Preference Shares and “Guaranteed” Returns
This post was written by Karl Whelan
The European Commission continues to instruct Bank of Ireland to stop paying coupon payments on lower tiered bonds unless the payments are legally binding. Which brings us back again to the €280 million that is due to the Irish state from Bank of Ireland this Saturday.
The Commission’s request that the bond coupons not be paid triggers a “dividend stopper” clause for the government’s preference shares: These bonds have a claim that is senior to the preference shares, so this clause ensures that the holders of preference shares can’t get paid before them. This means we won’t be getting €280 million in cash from BoI this weekend.
The government’s preference shares do contain a clause stating that if BoI does not pay the €280 million in dividends, then it must pay the same amount over to the government in ordinary shares and that this must be done “no later than the date on which the bank subsequently pays a cash dividend on other Core Tier 1 capital.”
It appears that the NTMA, which is managing this investment for the state, could request these ordinary shares now. However, they are not requesting the shares. In his recent Oireachtas committee appearance of February 11 (link here), John Corrigan, CEO of the NTMA, says that this is because NTMA have “pragmatically taken the view that it would be preferable to get the cash. We are happy to allow some leeway in that respect until the Commission process works its way out.”
In relation to this Commission process, Minister for Finance, Brian Lenihan, has suggested that not only might this process result in us getting our cash dividend but that we may get this payment while the subordinated bond holders don’t get their coupon. On February 11, Minister Lenihan told the Oireachtas:
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.
The likelihood is that we will never get this cash payment. Whatever the outcome of the Commission process is, it seems highly unlikely that the EU will allow the preference shares—which are regularly described as “deeply subordinated” capital instruments—to get a payout in the presence of legal clauses that insist that the bondholders get their payment first.
In addition, it is worth recalling the point of the Commission’s actions. As BoI’s press release on this issue explains “this restriction on banks which are subject to restructuring plans is intended to prevent the reduction of own funds by financial institutions which are still reliant on State aid to fulfil regulatory capital requirements.” Now, whatever the outcome of the next couple of months, it seems unthinkable that a post-NAMA BoI will not be reliant in some shape or form on the state. So, this whole process is unlikely to result in subordinated bond holders getting their payout.
The likely endgame in relation to this issue has been clear for some time (and some would say has been from the start): The €7 billion in preference shares will get converted into ordinary shares and any dividend payments and future capital returns on these shares for the state will depend on the future performances of these banks or the price obtained in a privatisation sale.
So while it was pretty hard to stomach claims last year that from people like Brian Goggin and Damien Kiberd that the €7 billion represented a great investment from the Irish taxpayer, one could possibly argue that they were unaware of the scale of the problems with our banks. However, in February 2010, government TD’s like Darragh O’Brien raving in Oireachtas Committee meetings (page 4 of the transcript) about how the 8% is a “guaranteed return” (from a “deeply subordinated” instrument!) and that “it is double the best guaranteed rate available on the market” is plain silly.
Tags: Preference Shares
February 18th, 2010 at 9:31 pm
‘we’ won’t be getting anything even if they did pay out, there was never an intention to distribute any dividends so ‘we’ are no better off one way or another.
don’t get angry, instead buy their LT2 with a coupon at 10% which is trading below par.
the state bought in cheap, there is nothing to say they didn’t or couldn’t make anything on the secondary market, and of course, let us not forget: the rip off was built in from the start, I wouldn’t be surprised if they issue an IOU.
February 18th, 2010 at 10:04 pm
I don’t understand. That nice Mr. Davy the stockbroker told me in June that BoI were going to raise 1.5 bn in equity capital and pay back part of the government preference shares…
http://www.rte.ie/business/2009/0619/boi.html
What is not surprising is that BoI are going out of business, what is surprising is that Davys are still in it…
“The likely endgame in relation to this issue has been clear for some time (and some would say has been from the start)”
Indeed, some would
There was never any need to chase the pretty cailin Irish banks, act coy and they’ll fall into your lap.
