I have been sceptical all along about the government’s decision to use €7 billion of public money to purchase preference shares in AIB and BOI earlier this year at a time when the combined market value of these banks had reached a low point of about €1 billion.
When I appeared before the Oireachtas Committee on Finance and the Public Sector in May, I argued that the Irish banks would not have the resources to pay back these preference shares and that they would end up being converted into ordinary shares.
My recent presentation to the Labour Party also argued that the government’s preference shares were most likely going to be converted to ordinary shares, thus foregoing the automatic eight percent annual divided associated with these preference shares.
AIB’s statement in relation to its negotiations with the EU Commission brings us close to this event.
Some highlights from the AIB statement:
The EC has indicated that, in line with its policy and pending its assessment of the AIB restructuring plan, AIB should not make coupon payments on its Tier 1 and Tier 2 capital instruments unless under a binding legal obligation to do so.
AIB has agreed to this request by the EC and announces that under the terms of the Stg £350,000,000 Fixed Rate/Floating Rate Guaranteed Non-voting Non-cumulative Perpetual Preferred Securities of AIB UK 3 LP which has the benefit of a subordinated guarantee of AIB (“the LP3 Preferred Securities”) that the non-cumulative distribution on these securities, which would otherwise have been payable on 14 December 2009 will not now be paid.
The effect of this decision by AIB will be to trigger the “Dividend Stopper” provisions of the LP 3 Preferred Securities, so that AIB will be precluded, for a period of one calendar year from and including 14 December 2009, from declaring and paying any distribution or dividend on its “Junior Share Capital”, an expression which, at the moment, comprises AIB’s ordinary shares (“the Ordinary Shares”) and the Irish Government €3.5bn preference shares (“the Preference Shares”) issued on 13th May 2009 to the National Pensions Reserve Fund Commission of Ireland (“NPRFC”).
Were the Dividend Stopper to remain in force, AIB would be precluded from paying the dividend due on the Preference Shares on 13 May 2010. Under these circumstances, in accordance with the terms of the Preference Shares, the NPRFC would become entitled to be issued, at a date in the future, a number of Ordinary Shares related to the cash amount of the dividend that would otherwise have been payable.
However, consistent with the stated objective of the Minister for Finance of not taking majority stakes in the banks (including in AIB) the preference of each of the Minister for Finance, and AIB is for AIB to pay the dividends normally on the Preference Shares. In furtherance of this objective, the Department of Finance and AIB are in continuing discussions with the EC in respect of AIB’s restructuring plan (which is required in compliance with state aid rules), one element of which would allow AIB to resume declaration and payment of dividends and distributions as normal.
Reuters reports a European Commission spokesmen as responding to this statement as follows:
“In the Commission’s approach to restructuring aid for banks, it is possible for the period of coupon restrictions to be adjusted if this would favour private capital raising that would in turn reduce the amount of state aid,” it said.
“The Commission will support efforts of AIB to raise private capital, including measures aimed at providing adequate remuneration to the government’s preference shares without necessarily diluting existing shareholders,” it added.
Some questions about this:
1. What is “adequate” remuneration of the government’s preference shares?
2. Will any private investor want to inject equity into AIB with anything approximating the current €3.5 billion/8 percent divided preference share deal remaining in place?
3. What chances are there that private equity will become involved to an extent that the EU Commission will allow the government to receive dividends on its preference shares?
4. The EU Commission’s policy of not wanting taxpayer funds to get shovelled in one end of banks only to get shovelled out the other end to pay bondholders is clearly aimed to protect European taxpayers. How does the less well articulated policy expressed in the Reuters article protect Irish taxpayers?
And a final observation. Remember that many people in government assured us that the €7 billion investment in preference shares was a sound one that would pay off for the Irish taxpayer. Many of the same people have assured us that NAMA will at least break even.