Bank of Ireland Issues Ordinary Shares to the State

Despite NTMA chief John Corrigan’s position last week that the state expected to receive its cash dividend of €250 million from Bank of Ireland at some point soon and so would not be getting ordinary shares in lieu, the Bank has today announced that they will be issuing ordinary shares for this amount to the government on Monday February 22. Announcement here. The Department of Finance response to is here. Hat tip to commenter Frank Galton.

111 thoughts on “Bank of Ireland Issues Ordinary Shares to the State”

  1. Clearly, the left hand doesn’t know what the right hand is doing. These guys – MoF, DoF, NTMA and Nama – are making it up as they go. You couldn’t make it up. So, the taxpayer has suddenly got 15% of BoI. What is the position v-a-v AIB?

  2. One has to worry whether the state will get any value for these shares ultimately.

    Is it valid to hope that there is an optimal amount for the state to put into the banks to attract in private capital and that whatever losses we sustain on our shareholdings in the bank, whether by dilution or by non-payment of coupon, can be credited towards that optimal amount?

  3. To expand on that, any large private investor in Irish bank equity is likely to offer €x per y% of bank share capital after recapitalisation. The private investor may well not be too worried who is being diluted as long as their share is steady and the bank will be run on commercial lines without state interference.

    The €x is likely to be greater the lelss the debts of the banks are. Therefore the outstanding debt to the Government could be a disincentive to recapitalisation. Therefore, taking ordinary shares is a good move if attracting private equity into recapitalisation is paramount. So just how important is attracting private equity?

  4. @zhou
    I suspect the only method to attract private sector capital at all will be for the state to take a loss, indeed, NAMA equity or another coupon payment in kind will already see the state diluting itself.

    So how will it play out? The state completes all its recapitalisations ending with an 80-90% share and the banks with 4.5% Tier 1 under Basle III. A 10-1 share swap ensues to raise the prices of the banks to levels that allow them to fall to fair value. Then there may be a change of private money diluting the state to bring equity up to 8% or so…

  5. Looks like Professor Karl Whelan owes Deputy Darragh O’Brien an apology for earlier remarks.

    “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.”

    The State gets an 8% return after all, in shares as per the conditions of the Preference shares. Whelan’s comment now looks plain silly.

    Interesting that the NTMA boss’ statement as quoted by Whelan earlier that NTMA has “pragmatically taken the view that it would be preferable to get the cash” has now become “the state expected to receive its cash dividend”. Which is it, prefer or expect? Cash is perferable to shares, but if you can’t get the cash, the smart play is to take the shares.

  6. I don’t understand this interest in private capital. BoI is only worth about €1.2 bn so a deeply discounted 1 for 1 rights issue might raise around €800 mln or so (including €120 mln from the State to avoid diluting its 15% holding). This would be hardly be enough to sort out the bank’s problems.

  7. @yoganmahew
    What do you mean a 10-1 share swap?

    @Eoin
    Do you think there is still a chance of getting private investors involved?
    Even post NAMA I’m not sure the that there would be that many takers of the banks at €1 for 100%.

  8. @D_E
    I mean they will do what AIG did – combine 10 old share for 1 new share – moving the share prices from, say, 99 cents to 9.90. This will allow an adjustment to the overall value of the company without wild penny share percentage movements (optics, darling, optics).

  9. Once a rescue has begun, no one will invest in the bank without a sovreign guarantee on at least 90 percent of the debt. It would be madness to do otherwise. Too much uncertainty about the book. The investor would pay a premium for the guaranteed bank however and the state should get this money.

    This is what has to happen in the end as far as i can see. Alternatives are a. Extraordinary return to profitability, b. Orderly state funded wind down, c. Disorderly wind-down.

  10. @ DE

    you could still get a d-for-e swap which basically creates new private equity shareholders, but a lot more difficult to do a right issue after this, at least not without massively massively diluting existing shareholders.

  11. the bank had to do something in order to hold to their commitments, if they didn’t have the cash then the shares were the other option, the run down in the price since early Jan (to me) would imply this eventuality was being partially factored in. this isn’t the end of the world, and it isn’t ‘iceland’, just another day in the trenches, get used to it.

