Bank of Ireland and the Government’s Preference Shares

Last month, we discussed how the the EU had prevented AIB from paying coupon payments on certain bonds, which will prevent them from paying dividends on the government’s preference shares, which in turn will trigger the right of the National Pensions Reserve Fund Commission (NPRFC) to acquire ordinary shares equivalent to the amount of the dividend. Bank of Ireland has now made a similar announcement.  Here‘s the press release. The highlight:

In accordance with the terms of the 2009 Preference Stock, the NPRFC would become entitled to be issued, on February 20, 2010 or on a date in the future, a number of units of Bank of Ireland Ordinary Stock (based on the average trading price of Ordinary Stock in the 30 trading days prior to February 20, 2010, assuming the Ordinary Stock was settled on that date) related to the cash amount of the dividend that would otherwise have been payable (€250m), should there be no change in these circumstances. The Bank is, however in ongoing discussions with the Department of Finance and the EC on this and other related matters as part of our overall engagement on the Bank’s restructuring plan and accordingly, this outcome is not certain.

So they’ve got a month to engage their way out of what would be a serious dilution of the current private ownership, even prior to any recapitalisation required by the losses triggered by NAMA.

14 replies on “Bank of Ireland and the Government’s Preference Shares”

(He’ll turn up sooner or later)
This post has nothing to do with this thread so skip for rest of discussion.

Surely this is the FINAL straw for our corrupt, reckless government:

After the bank guarantee AIB should have been watched like a hawk. But now we learn this:

One seventh of the money (€550 million of the €3,500 million) the taxpayer put into AIB effectively went in March 2009 to prop up Zoe on the basis of extraordinarily fragile security. The recapitalisation of AIB and BOI with an investment of €3.5 Bn from the National Pension Fund into each was agreed on the 11th February 2009.

“Mr Lenihan said the recapitalisation programme will be funded from the National Pensions Reserve Fund. €4 billion will come from the Fund’s current resources while €3 billion will be provided by means of a frontloading of the Exchequer contributions for 2009 and 2010.”

It doen’t matter when the money actually went in (looks like 12 May 2009) from the announcement on AIB should have been watched like a hawk. It should have been minutely scrutinised from the bank guarantee in SEPT 2008 on, let alone after we agreed to put the NATIONAL PENSION FUND’s money in.

Anyone who said Zoe was being kept afloat was dismissed as a conspiracy theorist. No conspiracy theorist could have dreamt the reality exposed on Monday.

“A SENIOR judge expressed astonishment that AIB handed out €550m loans to five companies formerly controlled by Liam Carroll with only a letter and the deposit of title deeds as security.”

“But High Court judge Mr Justice Peter Kelly said that it was “astonishing” and “extraordinary” given the vast sums involved that AIB’s only security for the borrowings was letters of undertakings from a solicitors firm and the deposit of title deeds.”

“He said this was “fragile” security and in some instances the letters mis-stated the name of the Zoe company that owned the property involved.”

“Mr Justice Kelly said it was “fortunate” for AIB that the Zoe companies acknowledged the errors and that the intention of the legal undertakings — to hold on trust the title deeds for AIB — was to create an equitable mortgage over the portfolio of commercial and residential properties, most of which were located in Dublin.”

Purely innocent staggering incompetence as usual? It doesn’t matter. Suppose that they weren’t ordered by the government to just give it to Carroll. Then either:

The government knew half a billion put in to the banks to help small and medium sized businesses was actually going directly to Carroll.
They had no idea what was going on in the banks in Mar 09….MARCH 09!!!!!

A) If they knew they mislead us on the purpose of capitalising AIB.
B) If they didn’t know everything the banks did in March 2009 and one seventh of the NATIONAL PENSION FUND money put into AIB was risked like this they are HUGELY, RECKLESSLY incompetent.

I say this every day but surely this is the FINAL straw for our corrupt, reckless government.

Pension fund money anounced Feb 09:
“AIB and Bank of Ireland both get €3.5 billion”
RTE 11 Feb 2009

Revelation of reckless lending by AIB in MAR 09:
“Judge shocked at AIB security when lending to Carroll firms”
Irish Independent 19th January 2010

Money goes in May 09 but that is irrelevant – AIB and the government both knew it was going in, and AIB was guaranteed since Sept 08.
NPRF website:
NPRF directed Investments

This just illustrates why AIB should have been watched like a hawk ALL THE TIME.

Irish Times 19th Jan 2010:
“AIB still has questions to answer over Green deal”
This issue was known to AIB and it seems it’s current boss since 2008.
“According to well-placed sources, the bank discovered the scam back in September 2008 when the Irish banking system was on its knees and required a blanket Government guarantee to continue functioning.”

