A group of US hedge funds is threatening to take legal action against the Irish government if it proceeds with plans to inflict losses of up to 100 per cent on ?300m subordinated bonds they hold in Bank of Ireland.The bondholders, which include Appaloosa Management LP, allege the plan is ??politically motivated? and could result in increasing borrowing costs for Bank of Ireland and the Irish state.
In a submission to the Irish government the bondholders say the market would ??view with great cynicism? any move to prefer the rights of equity holders over more senior ranking creditors.
Michael Noonan, Ireland??s finance minister, has announced he is considering using the powers under emergency banking legislation in Ireland to inflict losses of up to 100 per cent on junior bondholders using a Subordinated Liabilities Order (SLO).
He said BOI needed a further ?350m to meet a capital target of ?4.2bn set by the Central Bank of Ireland following stress tests undertaken in March.
The Irish government said in the summer it would seek to save up to ?5bn by imposing losses of up to 90 per cent on junior bondholders in Irish banks.
Almost 200 responses were received by the department of finance by Wednesday, including the submission by a committee representing investors holding ?300m in junior bonds.
The submission made by the US bondholders says there is no economic need to inflict losses on junior bondholders because the bank has probably already met its capital targets for 2011.
It warns they will consider legal action in the UK and Ireland if the minister goes ahead with his plan to inflict losses on the bonds. It says the bondholders are also open to alternatives, such as a debt-for-equity swap to help BOI meet its purported capital requirements.
