# AIB 12.5% 2019 Bond



## Brendan Burgess (12 Aug 2009)

Dolmen are now actively marketing this bond. I can't find anything on their website, and their PDF won't copy and paste for some reason.

Has anyone looked at this?


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## askU (19 Aug 2009)

*Its high risk isnt it?*


_[FONT=&quot]W[/FONT][FONT=&quot]e[/FONT][FONT=&quot]f[/FONT][FONT=&quot]ee[/FONT][FONT=&quot]l[/FONT][FONT=&quot]that  at  a  current  price  of  100  (yielding  12.5%  per annum)  it  is  our  preferred  alternative  to  AIB  equity.  This bond  offers lower risk exposure while offering potential high returns[/FONT].

_ _[FONT=&quot]T[/FONT][FONT=&quot]h[/FONT][FONT=&quot]i[/FONT][FONT=&quot]s[/FONT][FONT=&quot]i[/FONT][FONT=&quot]s[/FONT][FONT=&quot]a fixed rate bond,  therefore the coupon will consist of an annual payment of 12.5% for the life of the bond.  This is the bond that AIB exchanged for  6 separate Perpetual  bonds  2  weeks  ago.  This  bond  is  an  excellent  alternative  to  purchasing  equity  in  AIB,  as  it  offers  greater  stability,  while  maintaining  a  strong  return.  AIB currently carries an A rating from S&P, with a negative outlook. Moodys rate AIB debt Aa3 with a negative outlook.  [/FONT]_

_[FONT=&quot](1)        This is the clean price, excluding accrued interest. The value of fixed rate bonds increase as interest rates fall. [/FONT]_
_[FONT=&quot]([/FONT][FONT=&quot]2[/FONT][FONT=&quot])[/FONT][FONT=&quot]G[/FONT][FONT=&quot]R[/FONT][FONT=&quot]Y[/FONT][FONT=&quot]—Gross Redemption Yield; Yield to maturity assuming all interest payments are reinvested at the same rate[/FONT]_


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## Sunny (20 Aug 2009)

The bond is rated A2 by Moodys, A- by S&P and BBB+ by Fitch.

It is a Lower Tier 2 security which means it is only subordinated to Senior debt and so you are going much higher up the capital structure. There is no coupon deferral and there are no loss absorbing features. It is an attractive yield but obviously you have to be aware of the interest and credit risk that you are taking on. I can see why they are suggesting it as an attractive alternative to equity though. Especially for institutional investors.


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## Lightning (20 Aug 2009)

Very interesting spot Brendan. 

There is a little information on page 4 of this PDF on the Dolmen Stockbrokers website:[broken link removed]

Does anyone know what the minimum investment is?

I have dropped Dolmen Stockbrokers an email with some questions.


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## mantis1234 (26 Aug 2009)

Did you get any response from Dolmen?
Thanks


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## sunshine? (4 Dec 2009)

Excuse my ignorance here but are investors buying the banks debt?
Whats different between this and mortgaged backed securities? That contributed to the whole credit crisis in the first place.

And how can AIB pay 12.5% when mortgage holders borrow from the bank at 2 - 3%.

If someone could make sense of this for me I'd really appreciate it.

Also why would investor invest in this bond if the last bond AIB issued is now only quoted at around 35 - 40% of nominal value.

Is it just me or are alarm bells ringing!!


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## burmo (7 Dec 2009)

Can someone please explain or point me to some reference material. Is this guaranteed or what are the limitations?


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## North Star (8 Dec 2009)

As Sunny mentioned previously this is a lower Tier 2 bond that AIB issued recently when they had an auction to swap outstanding capital bond issues. (most of the banks did this and saw a one of increase in their profitability) As this issue is Lower Tier 2 there is no coupon derferral mechanism. Unlike AIBs Tier 1 debt on which the EU commission ordered them to stop paying the coupons (interest) 
The bond is as far as I know issued outside of the state guarantee and that partly explains the high coupon. When I last checked at the end of November the yield to maturity (what you would get if you kept the bond until its maturity date in 2019) was just above 11%
As with any fixed rate bond the market price will be influenced by the path of interest rates and the credit quality of AIB.
Rather than be blindly attracted to the high coupon potential investors need to understand the risks involved. Investing in one bond means that you have full exposure to one counterparty i.e no diversification.
Personally I think this is an attractive proposition for those prepared to tie up funds for a long time. I would still limit this to a small portion of an overall investment strategy approx 10%. It is tradeable but the market price will as I said depend on interest rates and credit spreads. It does carry some real and significant risks.... there is no such thing as free money.
As with all investments you need to look at it closely and get an understanding of the risks. Bloxhams have a bond desk and may be able to provide further info. I hope this helps. 
Kind regards Vincent


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## burmo (8 Dec 2009)

Hi North Star,

So to clarify my understand, the yield to maturity is 11%. This based on the current price and the final price is known I guess? Also what is the coupon rate and is this a guaranteed rate assuming that as you say that Lower Tier 2 bonds do not have their coupons deferred?


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## North Star (8 Dec 2009)

Hi Burmo: The yield to maturity is what you would earn plus your investment if you held the bond to maturity. The coupon is always 12.5%, the price is the variable factor. If it were priced at par i.e 100 then the yield to maturity would be 12.5% 
A higher price means a lower yield and vice versa. The price is approx 107 to give a yield to maturity of 11% i.e coupon is 12.5% but for €100  as the price is 107 you get less than 100 of bonds 100/107
The market price will vary over time (and in some cases very dramatically) but assuming no default you get your money back plus the yield to maturity.


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## burmo (8 Dec 2009)

Thank you very much. Ok, nearly there...

Can you please explain the coupon? I think I'm getting confused having looked at a New Ireland 2014 4% Irish goverment bond brochure chart showing the €4 coupon being paid every year.

