BANK OF Ireland expects its equity capital position will be improved by €1 billion having bought some of its bonds at a considerable discount.

In a statement yesterday it said euro and sterling denominated bonds with a face value of €1.26 billion had been purchased for between 38 per cent and 50 per cent of their value.

Because the bank is buying the subordinated debt at a discount, it is improving the net position of the bank. The debt was purchased as part of an ongoing tender process, the US dollar aspect of which is to expire on June 16th next. The dollar end of the process takes longer because the rules governing those bonds differ to those of the European currency bonds.

The euro and sterling bond element of the exercise generated more interest than had been anticipated and more of the bank’s debt was purchased than expected.

The US dollar element of the process has now been increased from $525 million to $600 million.

“Assuming the dollar denominated offer is completed for the full amount, the combined equity accretion for the Bank of Ireland group arising from the tender offers is expected to be circa €1 billion,” the bank said in a statement.

The dollar bonds, if sold, will constitute approximately half of the bank’s dollar denominated bonds. The European currency bonds bought to date constitute approximately 57 per cent of the bonds in those currencies.

Subordinated bonds are selling at a discount in the marketplace because the risk associated with the bonds has increased as a result of the global financial crisis. Irish bank bonds are among those selling at a particular discount.

In recent times the discount has been reducing in part because of improving sentiment, though the discount remains considerable. Holders of bonds from Irish banks are concerned that the banks could be nationalised and the holders of the debt would be expected to suffer prior to the taxpayer having to put money into the banks.

AIB has not yet launched a programme to repurchase its debt, though it is thought it may in time do so.

Analyst Scott Rankin of Davy Stockbrokers said the purchase of the bonds makes for an increase in the net worth of Bank of Ireland and constitutes a gain for shareholders.

The amount purchased by the bank was greater than the market had anticipated and was “very significant” in terms of the bank’s market capitalisation.

The bank’s share price closed at €1.81 yesterday, an increase of 1.97 per cent. “The bank’s share price should have gone up but it didn’t,” Mr Rankin said. He thought this might have been because the share price had had a good run recently. A month ago the bank’s share price was €0.81.

Mr Rankin said this rise in price may be due to a view that the bank may not need more Government capital and that the National Asset Management Agency may not be as “punitive” to the bank as was formerly thought.

Bondholders were selling at a discount because they knew it would be a long time before the bonds would be trading at near their full value, he said.