February 18th, 2010 at 10:49 pm
@Karl Whelan
You have committed the dreadful O’Brian for O’Brien error. And tidy up that last paragraph.
February 19th, 2010 at 12:22 am
@Karl.
Quelle Suprise..
Perhaps Daragh O’Bryan doesn’t know of the existence of these, http://www.fixedincomeinvestor.co.uk/x/ic-bondtable.html?id=3015&stash=8A6ECD0&groupid=PIBS# perhaps just as well or the NTMA might be frog-marched into another glorious investment..
February 19th, 2010 at 12:45 am
“The European Commission continues to instruct Bank of Ireland to stop paying coupon payments on lower tiered bonds unless the payments are legally binding.”
Is there any chance that a Fianna Fail Minister could swear an affidavit that there is and never was any “legally binding” obligation to pay a dividend/coupon on the Preference Shares, and, have his legal representatives present that affidavit to a Judge of the High Court?
Is there any chance that the Soldiers of the Planet (that’s right not Soldiers of Destiny) could give that Minister a vote of confidence?
Is there any chance that the Soldiers of the Planet having found out that the Soldiers of Destiny may have been a little economic with the truth, might demand the head the Fianna Fail Minister who lead them to believe that dividends would be paid?
And if there is any chance of that, is there any chance that the Green Party will let the Citizens enjoy the head of that Minister in a basket with organic chips?
Oh dear Karl?
Did Ireland just wake up to the fact that the €7,000,000,000 preference shares are utterly worthless?
It’s on days like these that we need the people of Limerick to give Ireland a lead.
But the people of Limerick have let themselves down again, as usual, in their ambition to please the Feudal Lord.
Not unlike the people of Ireland.
February 19th, 2010 at 1:14 am
So Karl,
I have asked this question again and again.
I believe that the €7,000,000,000 (not the interest on it) is, and, was lost from day one.
The €7,000,000,000 has a legal value of €70,000,000,
The Minister designed it such.
Now “Mr Bond” “James Bond” “Eoin” “Eoin.Bond” “Eoin Eoin.Bond” or whatever multiple personality disorder he/she or (his or her girlfriend) has, would have me believe that that is not the case.
“MrBondJamesBondEoinEoinBondEoinEoinBond” would have me believe that the Minister is doing this for the good of the bondholders.
And he would be correct.
The Minister is not doing it for the good of the Citizen.
What say you Bond?
February 19th, 2010 at 1:37 am
The net present value a dividend on the Perpetual 8% Preference Shares is worth what Bond?
Was that just some Nominal Nonsense that a Minister Swore in front of the Citizens?
Where’s the money Bond?
Has the Minister already given you a promise Bond?
February 19th, 2010 at 1:39 am
I see you’re on the night shift again Greg.
February 19th, 2010 at 1:44 am
What is the current value of the Warrant on the equity of AIB and BofI Bond?
I say it’s not worth the paper you wipe your arse with Bond.
What do you say the Warrant on the equity is worth Bond?
You work in a “Bank” you do “Bond” stuff.
Don’t be shy, Tell me what the Warrant of the Equity is worth.
February 19th, 2010 at 2:17 am
“This means we won’t be getting €280 million in cash from BoI this weekend”
And what was it that Minister Gormley didn’t explain to you about that when he led his party into a “New” “Clean” “Smart” “Green” “Jobs” “Economy”?
Ye of little faith.
The “Green Smart New Equal Money Love Change Economy” is Real.
Get Faith. Get Loved Up. Do New Green Head Shop Drugs. What’s wrong with you?
This is not about you Karl. This is Religion.
Pay your Carbon Tax and LOVE your anointed Green Lords.
February 19th, 2010 at 9:04 am
“You work in a “Bank” you do “Bond” stuff.
