Allied Irish Banks raises 750 mln euros in bond issue to help repay bailout

* AIB sells 10-year paper at a yield of around 4.15 percent

* Investors bid for more than 5 billion euros (Changes source to AIB, adds quote)

DUBLIN/LONDON, Nov 19 (Reuters/IFR) - Allied Irish Banks (EUREX: 558453.EX - news) (AIB) drew strong demand as it raised 750 million euros ($803 mln) in a bond issue on Thursday under its plan to start repaying a state bailout.

The strength of demand bodes well for the lender's potential stock market flotation next year.

The government has pumped 21 billion euros into AIB since the 2007-2009 financial crisis, the biggest bailout given to any Irish bank still trading. The state will recoup an initial 1.6 billion euros under AIB's capital reorganisation.

As part of the plan, the 99 percent state-owned bank pledged to issue at least 750 million euros of Lower Tier 2 (LT2) bonds, its first subordinated offering since it imposed severe losses on subordinated debt holders four years ago.

The bank sold the 10-year paper at a yield of around 4.15 percent and investors bid for more than 5 billion euros in the much-anticipated deal, the bank said.

The demand came despite the bank having imposed losses of up to 90 percent on junior bondholders in 2011 to help the government cut 5 billion euros from a bill to save the country's banks. That bill eventually came to 64 billion euros, or around 40 percent of annual economic output.

"This is a very strong endorsement of the positive trajectory of the AIB credit story by overseas investors," said Chief Financial Officer Mark Bourke. The offer attracted interest from 300 investors in 26 countries, AIB said.

Ireland (Other OTC: IRLD - news) 's slimmed-down lenders have since begun to recover along with the Irish economy, which is set to grow by more than 6 percent this year and is forecast to be the fastest-growing in Europe for a third successive year in 2016.

AIB, which almost tripled its first-half pretax profit, said on Tuesday it had generated more capital in the third quarter, reduced its bad loans by more than 10 percent and increased its net interest margin.

The government, which has already recouped the cash invested in rival Bank of Ireland (EUREX: 1269463.EX - news) and earlier this year returned part of the much smaller bank permanent tsb to private ownership, expects to recover more than it invested in AIB over a number of years.

The bank will repay another 1.6 billion euros next July when state-owned contingent capital notes (CoCos) mature, and if the current government is returned to power early next year, it will sell a 25 percent stake on the stock market within months of re-election. ($1 = 0.9340 euros) (Reporting by Padraic Halpin, Julian Baker and Alice Gledhill; Editing by David Holmes and Susan Fenton)