Cantillon: AIB flotation on back-burner as bond values limp

Spare a thought for investment bankers who’ve been swarming around Allied Irish Banks still hoping for a massive payday this year from the State selling a 25 per cent stake in the lender.

Even the most optimistic could see it was looking increasingly unlikely a deal would happen before 2017, as global markets for initial public offerings have been in the doldrums. That’s not to mention the political stagnation since the general election, delaying the type of work needed to get such a huge deal off the ground.

So, few eyebrows were raised in the market when the draft programme for government, which emerged on Thursday, made no reference to an AIB stake sale this year – merely saying no more than 25 per cent would be flogged before 2019.

But even if the flotation market were as ripe as this time last year (remember the top-of-the-range price the government got for a quarter Permanent TSB stake?), and there was a trigger-happy government in place, the market has taken decidedly negative view of AIB of late.

There’s no point in looking at the equity markets. AIB’s share price has been bobbing around for the past five years in a parallel universe. It’s the market for AIB’s riskiest bonds that give the clearest gauge of what investors think of the bank – and it ain’t pretty.

AIB sold €500 million of subordinated bonds, known as Additional Tier 1 notes, last year as it returned to the junior debt markets after the crisis. It’s no wonder it took its time, given it had inflicted €5 billion of losses on junior bondholders between 2009 and 2011.

While the deal was well-received, the bonds now rank among the worst performers in Europe this year and are currently changing hands at less than 86 cent on the euro. Similar Bank of Ireland notes are trading at 95 cent.

Two things have investors worried. Firstly, the bank has failed, unlike its two main rivals, to disclose a key regulatory capital target set for it by the European Central Bank this year – leaving the market second-guessing how high the number could be. Secondly, whistleblower allegations last month that AIB has overplayed its progress on sorting problem loans has rattled some.

The bank needs to address and draw a line under both issues if investor sentiment is to recover and taxpayers stand a chance of full recovery of the €21 billion pumped into AIB.

In the meantime, keep an eye on those junior bonds.