  12. @Brian Flanagan
    “deeply discounted 1 for 1 rights issue”

    You may want to revisit the meaning of “deeply”. In the simplest arithmetic, the banks need massive amounts of money, 70-90% dilutions just to stay afloat. Unfortunately as the stock market price is a predictor of LTEV for shares, the government can’t spoof the value by setting up a crooked committee.

    NAMA must be close to dead in the water and has surely been doing the wrong thing all along. An asset liquidity scheme, like the Cretan one, should have been set up whereby the banks could swap ABS at face value for government bonds and pay a price for them. Effectively the government operating its own repo scheme for the banks in the Irish market. The price could have been fudged to be risk weighted based on the institution rather than the asset allowing the banks to store all their smelly stuff.

    The banks could have paid money to the government for this repo as well as an equity component for initial entrance, say 25% equity being the cost of entrance. With their balance sheets shored up and liquidity available, whether the ECB was giving or not, some of the banks might have been able to trade their way out. They would have been largely zombie banks for a while as they wrote off their bad debts year by year, but really that is the best we could have expected – zombie banks that don’t cost us very much (or even produce an accounting income).

    Otherwise they would be busted and a NAMA like operation would be used to work out their bad assets. But only after they had been busted.

  13. As follow up to my comment about a rights issue, the IT reported (today) that BoI is planning to raise €2.5 bn through a rights issue with four investment banks partly-underwriting or guaranteeing the issue. There would also be a debt for equity swap.

  14. @Eoin
    But I was sure I heard that a debt for equity swap would collapse the banking sytem, the state and the euro… I must have cloth ears.

  15. @ Declan

    My point in relation to Mr. O’Brien’s comments was that returns on preference shares are not at all guaranteed so comparing the 8% dividend with low risk returns was misleading. Mr. Corrigan may have decided this week that the “smart play” was taking shares rather than continuing to claim we’d get cash as had last week. But the market cap of private BoI shares is only just over €1 billion, so the endgame here for this strategy is us owning all of the bank and getting whatever that ends up being worth.

    The investment was never in any way a risk-free guaranteed return and for Mr. O’Brien at this late stage to be saying so is, as I said, silly.

    Perhaps you think the €7 billion was a fantastic investment. I’m just going to have to disagree.

  16. @ YM

    im referring to subordinated debt, not the seniors. And im suggesting doing it around a year after the initial suggestion to do it. At the risk, no the certainty, of repeating myself, can no one see the difference there?

  17. @Eoin
    I can see why people feel there should be difference and accept that many feel there is.
    But I see no reason WHY bank funding should be effectively the same as government debt.

  18. @Eoin
    Come now. Those of us who suggested that debt for equity was the only likely resolution of the banks’ problems were derided as fantasists (I’m a pepsi man myself). If the case had been accepted, no matter the timescale, perhaps the ludicrous accounting debt buybacks wouldn’t have wasted the banks’ cash resources and swapped debt at both a lower price and a lower dilution.

    As it is, the scale of the recapitalisation required has gone beyond what subordinate debt could carry, particularly since it has already been rejigged. Perhaps in another year senior debt will be considered as decoupled from sovereign debt as junior debt now is. In fact, I’d go so far as to predict October 2010 as the date…

  19. It was nice of NAMA to give the share price enough of a boost that 250 mill didn’t amount to a much bigger share in the bank.

  20. This sounds like one of those moments in a movie where the protagonists all make enough money to retire on. But I’m not sure that’s going on here.

  21. @All

    Well if they hoard the petty cash due the state [which pumped billions in] ….. what chance Joe and Joan little citizens of getting any credit? None.

  22. Just doing a little reading on some of the threads started here a year ago when the pref share deal was announced, a favourite being this from Prof/Governor Honohan http://www.irisheconomy.ie/index.php/2009/02/12/why-do-bank-share-prices-fall-when-government-buys-preference-shares/ where he tries to work out the size of the required investment in the banks.