“In a letter to The Irish Times in October last year, a former director at the bank, Padraic Fallon, penned a staunch defence of Doherty’s recent appointment as managing director. He argued that “AIB would not have lost $691 million in 2002 at its [Allfirst] Baltimore unit” if Rusnak had been under Doherty’s chain of command.

From 2003 on, Kallakis allegedly pulled off one of the biggest property scams ever seen in Britain or Ireland. AIB’s capital markets controls corporate banking so this scandal is one that happened on Doherty’s watch.”

The government accepted the appointment of Doherty.

I hope this post has something to do with the topic?

This shows who is in the driving seat, and it ain’t ol’ Biffo! We are now (maybe the previous poster is more relevant than he gives himself credit for, modest chap that he is! ) mortgaging our future for the sake of the banks. There has not been any local control over this process whatsoever, using the government as a mouth piece, just as Iceland has been pressured!

Cronyism gets us into trouble, Euro bankers make money out of our greed for funds and want all their capital back and more, leaving the mess firmly in our laps! Just what is going on?

Greg makes the point:
“The conversion of an unpaid dividend is at the absolute discretion of the directors of the bank.

“Dividend: Fixed dividend of 8%, payable annually. Dividends payable in cash at the discretion of the bank. If cash dividend not paid, then ordinary shares are issued in lieu at a time no later than the date on which the bank subsequently pays a cash dividend on other Core Tier 1 capital.””

Now, the next sentence in that is:
“The voting rights associated with such shares may be exercised from the date the dividend became payable.”
So it looks like the state has an additional 14.3% voting share in BoI?

The Independent has some coverage this morning saying that the subordinated bond holders may be offered a debt for equity deal.

According to RBS, the following two $ denominated bonds are the next to have their coupon stopped:

BOI Capital Funding (No2) LP 5.571% $800m non-cum perp prefs- 1 Feb 2010 Coupon

BOI Capital Funding (No3) LP 6.107% $400m non-vote non-cum, perp prefs- 4 Feb Coupon.

Stopping the coupons on these bonds will however mean that coupons cannot be paid on pref shares for at least one year. The current BOI pref shares are:

The Bank of Ireland UK Holdings plc EUR600m 7.4% perps prefs

The Bank of Ireland UK Holdings plc GBP350m 6.25% perp prefs

BOI Capital Funding (No1) LP EUR600m non-vote non-cum perp prefs

BOI Capital Funding (No4) LP USD500m non-vote non-cum perp prefs and

The Irish govnt prefs EUR3.5bn…

All told, that is approx €6bn. Presuming they may eventually have to convert all prefs to equity, a mammoth haircut will be required.

All, of course before the NAMA recap.

In a company who’s current market cap is approx €1.5bn.

I’m starting to move away from the nationalisation camp, because I really can’t see any value here (either as an investment or as an ‘economic driver’)

@ yoganmahew

I think they covered that by….

“Voting Rights: While any New Preference Shares are outstanding, the Minister will have 25% of total ordinary voting rights in respect of change of control and board appointments. The 25% of total voting rights of the Minister in respect of board appointments is inclusive of the voting rights associated with warrants and ordinary shares issued in lieu of cash dividends.”

We’re dealing we very slippery customers here.

Interesting point,

KW said: “So they’ve got a month to engage their way out of what would be a serious dilution of the current private ownership, even prior to any recapitalisation required by the losses triggered by NAMA.”

The month of uncertainty is the month used to calculate the price at which ordinary stock will be acquired. If the share price drops now because of the prospect of this happening then BoI shares will be even more diluted. Ergo, even if BoI know now that the preference dividend will be converted to ordinary shares they would still seek to sew doubt about its inevitability in order to minimise shareholder dilution.

“I’m starting to move away from the nationalisation camp, because I really can’t see any value here (either as an investment or as an ‘economic driver’)”
Yup. Insolvent companies don’t magically become profitable unless someone takes a loss. In the normal process, lenders, bondholders take the monetary loss and get new equity in return. The existing equity is wiped out. Any other scheme is pot-of-gold economics…

Let’s hope the EC continues to stand up for capitalism and opposes Bank of Ireland’s attempt to get out of its obligations.

The noose is tightening around Irish banks and I think we will see a second shock in 2010. Their troubles are too big for even the otherwise heavily indebted Irish state to fix.

@Garo – “… we will see a second shock in 2010. Their troubles are too big for even the otherwise heavily indebted Irish state to fix.”

I guess only time will tell. I was just (a few minutes ago) having a conversation with a ‘well known journalist’ in BusinessWeek who was giving me more or less the same opinion. I wonder what will unravel in 2010? I suspect there’s an unholy can of worms in there somewhere and someone, somewhere is going to come along and take the lid off that can. They also expressed the opinion that we are going to see (already started I think) increasing emigration of the ‘professional classes’ from Ireland.

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