UPDATE 5-Investors brace for painful Irish bank bond swaps

* Several options on table for senior debt – paper

* Politicians say bondholders should share pain of bailout

* Critics say move would undermine euro zone confidence

* Bond exchange offers seen as carrot, before stick

* Irish bank bond spreads wider following report

(Adds details on debt, comments from EU source)

By Steve Slater

DUBLIN, Nov 26 (BestGrowthStock) – Expectations rose on Friday that
top bondholders in Irish banks will be offered the chance to
swap billions of euros of debt for new bonds, realising a loss
and taking a share of Ireland’s pain but avoiding a potentially
worse fate.

Such tenders have been used successfully by Irish and other
European banks during the financial crisis. These have allowed
them to buy back bonds at a premium to their market price but at
a discount to nominal value, saving them money and forcing bond
investors to take a so-called “haircut”.

There was more bad news when Standard & Poor’s cut Irish
banks long-term credit ratings, saying: “The stand-alone
creditworthiness of the four domestically owned Irish banks has
weakened”. [ID:nWLA9235]

S&P cut nationalised Anglo Irish Bank’s rating by six
notches due to the threat the Irish government may reconsider
its supportive position on 4 billion euros ($5.3 billion) of
senior debt that isn’t guaranteed by the government.

Also vulnerable to haircuts are 6 billion euros of unsecured
senior debt at Allied Irish Banks (ALBK.I: ) and 5 billion at Bank
of Ireland (BKIR.I: ), analysts said.

Expectations increased that senior bondholders at the top
three banks would have to bear some of the distress after The
Irish Times said the IMF and European Union have been examining
ways of spreading the bailout costs.

Investor nervousness grew after the report, with prices of
Irish and European bank bonds falling sharply. There were no
bids for AIB or Bank of Ireland senior debt, with liquidity in
the market drying up. [ID:nIFRbycBl2]

An EU source familiar with the talks said talks between
Dublin and the IMF/EU team provisionally concluded and there was
no requirement for senior bondholders to take a haircut.

A exchange offer would be among the least painful options
for the bank bondholders. Another scheme being considered
involves swapping bank debt into equity. Investors could also be
given the choice of injecting fresh capital or facing a cut in
their investment, The Irish Times said.

Whether senior bondholders are forced to take a hit is a hot
topic after several European politicians said they should share
the cost of the bailout.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ IFR: Banks Under Pressure; Spain in Spotlight [ID:nIFRbycBl2] IFR COMMENT: Concern Over Irish Debt Reports [ID:nIFR1Ztqkz] Breakingviews comment: [ID:nLDE6AP0H4] For a graphic on Ireland's bailout challenge click on: http://r.reuters.com/cyb96q For stories on the Irish bailout, click on: [ID:nLDE68T0MG] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

BURDEN SHARING

“Clearly things are coming to a head in Europe and there’s a
debate, particularly in regard to the Irish banks, that
bondholders may need to be subject to burden sharing,” said Mark
Dowding, senior portfolio manager at Bluebay Asset Management in
London, who helps oversee $22 billion in assets.

“In the first instance it may be offered as a debt swap. But
if there’s not sufficient take up there may be more of an
enforced effort,” Dowding said.

However, such a dramatic move could further undermine
confidence in banks in Portugal and Spain, by showing all
investors are vulnerable. And it could make it tougher for Irish
banks to fill a future funding gap estimated at about 160
billion euros. [ID:nLDE6AO1Q2]

German Chancellor Angela Merkel has repeatedly said
bondholders should share the pain when a country hits trouble,
but only for bonds issued from as early as 2011. [ID:nBAT005789]

An 85 billion euro rescue package is expected to be
unveiled, possibly this weekend, to cover Ireland’s funding
costs and the cost of “overcapitalising” the banks.

Ireland says it will honour its obligations to senior bank
bondholders, despite forcing a haircut on subordinated debt
holders in Anglo Irish and Irish Nationwide [IRNBS.UL].

But the main opposition party Fine Gael, which will likely
lead a new government next year, has said all bondholders should
share the burden of bailing out the banks. [ID:nLDE6AO0LX]

In meetings with the IMF/EU team, representatives of the two
main Irish opposition parties gave notice their parties would
seek to reopen the issue of how senior bondholders are handled
if they win an election next year, according to the EU source.

Bank of Ireland, which has boosted capital by 1.7 billion
euros from bond offers in the last two years, had 31 billion
euros of senior debt and asset-backed securities at end-June.

AIB has made 1.6 billion euros, including 445 million
earlier this year after swapping lower Tier 2 debt at an average
haircut of about 20 percent to face value. Anglo [ANGIB.UL] has
about 6.5 billion euros of senior debt. [ID:nLDE6AO1D6]
(Additional reporting by Carmel Crimmins, Alex Chambers, Paul
Taylor and Luke Millar; Editing by David Holmes and Alexander
Smith)
($1=.7540 Euro)

UPDATE 5-Investors brace for painful Irish bank bond swaps