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exiges

Uk Investors In Bonds Battle

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http://www.bbc.co.uk/news/business-13731997

Bank of Ireland (BOI) could face a legal challenge from British investors who face losing 80% of their money.

Irish banks are under pressure from the state to raise capital, and bond holders are expected to "burden share".

One of the bond holders affected, Liberal Democrat MP, John Hemming, told BBC Radio 4's Money Box, it was unfair that smaller investors were worst hit.

BOI said that its offer to the holders of the permanent interest bearing shares complies with all requirements.

High returns

Money Box has been contacted by a number of concerned investors, who hold the bonds in question, first issued by Bristol and West in 1991.

The permanent interest bearing shares, or PIBS, were sold by a number of building societies at the time to boost capital.

The bonds pay 13.375% a year, which is a very high return now, but when the bonds were issued, interest rates were running in double figures.

In 1997, BOI took over Bristol and West, and in 2007 the bonds were officially transferred to the BOI UK branch.

Financial woes

Ireland's recent economic problems have resulted in the government insisting that banks shore up their capital positions.

BOI has been told it must raise 4.2bn euros in capital by a 31 July deadline, imposed by the state.

In order to raise the money, BOI announced an exchange offer, which would see most of the PIBS investors receiving 20p in the pound for their holding.

However, people with more than £100,000 invested in the PIBS, are being offered 40% of the value of their bonds, if they accept new shares instead.

Ordinary investors suffer

In effect, this means the Irish government is getting preferential treatment, according to Mr Hemming, and small investors are being asked to sacrifice the most.

"A lot of small investors are losing out to protect the Irish tax payer," he told Money Box.

"The whole thing is likely to get tied up in a legal complication. There's a firm of solicitors, who are working on coming on board at the moment."

The offer to bond holders will worsen after 22 June.

Under a European Union directive, companies offering exchanges can either aim them at all investors, or deem them only suitable for larger investors.

Investors wanting to accept the deal face a tight deadline of 22 June, 2011.

Acceptance after this date will see the offer reduced to 16p cash, or 32% in shares, for every pound held.

If investors refuse to accept the offer, the Bank of Ireland will seek to redeem the bonds at 1p for every £1,000 held.

The interests of the bond holders are not protected by the Financial Services Authority, and as a result people cannot claim for compensation through the Financial Services Compensation Scheme.

The BOI UK branch - which bought Bristol & West - falls under the Irish regulator. BOI UK, which was created last year and which operates Post Office accounts, is regulated by the FSA. This means that UK deposits up to £85,000 in the Post Office are protected by the UK's financial compensation scheme.

Edited by exiges

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A lot of small investors are losing out to protect the Irish tax payer.

- John Hemming, MP, BOI bond holder

Damn right they are. Bonds return a yield because of the risk of default. That's capitalism. I assume Mr Hemming bought Irish bonds because of the higher yield, yet expects the government to bail him out now his bet has failed.

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Damn right they are. Bonds return a yield because of the risk of default. That's capitalism. I assume Mr Hemming bought Irish bonds because of the higher yield, yet expects the government to bail him out now his bet has failed.

Did I read right ? He's got a bond paying 13% per annum for the last 20 yrs

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Damn right they are. Bonds return a yield because of the risk of default. That's capitalism. I assume Mr Hemming bought Irish bonds because of the higher yield, yet expects the government to bail him out now his bet has failed.

Brown would have :rolleyes:.

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Did I read right ? He's got a bond paying 13% per annum for the last 20 yrs

Yes. That is correct.

These bonds are deeply subordinate (i.e. the first to be defaulted upon, in case of insolvency) and have no end-date - i.e. they are perpetual - and no protection from inflation.

13% is the going rate for this type of bond. A couple of years ago, Barclays sold exactly this type of bond to investors to raise capital (rather than go for a conventional rights issue) - their bonds offer 14% per annum in perpetuity.

The issue with this story is not that the bonds are being defaulted on. This is to be expected in the event of insolvency. Rather, it is the fact that the defaulter does not have to treat all investors in these bonds equally (small, personal investors being offered very little - whereas banks holding these bonds are being offered a much better deal - i.e. the banks are being bailed out at the expense of private investors).

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Yes. That is correct.

These bonds are deeply subordinate (i.e. the first to be defaulted upon, in case of insolvency) and have no end-date - i.e. they are perpetual - and no protection from inflation.

13% is the going rate for this type of bond. A couple of years ago, Barclays sold exactly this type of bond to investors to raise capital (rather than go for a conventional rights issue) - their bonds offer 14% per annum in perpetuity.

The issue with this story is not that the bonds are being defaulted on. This is to be expected in the event of insolvency. Rather, it is the fact that the defaulter does not have to treat all investors in these bonds equally (small, personal investors being offered very little - whereas banks holding these bonds are being offered a much better deal - i.e. the banks are being bailed out at the expense of private investors).

Personally, I think bondholders should take the risk, but I also think that it is unfair that the small private bondholders should be treated any different to big institutional holders. In fact it could be argued that as the big institutions have access to greater resources they should be able to manage risk more effectively than a single small investor and therefore deserve to get less back as they should have undertaken proper due diligence and on going risk reviews.

To me this smacks of another forced bailout of the big guys by the little guys. At least it is not being dumped on the un-involved tax payer this time, which is a step in the right direction IMO.

I guess no one said that this world was just.

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You mean investors can lose money? :o

When did this happen?_ why aren't these people on the bailout list?

There's been a cockup somewhere, heads will roll.

Edited by wonderpup

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All bondholders are being offered 20 pence in the pound cash, the 40% option for larger holders is not a cash offer, it's an equity offer, so not a valid comparison.

Why are smaller bondholders not being offered the equity option?

I've no idea, but one possibility is so that the market is not suddenly flooded with small investors trying to offload shares at the same time. The 40% option might come with conditions about when they can be sold, which is difficult and expensive to do with small shareholders.

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  • 277 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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