank of Ireland (BKIR.L) and that many of its shareholders have already been badly burned by a 99 percent slide in its share price since 2007.
"The government was always going to have to underwrite the rights issue. It would have been nigh on impossible to get any bank to back a rights issue," Gilvarry said. "The take-up of the rights issue will be extremely low, in our view. The government will end up a majority shareholder in the bank"
Under what it is calling a Liability Management Exercise (LME), Bank of Ireland will offer to buy back about 2.6 billion euros worth of Tier 1 and Tier 2 subordinated debt securities. [ID:nLDE74U11T]
Bondholders taking up the offer will receive 10 percent of the nominal value of their securities in cash or may opt for an equity alternative worth 20 percent of face value.
The Irish government has said bondholders who decline the offer will face other "severe measures" to force them to do their bit bailing out lenders after taxpayers and shareholders shouldered billions of euros worth of losses to date.
MASSIVE DILUTION
One of two investors in Allied Irish Banks (ALBK.I) withdrew a court challenge on Friday to the government's plans to impose losses of up to 90 percent on junior bondholders. [ID:nWLA1874]
Bank of Ireland meanwhile warned that any alternative imposed by the government on reluctant debt holders would likely afford them even lower returns.
The new shares to be issued will be priced at 10 cents each, a steep discount to Thursday's closing price of 16.5 cents.
The scale of the capital raising and the need for bondholders to take a hit was already known, but shares in Bank of Ireland initially fell as much as 22 percent to 12.8 cents. The stock recovered some lost ground however and was down 13 percent at 14.4 cents in London at 1232 GMT and 12 percent weaker in Dublin.
"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," said one analyst who asked not to be named.
"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."
Bank of Ireland said the scale of the rights issue would depend on how many debtholders opt to receive shares rather than cash for their securities and put it at between 1.76 and 2.22 billion euros.
The precise size of the rights issue would be announced shortly after completion of the LME tender offer, the bank said.
($1=.6931 Euro)
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