State In No Rush to Collect Dividend

You may remember that about this time last year, the state’s investment of €7 billion in preference shares of the two main banks was regularly touted as a great investment, with the 8% dividend playing a big role in helping to reduce our budget deficit. The story in relation to these dividends has now gotten a bit complicated and it now appears that instead of getting €560 million this year, we’re perhaps getting nothing.

As discussed here before (here and here) the EU Commission does not like the idea of taxpayer money going into the banks only to be paid out to subordinated bonds. For this reason, the Commission has prevented AIB and Bank of Ireland from paying coupon payments on certain bonds. This has triggered “dividend stopper” clauses which prevent the banks from paying cash dividends on the government’s preference shares, which are due on February 20 in the case of Bank of Ireland and May 13 in the case of AIB. This in turn would trigger the right of the National Pensions Reserve Fund Commission (NPRFC) to acquire ordinary shares equivalent to the amount of the dividend. And €560 million is a large amount of money relative to the current stock market capitalizations for these banks.

However, it turns out that NTMA are not keen on collecting these shares for the taxpayer. Via Bloomberg, the Irish Times reports:

Speaking at a Dáil committee in Dublin today, Mr Corrigan said failure to pay the coupon won’t automatically lead the government to take a bigger stake in the lenders. The NTMA chief executive said he would prefer the banks to pay the coupon in cash rather than shares. He said he is “in no rush” to collect the shares, and will await a European Union decision on the coupon before deciding how to proceed.

In relation to not being in a rush, it is true that the NTMA don’t have to take the shares. The original announcement stated:

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.

Since the banks are not currently paying out dividends on ordinary shares, then it is clear that the shares don’t have to be issued, though it is less clear as to who makes the decision to get shares issued—the banks or the government.

It would be interesting to know the exact nature of this EU decision-making process that Mister Corrigan referred to. The Commission has already made its judgment on the payments to subdebt holders and it has adopted a consistent stance on this issue with other EU banks. There doesn’t seem to have been any conversion of the subdebt to some other form of claim that wouldn’t have a dividend stopper. So what exactly are we waiting for? A bit of clarity on this would be nice.

16 thoughts on “State In No Rush to Collect Dividend”

  1. So the government is refusing payment on an investment.

    Is this supposed to reassure bond markets?

  2. @ Karl

    “So what exactly are we waiting for?”

    At a guess – the buy back of all outstanding subordinated debt (possibly post NAMA), which isn’t all that much in fairness. At this point i would imagine the EU wouldn’t have too much issue with the only resumed subordinated payouts then being to the government.

  3. @ Eoin

    “At this point i would imagine the EU wouldn’t have too much issue with the only resumed subordinated payouts then being to the government.”

    And indeed, neither would I. That said, I spoke with someone who was at the Oireachtas committee session and they got the impression that Corrigan was saying the EU would allow payments to the government but not the subdebt holders, which seems to me an unlikely (and probably not legal) outcome. Hopefully the transcript will give a clearer picture when it’s released.

  4. @ Karl

    “which seems to me an unlikely (and probably not legal) outcome.”

    Indeed, what i received from an analyst (and backed up by someone else as well):

    “if the coupon deferral is reversed on the €3.5bn 8% gov pref the reversal will occur for the T1 securities”.

    Possibly the wrong impression was given at the Oireachtais committee today, but clarity would be helpful all around.

  5. If the government/NTMA decides to wait, does the bank not have to take a contingent charge on its balance sheet? This surely defeats the purpose of both the EU’s move and the NTMA’s refusal to take equity instead.

  6. The €7b and associated coupons will best be considered in the overall context of the bank’s recapitalization. Retaining flexibility until then (May) is prudent.

  7. Thanks Veronica — I had missed that.

    Here’s a link to the same material from the far more functional KildareStreet.com site that was recently brought to our attention:

    http://www.kildarestreet.com/debates/?id=2010-02-03.677.0

    In the debate, Minister Lenihan says

    “There is a fundamental distinction between a bond that provided for the repayment of interest advanced on foot of an arrangement with a private investor and a capitalisation arrangement that was approved by the Commission itself. While the position is that the payments are stopped at present, that is without prejudice to the State making its case in the context of the restructuring plan that such preferential payments should be made.”

    This seems to me to be suggesting that the government can get its preference share payment while at the same time the subdebt bond coupons do not get paid. If so, this seems to run counter to another fundamental distinction, which is that subdebt ranks ahead of preference shares in the capital structure — this is why the sub bonds had a dividend stopper in their contracts.

  8. @Karl Whelan
    “This seems to me to be suggesting that the government can get its preference share payment while at the same time the subdebt bond coupons do not get paid.”
    Mental reservation.

  9. yoganmahew
    I agree that this would be necessary. But timing and cashflow!

    By not taking it there is still a recognition of the liability to a creditor but the cash is still part of the capital structure! As every diminution of capital will firstly impact reserves, it is vital that every cent remains.

    The timing will be at years end. A week is a long time in politics. Months are a very very long time in an insolvent bank.

  10. Oliver VT

    Your point is being over made and reflects a fevered state of mind.

    I should know! Please ask your medical adviser for micardis. They lower my blood pressure very effectively. You deserve to have a long life, pointing out the errors of their ways!

    A consistent identity would also build up credibility?

  11. @Pat Donnelly
    The blood pressure is fine – it’s Brian Lenihan’s putrid politics that are the problem.

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