Allied Irish Banks plans to return to the subordinated bond market for the first time since the financial crisis as it prepares to start repaying its €21 billion bailout by the year end, according to people with knowledge of the matter.

AIB is seeking to redeem €1.5 billion to €2 billion of the State's holdings of €3.5 billion of preferred stock in the bank, with the remainder converting to equity, said the people, who asked not to be identified because the talks are private.

To help fund the deal and maintain capital levels, the lender may sell Tier 2 bonds and Additional Tier 1 (AT1) notes, the people said, declining to give amounts involved.

The blueprint is subject to market conditions and final approval from the European Central Bank’s supervisory unit, which is expected by the middle of November, said one of the people. An announcement on the plan could be made immediately afterward, they said.

Holders of AIB’s junior bonds lost €5 billion from 2009 to 2011 as the lender collapsed under the weight of soured property loans, and it will be the last of Ireland’s three surviving banks to return to the subordinated debt market since the crisis. The yield on Bank of Ireland Plc’s Tier 2 bonds sold in December 2012 has fallen to 4.52 per cent from 10 per cent.

Department of Finance spokesman Brendan Loughnane and AIB spokeswoman Niamh Hennessy declined to comment.

AT1 notes, which European banks have been issuing since April 2013, are undated securities which convert into shares should capital levels drop below a certain threshold. Issuers can just decide not to pay coupons on the notes.

Minister for Finance Michael Noonan said in September that he expects to recover as much as €4 billion of the bank's bailout costs before selling a 25 per cent stake in the company in the middle of next year.

AIB sold €1.6 billion of contingent convertible notes to the Government in July 2011. These will be redeemed at maturity in July 2016 and will not be repaid early, said the people. – Blommberg