Don’t be shy, Tell me what the Warrant of the Equity is worth”
thats actually pretty funny
February 19th, 2010 at 10:12 am
From RTE website:
COST OF STATE BORROWING FALLING - Investors are taking a more favourable view of the Irish economy due to Government action in the budget, resulting in a fall in the cost of state borrowing, says the Irish Examiner. That trend is set to continue and it is predicted the extra yield investors demand to hold Irish bonds could fall by 0.5% within weeks. Commerzbank AG said yesterday that the tough measures Ireland has taken and its ability to cope on its own with its budgetary problems should see the yield differences fall further. The spread could fall by between 80 and 70 basis points in two months after Ireland slashed spending. THE CREATION OF NAMA HAS ALSO HELPED IRELAND’S INTERNATIONAL PROFILE, said David Schnautz, an interest-rate strategist at Commerzbank in Frankfurt.
Seems to go against the consensus on this site. But, then he’s only the interest-rate strategist at Commerzbank in Frankfurt. So what would he know compared with Morgan Kelly, Karl Whelan and Brian Lucey?
February 19th, 2010 at 10:26 am
@ Greg
eh, what?
@ Karl
i still reckon BoI subordinated debt gets wiped out via d-for-e swap in next month or two, and that gives them the flexibility to pay te pref coupon again.
February 19th, 2010 at 10:27 am
@ JtO
in my inbox this morning…
“its actually truly amazing how ireland has weathered the latest soverign mini panic. perfect pr + execution. people love the way they pre-funded, have a much longer maturity profile than greece for example and have now issued more than 40% of total issuance for the year.”
But of course, David McWilliams was just on Bloomberg telling anyone that would listen how we’re all actually screwed…
February 19th, 2010 at 10:49 am
The following from The Economist:
http://www.economist.com/world/europe/displayStory.cfm?story_id=15549449&source=hptextfeature
includes a chart on 10 year bond yields for the PIIGS against Germany. While the Greek spread, not surprisingly, is heading for the stratosphere, Ireland’s seems to have merely stabilised above the others. I had expected some reward - in terms of a narrowing of the spread - for the “rectal fiscitude” of the Budget. Perhaps the prospect of a delayed reward is being flagged up in the RTE story. Still, the delay would worry me a little. Are other concerns sustaining the current spread?
February 19th, 2010 at 10:59 am
@Paul Hunt, this chart might help shed some light on the continuing worries about Irish sovereign debt risk http://av.r.ftdata.co.uk/files/2010/02/heatmapbig.jpg
While we have managed to sort out our short term funding problems, our rate of deflation (both cpi and GDP) is higher than other peripheral eurozone economies.
The real costs of servicing our debts (as the chart highlights) are quite high.
I do hope that jto and Mr. Schnautz are correct, but there still seems to be some risk that we have only managed to postpone our debt crisis.
Not directly related to this thread, but an interesting note from Rossa White of Davys on how we wasted the boom http://www.davydirect.ie/content/pubarticles/economy20100219.pdf
February 19th, 2010 at 12:58 pm
Did Budget 2010 include these interest payments in expected revenues?
February 19th, 2010 at 1:47 pm
Non-cumulative, eh? So if we don’t take equity, we get nothing…
February 19th, 2010 at 1:57 pm
@Ahura
I don’t believe so. I think they would have counted as NPRF income (as the preference shares are held by the NPRF). There are a couple of implications for the NPRF, though. The preference shares are held at investment value - the recapitalisation value that was put into the banks. Does the fact that they are not paying any return make a difference to this holding value? What should the preference shares be written to, if so? As the value of the NPRF is used to offset state borrowings to turn the GGD into the National Debt, does this have any implications?
