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Subordinated debt: Furious investors challenge AIB bail-in

Order disputed in court; Capital hierarchy disrupted

 Irish finance minister Michael Noonan

Michael Noonan’s SLO has antagonised bondholders

The way in which Irish finance minister Michael Noonan has chosen to bail-in subordinated bondholders in Allied Irish Banks (AIB) has caused outrage among investors. Critics claim that the government is arbitrarily rewriting the rules by opting to issue a Subordinated Liabilities Order (SLO) under the Credit Institutions (Stabilization) Act of 2010, which drastically alters the terms of the debt and gives preference shareholders priority in receiving dividends while interest payments are suspended to higher-ranked bondholders in the capital structure.

"It is like finding out that you are still on the Titanic – it is still sinking, but you have suddenly moved from the first-class deck to the third-class deck – and all the third-class passengers have gone to second class," fumes one observer.

No one was very surprised when burden-sharing by the subordinated debt investors of AIB was made a condition of European Commission state aid for Ireland. Indeed, those subordinated bondholders that objected to rival Anglo Irish Bank’s coercive debt exchange last October at 20% of par were told that non-acceptance would lead to repayment of just one cent in every €1,000.

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