If you say the coupon is 12.5% then if I buy now I will get 12.5% * 100/107 = 11.68%. So the coupon is simply the original par price investment return? Or does it have another significance?


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## Sunny (8 Dec 2009)

burmo said:


> Thank you very much. Ok, nearly there...
> 
> Can you please explain the coupon? I think I'm getting confused having looked at a New Ireland 2014 4% Irish goverment bond brochure chart showing the €4 coupon being paid every year.
> 
> If you say the coupon is 12.5% then if I buy now I will get 12.5% * 100/107 = 11.68%. So the coupon is simply the original par price investment return? Or does it have another significance?


 
You will still get the 12.5% coupon. Thats simply the interest rate that the bond is paying. So if you a €100 bond you would recieve €12.50 in interest every year. But this doesn't equal the actual return on the investment. You have to look at the yield because you are not buying the bond at par as Northstar points out. You are buying it at a premium i.e. over 100 so this reduces your overall return as the bond will redeem at 100. Likewise if the 12.5% bond was selling at a price of 98, you would get the 12.5% coupon but your return would be greater because you bought the bond at a discount.


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## burmo (8 Dec 2009)

Sorry, not normally so slow.

So every year I would get the 12.5% of the nominal €100 bond = €12.50 per year.
But as I bought the bond for €107 I would only get €100 at the end. 

For example, say I bought one bond at €107 today.
So the total at the end would be €100 * 12.5% = €12.50 per annum x 2019-2010 = 9 years = €112.50
And the bond would be worth €100 at the end = -7€
Total gain = €112.50 - €7 = €105.50 gain plus my €107 back ?


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## BrianODohert (8 Dec 2009)

To Burmo:

"Total gain = €112.50 - €7 = €105.50 gain plus my €107 back ?"
No...you will receive a total of €105.50 "gain" plus €100 face value of the bond back. On an investment of €107, that return is estimated as being c. 11% annually. Which is a good return these days, when interest rates generally are so low. On top of that you have the possibility that some day before the bond matures you might be able to sell it at a profit--i.e. at more than your purchase price of €107. But that is not very likely...It would happen only if general level of interest rates drop, which is probably less likely than that they will go up in the next nine years. (On reflection...see below..)

An alternative is to consider buying the share itself. That's currently trading at less than one year's core earnings, which compares to many EU banks--even those in trouble and receiving large state bailouts- trading at an average of 15 times core earnings, it seems to me. And AIB used to trade at those levels and higher, in "normal" times/ recent years. So, by buying the attractive bond with the 11% return, you are taking on as the main risk the possibility that the company may fold and default on the bond. But that's the same risk, essentially, that you take on in buying the share. So, it seems to me the share is a better bet. I suggest this in brianodoherty.ie , where I put up some AIB charts some time ago...I may do so again soon. But the fact that the share is "unwanted" these days also explains why the bond return is so high, I guess. If public perception of AIB's prospects is so bad that they can't even get one years core earnings per share in the share price, then that's also why they must pay high returns for (at least some) borrowings. When the perception improves, the share price will rise...but so, also, I guess, will the bond price, --even if general interest rates do Not go down !

So, some people - both bond holders and recent share purchasers - should be looking to a capital gain in their AIB holdings... but the government will probably raise the capital gains tax in tomorrows budget !. (Some officials seem to want to depress the banks' share prices, maybe to attract a foreign bank to take them over...for that will be the result!)...Maybe you'd better wait until Thursday !


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## burmo (8 Dec 2009)

Thank you Brian for your developed reply.

Would it not then be €100 * 12.5% * 9 = €112.50 'gain' + bond €100?  = €212.50?

Same as I put it previously, awkwards perhaps, at €112.50 - €7 = €105.5 + €107 = €212.50?


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## sunshine? (9 Dec 2009)

Money is returned at maturity assuming no defaults.
Again am I the only one alarmed here. That seems to be a very big assumption!
Especially considering the current economic situation, do we really think that AIB will magically have no defaults, unlike every other bank in the world?


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## Sunny (9 Dec 2009)

sunshine? said:


> Money is returned at maturity assuming no defaults.
> Again am I the only one alarmed here. That seems to be a very big assumption!
> Especially considering the current economic situation, do we really think that AIB will magically have no defaults, unlike every other bank in the world?


 

You get your money back as long as AIB itself doesn't default. Has nothing to do with defaults in it's underlying loan book. (unless those defaults are big enough to lead to the end of AIB)


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## burmo (9 Dec 2009)

Sunshine - I am not thinking about doing this bond... it seems seriously risky to me.


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## Sunny (9 Dec 2009)

burmo said:


> Sunshine - I am not thinking about doing this bond... it seems seriously risky to me.


 
Burmo, it is risky. As North Star points out above, you are taking on interest rate and credit risk. You don't get a 11% yield without significant risk. Having said that, I would prefer this bond to AIB equity.


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## sunshine? (10 Dec 2009)

Sunny said:


> You get your money back as long as AIB itself doesn't default. Has nothing to do with defaults in it's underlying loan book. (unless those defaults are big enough to lead to the end of AIB)



It was my understanding that you get the 'coupon', ie. 12.5% back as long as AIB doesn't default. But I'm not sure this applies to the capital returned at maturity. If someone could clarify this...


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## Sunny (10 Dec 2009)

sunshine? said:


> It was my understanding that you get the 'coupon', ie. 12.5% back as long as AIB doesn't default. But I'm not sure this applies to the capital returned at maturity. If someone could clarify this...


 
No, you get everything. You are taking on AIB credit risk. You are below senior debt holders in the capital structure but that would only come into play in the event of default as it would affect your recovery rate. There are no loss absorption features in this bond so they either pay up or they default.


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