February 19th, 2010 at 3:10 pm
@yoganmahew
I think you’re right, they used NPRF funds. Re valuing the investment, I’d say they’ll hold them at 7bn. I don’t know what rules apply to the NPRF, but I’d expect they’d argue a “Hold to maturity” line. Typically if you can make a good case that you expect no loss, you can hold at full value. If they had to use a mark-to-market or mark-to-model, they’d probably have to reduce the value of their investment. Obviously, the NPRF will make a large loss if they convert prefs to ordinary shares.
I suppose an option for the NPRF, if they receive the coupon in shares, is to transfer them (internally) to their discretionary portfolio in return for cash.
February 19th, 2010 at 4:18 pm
@LorcanRK,
Many thanks. It’s probably wise not to deviate too far from the orginal post, but I think the two issues are related. Borrowing money directly (or using the NPRF) to recap the banks is seen as an “investment” where great pains are taken to differentiate this from borrowing to cover the current fiscal deficit. I doubt bond buyers are as comfortable with these “investments” as we might be led to believe.
February 19th, 2010 at 5:07 pm
@Ahura Mazda
“if you can make a good case that you expect no loss, you can hold at full value”
So, mapping the options -
- what are the other preference shares trading at?
- what is sub-ordinate debt (senior to preference shares) trading at?
- how much coupon is being paid?
- what is the likelihood of conversion to equity?
- what is the likelihood of default?
Is it close to nothing the preference shares are worth? Whatever it is, it is currently a grim prognosis, no?
February 19th, 2010 at 6:49 pm
@ALL
Courtesy of poster Gadjodilo on another forum.
“The State is taking 15.7% stake in Bank of Ireland on Monday. The shareholding is in lieu of a dividend owed to the Government by the bank.”
http://www.rte.ie/business/2010/0219/boi.html
February 19th, 2010 at 6:50 pm
Statement from BL.
The Minister for Finance, Mr. Brian Lenihan T.D., welcomes the issue by Bank of Ireland to the National Pensions Reserve Fund of €250 million worth of its ordinary shares in lieu of a cash payment of this year’s coupon due on the preference shares which it received under the recapitalisation agreement. This ensures that taxpayers are remunerated in a timely fashion for their investment in the bank.
The European Commission have requested that discretionary coupon payments on tier 1 and upper tier 2 capital instruments in Bank of Ireland, which includes the Government preference shares, not be paid while they consider Bank of Ireland’s restructuring plan. However, the Commission have no objection to payment of the coupon in shares and the Government is therefore receiving ordinary shares instead of cash, based on current prices.
The Minister understands that the Bank of Ireland is assessing its ongoing capital needs and is actively exploring options, including accessing the private capital markets to enhance the capital position of the bank in consultation with relevant authorities. In his discussions with the bank the Minister will ensure that the taxpayer is appropriately remunerated for any investment in the bank and issues in relation to coupon payments and preference shares will be determined in the context of the Bank of Ireland restructuring plan.
February 19th, 2010 at 6:54 pm
Key line from B of I statement:
As part of this overall capital plan, and in the context of wider discussions with the State, the Bank is continuing to work with the State and the EU, including positioning the State shareholding in the Bank at a level which facilitates possible access to private capital sources. The Bank acknowledges the ongoing State support.
February 19th, 2010 at 7:09 pm
Does this have implications for AIB?
February 19th, 2010 at 7:18 pm
[...] NTMA chief John Corrigan’s position last week that the state expected to receive its cash dividend of €250 million at some point and [...]
February 19th, 2010 at 9:03 pm
Oh and on the likely endgame…
http://www.thepropertypin.com/viewtopic.php?p=176421#p176421
Don’t worry, though, I don’t know no monetarist economic theory of inflation…
February 21st, 2010 at 1:57 am
PaBandit,
“I see you’re on the night shift again Greg.”
It’s the Graveyard shift Pa.
Somebody has to keep them Zombie Bankers in their place.
Buried ……..
“Do the Math … Do the Monster Math…”
http://www.youtube.com/watch?v=nmKWJMENMxE
May 5th, 2010 at 6:16 pm
[...] and that