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* Investors buy bonds at slight premium
* CoCo notes convert to shares if capital falls below 8.25 pct
* Deal follows successful state fundraising
By Conor Humphries and Laura Noonan
DUBLIN/LONDON Jan 9 (Reuters) - Ireland sold a larger than expected 1 billion euros ($1.3 billion) of Bank of Ireland debt on Wednesday, cutting its exposure to the bailed-out bank amid growing confidence in the country's economic recovery.
Private investors bought the 1 billion euros of contingent capital notes, known as CoCo bonds, at a slight premium, beating a target of at least 500 million euros after it received bids worth 4.8 billion euros.
Ireland's costly bank bailout after a property crash ravaged the economy saw it assume full control of the entire sector except for part state-owned Bank of Ireland, and the government said the deal was the first step in recovering taxpayer money.
"Of the 64 billion we put into the Irish banks, this is a full billion back, so we have started the process of recovering money for the Irish taxpayer," Finance Minister Michael Noonan told a news conference.
"It's a pretty significant day... I think people abroad will look differently at the Irish banks and I think they'll look differently at the Irish state as well."
On top of a 10 percent per annum return, Noonan said the government generated a profit of around 10 million euros from the sale of the notes, which were forcibly injected into Bank of Ireland as part of its July 2011 bailout.
The state also holds a 15 percent equity stake in the bank and Noonan said the government would sell those shares and the CoCos in other state-owned banks when the time is right and had no ambition to be bank owners in the long term.
The CoCos sale comes a day after Dublin kicked off its fund raising for the year by selling 2.5 billion euros of debt that covered a quarter of the 10 billion euros it aims to borrow in 2013 as it prepares to exit its EU/IMF bailout.
The Bank of Ireland sale will also further reduce Dublin's 2013 funding needs, the head of Ireland's debt agency told state broadcaster RTE.
"This is optically good for the Irish government," Danske Bank Ireland bond dealer Owen Callan said. "They can say we made a decent coupon and a small profit - and we have unwound a little bit of the whole sovereign banking coupling."
Bank of Ireland announced on Wednesday morning that private investors, including some existing stockholders, had agreed to take at least half the 1 billion euros of the CoCos the state has held since a sector-wide recapitalisation in 2011.
A group five North American investors bought a 35 percent stake in the bank 18 months ago.
The contingent capital notes, which mature in July 2016 and pay a coupon of 10 percent, convert into equity in the bank if its core tier one capital ratio falls below 8.25 percent.
Davy, Deutsche Bank and UBS were mandated to manage the placement and Ireland's finance department said it followed an approach by investment banks late last year, which indicated that there was sizeable investor interest in the notes.