AIB issue a corporate bond - the yield seems high?

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Protocol

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www.independent.ie

AIB Group raises €625m in new capital

AIB Group has raised €625m from the issuance of a new bond to institutional investors.
www.independent.ie www.independent.ie


The bond, which is known as an Additional Tier 1 perpetual bond, carries an effective interest rate of 7.125pc.


This strikes me as a high yield? Can anybody who knows more about this explain it to me?

It must be a junior bond?

When the bank are paying 0% - 2% on deposit liabilities, why pay 7%+ on bond liabilities?
 
Because it forms part of their capital.

The more capital they have, the more they can lend.

Deposits don't form part of their capital.

I presume that in the event of a problem at AIB, these bondholders would lose their money.

It's a perpetual bond so there is no maturity date. You could only get your money back by selling it in the market and there may or may not be buyers.

Brendan
 
Brendan Burgess said:
Because it forms part of their capital.

The more capital they have, the more they can lend.

Deposits don't form part of their capital.
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This is a bit muddled Brendan. An AT1 bond is a type of capital instrument, but not like equity.

Once the AT1 bond is issued there is a matching asset on the other side of the balance sheet in the form of cash. This can indeed be lent out.
 
OK Dr.

Maybe I have misunderstood it so.

But they are not "borrowing" at 7% to hand it back out as a mortgage at 3.5%.

I assume that this allows them to lend a multiple of the €625m raised using deposits on which they pay nothing.

But I stand to be corrected.

Brendan
 
That’s minimum reserves. Banks have to hold 1% of most types of liabilities with the central bank and not lend them out.

Otherwise money is fungible and the proceeds of the AT1 sale can indeed be lent out.

But I think the broader point is that these type of Instruments such as AT1 bonds exist to satisfy regulatory obligations and are part of a bank’s own risk management processes.

Irish banks (based on their public statements) have no shortage of zero-yielding deposits to lend out.
 
Hi Dr.

Red Onion explains it very well here.

Is the deposit guarantee a state guarantee?

I have copied this post from another thread as it explains it well. Brendan You need to have a basic understanding of how banks are funded to understand the DGS and whether there is risk. If a bank gets into trouble, there is an order in which things get wiped out and/or converted to...
www.askaboutmoney.com

These bonds do enable AIB to lend far more than the €625m

Brendan
 
Protocol said:
I still think 7.125% is a high yield for a bank with a strong position in a strong economy.

Ryanair borrowed in 2021 at 0.875%!!!
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There is just no comparison.

The AIB bondholders are taking on the next tier of risk to the shareholders themselves.

Ryanair bonds are probably secured on planes.

Brendan
 
A perpetual bond with no maturity date, and therefore no guarantee of getting your money back from the issuer, would need to have a higher yield to be as attractive as a bond with a maturity date.
 
AIB sell another AT1 bond, at 6%.

www.rte.ie

AIB raises €700m in new capital with AT1 bond

AIB has raised €700m from the issuance of a new bond to institutional investors, which offers an interest rate of 6%.
www.rte.ie www.rte.ie


Would there be any retail savers who might like to be able to buy these bonds?

(I don't mean small scale retails savers, I am suggesting 100k purchases)

Are they on DeGiro?
 
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