    What is astounding though is how little real progress has been made on the banking crisis in the past year. Is this what Brian Lucey meant when he referred to ‘Japanification’ of our banking system last year?

  23. The more delay the better. The apparent confusion is all a sham! The ECB has changed the game plan if it ever was a runner.

    Good. NAMA is looking less likely, which explains why the opposition peddled it so softly and the President did not get involved. I have already, months ago, suggested the share price yoyo may have benefitted some.

    So nothing new, just confirmation that the banks are still dead but still walk among the living. By having shares that are quoted, there is an opportunity for insiders. Except the insiders are not in the bank!

    Aaaah! The world is restored to sense. Greed will out. The shares will remain, as long as the possibility of NAMA affords yoyo money. In derivatives, Paddy Power or even in share trading, but at a risk. Once NAMA is shown to be dead then the banks will die. Peacefully. The good bank idea will resurrect itself, banishing the bold zombies! Christianity triumphs!
    And GF the good, was in on it? Shame!

    Anyone noticing the FX market lately? Could it be related to the need to bolster the US$? The treasury auction seems to be embarrassing for the US. The end of the beginning? The euro? Will emerge as strong as ever, sadly for those on the periphery….

  24. @Pat Donnelly – “NAMA is looking less likely”

    I fear you are being over-optimistic.

    There is a dogged determination to push this one over the line and many a hand is getting sweaty waiting for an OK from those over in Belgium (which will be forthcoming) and for these ‘assets’ (sorry, I laugh every time I use that word in relation to what’s going into NAMA as it implies something of real value) to be transferred.

    Clocks are ticking. Some people don’t need another Dubai or Greece falling off the shelf before the envelopes are pushed to the other side of the table…. and some of those shelves are looking mighty rickety.

  25. @Karl Whelan

    Not much of an apology. Says a lot about you and your motives.

    @Frank Galton

    When BOI shares went above 3 euros in the autumn, you and the other smart alex posters to this site put this forward as proof that the banks were getting a great deal. Now that the share price is below levels in the early summer, doesn’t this mean the banks are getting screwed?

  26. A bit off topic, but maybe one of you might know this?

    Everybody is talking about getting credit flowing again for viable businesses, (I assume that property development and investing is not included in the viable business group, that needs credit to survive) Has this amount ever been quantified? I would be very interested in knowing this figure and I would think it would be very important to know it when making a strategy for the economy?

    As for Nama it recently dawned on me that it will get credit flowing again. As far as I understand Nama will have money available to lend to unfinished projects and keep property empires going. So since the irish banks have no money and foreign bank would probably demand extreme security before lending a cent. Nama does seem like the only option to keep credit flowing to these large scale property developers. Maybe it is that simple, but could they maybe spare a little bit of cash for the viable businesses, I suspect it is only a fraction of what nama needs.

    I remember as child I always thought that there were some with a good plan in charge, that responsible adults were in charge. I have to say that I have been disappointed in that respect, Elaborate and evil scheming always turns out to be much less elaborate than you would expect.

    About 15 months I wrote jokingly that I suspected Ireland going for the Bad state option instead of the bad bank option. Since the banks had lent itself to bankrupcy by lending vast amounts to Irish people to buy Irish land which was theirs in the first place. So in fear of foreigners taking over these assets when the banks went bust, I suspected that the state would take over all these loans/assets, at high prices, moving these assets/loans into a bad state instead of a bad bank. And if IMF would arrive, surely they would not demand that a country sells it own land, that would be extreme even by IMF standards. Thus protecting the land. I have to admit when writing I went off on a tangent and wrot it in a humorous way. I did not really expect it to happen.

  27. @pera – “Nama does seem like the only option to keep credit flowing”

    You are right of course. Our dear leader has already told us many times that it is the only game in town and that there is no alternative. I really don’t understand why it is taking us so long to understand and accept this. All of us who haven’t figured this out yet are of course some kind of socialist pinko running dogs who should go away and commit suicide.

    “that would be extreme even by IMF standards”

    Oh no it wouldn’t. Sorry, thought the panto season had eneded 🙂

    No offence – just pulling your leg.

  28. Declan says “Not much of an apology. Says a lot about you and your motives.”

    Sometimes the commenters on this site make me laugh. I’m supposed to apologise for pointing out that “deeply subordinated” preference shares in practically insolvent banks are not a “guaranteed return”. What’s next? I’m supposed to apologise for saying the sky is blue?

    And as for me and my motives, I’m guessing this is supposed to be something about my dark conspiracy to bring down the government and wreak havoc on the economy via posting dorky corporate financy posts on a blog hardly anyone reads. Drat, my dastardly plot has been exposed!

  29. Can/should/could/will the government sell these shares on the market to get the cash?

    I strongly doubt they would get the €250 million worth, which makes a non-sense of what Declan said. A bird in the hand is worth two in the bush.

  30. @Eoin,

    it pains me to say, but you might be right.

    A nationalisation would have needed justification quickly. It took a long time (surprisingly long) time before it was shown that Anglo was in fact insolvent. NAMA has more or less shown that the other Irish banks might be insolvent in the same way that a nationalisation might have done. Based on the time it took with Anglo, it seems NAMA or nationalisation would have taken the same amount of time.

    BOI would probably (I’m guessing here) have paid the dividend if loans had been transferred to NAMA, at the very least they’d have had more cash to do so. The delay might have forced them to issue the shares instead.

    My first reaction to the buybacks was that it was bad business. My second was that this is settling with bondholders. Burning them and imposing losses on them might be a phrase to be used for those who prefer more inflammatory wordings. The issue could be about the price paid. Might have been too high, might have been too low. Either way, those bondholders have no recourse now and can make no complaints as they agreed to the buybacks.

    The outcome of NAMA depends on the price paid and when it is being paid. More delays and lower prices will improve the outcome (more equity stakes).

    However, I still think that NAMA was pushed through in a disgusting way (lies & scaremongering) & by opposing NAMA the outcome is, so far, better than it would have been.

    About getting credit to flow:
    Irish banks seems like old dogs with one trick – lending for property. Can they learn something new and lend more for business? I’m not so sure they can and if they can’t then…..

    At the moment I don’t see why a bank would want to lend for property instead of investing in invoice factoring or something similar. Same risk but the property lending is still likely to be lower return. Might be some business opportunities here 🙂

  31. @Jesper
    “BOI would probably (I’m guessing here) have paid the dividend if loans had been transferred to NAMA, at the very least they’d have had more cash to do so.”
    The problem, so far as I can see, is not a cash issue per se, it is that the preference shares have the option to take equity instead and the EU are saying that option should be exercised since it:
    – preserves cash
    – removes a contingent liability (that deferring would create)
    – moves the clean-up process along as the bank can recognise that little bit more bad debt with the 250 million saved

  32. @Karl Whelan

    Spin it all you want, the reality is that no ordinary shareholder of BOI has got a single cent in dividend this year, no holder of subordinated bonds has got a single cent this year, yet the State has received an 8% return on its Preference Shares. The Government played hard ball with the bank in drawing up the conditions of the Prefs, in that if the banks couldn’t pay cash, the State would demand ownership of part of the bank. That was a good move, since, as it transpires BOI couldn’t pay cash because of the EU blocker.

    How much is 15.7% of BOI worth? The answer is 250 million euros as of Friday’s closing prices — exactly what the State was due. The State, uniquely, got paid.

    Labour’s Joan Burton on Thursday issued a statement about the due dividends saying the ” taxpayer will be left empty-handed.”

    http://www.labour.ie/press/listing/126649283314495552.html

    She was wrong. You were wrong. The only question now is whether either of you have the maturity to admit it.

  33. @Declan
    “How much is 15.7% of BOI worth? The answer is 250 million euros as of Friday’s closing prices — exactly what the State was due. The State, uniquely, got paid.”

    You are of course assuming no further decline in the share price. If shares halve for example then the government only got 125m euro. I buy and sell shares regularly and got out of BOI at €2.35. They went over €3 as pointed out and are now just over €1. Even at that price I wouldn’t buy any, the risks are too great. All the government have done is swapped a debt for equity. It is still only paper, we won’t know how much it is worth for some time yet.

  34. re cash or shares

    1) i agree with KW in so far as i would have much preferred the €280m in cash from the BOI rather then ordinary shares, however

    2) regardless of whether we get cash or not in the grand scheme of things would we not be merely taking the money putting it in our pocket only having to take it out and give it back in a short space of time?

    3) i can’t see there being a big appetite for investors to put their funds into a rights issue for the bank shares given the losses they must be nursing on current holdings

    so we could be long term holders of stakes in the banks for some time to come

    4) i see a number of posters saying that NAMA is dead in the water-have i missed something-perhaps someone might enlighten me

  35. @Stuart Blythman

    “You are of course assuming no further decline in the share price. If shares halve for example then the government only got 125m euro. ”

    True, but if shares double for example then the government got 500m euro. Closing price on the day of transaction is the natural price to use. Of course share prices are very volailte in the short term (look at that they did over the past year) and they might drop like a stone next week in repsonse to yesterday’s news. Or they might not. But over the longer term, share prices tend to go up. So let’s check back in 5 years and see what they are worth?

    Can you see how Joan Burton is contradicting herself? She wants BOI to be fully nationalised so that the State would own an asset that could be sold for a return a few years down the road. Yet 15.7% of that same asset is worthless, according to her. How does that make sense?

  36. @Declan:
    “the reality is that no ordinary shareholder of BOI has got a single cent in dividend this year, no holder of subordinated bonds has got a single cent this year”

    Lackaday. Woe is me. What a thing.

    bjg

  37. @TOD
    “i see a number of posters saying that NAMA is dead in the water-have i missed something-perhaps someone might enlighten me”
    I’ll have a go!

    The reasoning behind NAMA (for the banking system) was twofold –
    1. Overpay for assets to give the banks a bit of a leg up without taking an ownership share.
    2. Cleanse the banks of bad loans so they could attract private capital and prevent state majority ownership.

    All else is spin or follows on from these two ideological positions. These two ideological positions stem from not wanting risk capital to bear risk.

    The EU have scuppered 1. largely by insisting on a loan-by-loan valuation. Market prices are now so low that even an LTEV leg-up of 10% and even one of 25% or 50% for land (as was announced on Christmas Eve last by the Dept. of Finance) is not sufficient to prevent a massive recapitalisation requirement. Far more than the banks could hope to generate in returns.

    The scale of the problems at the banks are so large that taking away C&D and some commercial loans is only dealing with one set of problems. A second set is going to revolve around smaller sub-NAMA borrowers and residential (there’s a good reason the IMF suggested leaving the door open for residential). So 2 is not likely to happen – private equity will only come from converting existing debt to equity at deeply discounted rates. This will include the government’s preference shares.

    So the state and the banks would have done better to extend and pretend on balance sheet rather than trying to shift the problem off balance. They have ended up storming down a blind alley, because they thought they knew a clever short-cut.

  38. @David O’Donnell

    Market price of BOI Friday, 19/2/10 = 1.26 euros.

    Now, can you explain how 1.26 = Sweet-f**k-all = sfa = zero?

  39. @ Declan

    This “you were wrong” “you should apologise” “you’re immature” stuff is getting a bit tedious. Rather than ranting, it might be better if you could highlight exactly what it is I’ve said that’s wrong (yes, me — not Joan Burton!) and then I could respond to specific issues.

    In relation to the dividend payment, I wrote that “the likelihood is that we will never get this cash payment” at a time when the government was claiming the opposite. I was right and they were wrong but I haven’t been screaming for apologies.

    In relation to getting ordinary shares, I wrote that, as of Thursday, the situation was that the government’s position was that they were in no rush and were waiting to get their cash dividends. That was true then. There has been a welcome change in the government’s position on this and I put a post on the site to acknowledge this change immediately.

    And then there’s the issue that I’m supposed to apologise for—stating that preference shares are not guaranteed returns. This is simply a fact. The prefs will end up being converted to ordinary shares with a highly uncertain value and the €7 billion is likely to prove a bad investment.

  40. Now that the state owns a portion of Bank of Ireland does this mean that the employees are now public servants (albeit only 16% public servants). Can we expect them to be paying the pension levy and take a pay cut?

  41. @Declan
    “But over the longer term, share prices tend to go up. So let’s check back in 5 years and see what they are worth? ”

    True, if the business survives. I had shares in Anglo which turned out to be worthless. Waterford Glass is gone. Independent Newspapers is interesting – at 10c very cheap but will the ordinary shareholders see the increase.

    As for Joan Bruton I don’t worry about what politicians say.

    But I agree with you we’ll see in 5 years or hopefully less. Until then no one can say who was right or wrong. I’m just glad we’re having a debate, there are those out there who would stiffle any contrary view. Hopefully when the next boom comes along we will handle it better as a result.

  42. @ Declan

    “Closing price on the day of transaction is the natural price to use”

    For clarity, and correct me if im wrong Karl/anyone else, but i think the share issue will be decided by the average closing price on BoI shares on the 30 days prior to the payment date (or something pretty close to that definition). I think the average is fairly close to the Friday price anyway, but just so we’re all on the same page.

    However, broadly speaking i think you’re right to highlight that we are in fact receiving something of at least some real value in lieu of the cash coupon, although i also reckon its very difficult to put a firm and fair value on the banks right now given their recapitalisation needs. But to call it worthless, ala Joan Burton, is clearly wrong as things stand (but i don’t think Karl suggested this either!). In light of this, your question “Can you see how Joan Burton is contradicting herself” is i assume a rhetorical one. After all, im still waiting for 500,000 people to emigrate per her analysis…

  43. I really don’t want to turn this into a Joan Burton thread but am I missing something? Did Burton say that the 15.7% was worthless? The link above is to a statement issued on Thursday when the government were still claiming they were waiting for a cash dividends.

  44. @Declan

    From the Joe/Joan citizen perspective: Negative €(3.5 billion) + Market value( ~€1.6 billion) = Negative = less than zero

    My humble apologies – but me poor head cannot figure out how to eat ‘less than zero’ ……… ‘let them eat cake’ nawwwww ‘let them eat less than zero’ (-;

  45. @ Karl

    apologies, im paraphrasing a bit too much, and im not sure if she has actually said anything since yesterday evenings announcement. However, this is what she said on Thursday…

    “Taxpayers Facing Another €560m Down the Drain on BOI & AIB”

    “it now looks increasingly likely that the taxpayer will be left empty-handed ”

    “Irish taxpayers stand to lose €560m in 2010 alone”

    “If both payments are missed, €560m, in cash, which should have boosted the national coffers, will have vanished.”

    At the very least, things haven’t turned out as she was suggesting. The dividends haven’t “vanished”, the taxpayer hasn’t necessarily “lost”, and they are certainly not being left “empty handed”.

    And then we have this particularly odd contradiciton from Richard Bruton today…

    “The taxpayer is left short and the shareholders in Bank of Ireland are left short as their share holding is diluted.'”

    Can anyone explain to me how anyone is in fact being “left short” in this situation?

  46. @Bond. Eoin Bond…

    & Seven_of_Nine is developing a ‘thing’ for you (-; lets meet up on the holodeck and discuss Golden Sacks, Senators, affidavits, and €10 billion bonuses ……

  47. B of I bye-law 6 (I) (4) (page 40)

    (4)Bonus issue of Ordinary Stock
    (a) If an instalment of the 2009 Preference Dividend is not paid on the
    relevant Dividend Payment Date pursuant to Bye-Law 6(I)(2) (a
    “Relevant Instalment”), each 2009 Preference Stockholder shall be
    issued and allotted on the Bonus Stock Settlement Date (as defined in
    Bye-Law 6(I)(4)(f)) the number of units of Ordinary Stock as is equal to:
    (i) the aggregate cash amount of the Relevant Instalment in euro which
    would have been payable to the 2009 Stockholder or would have been
    received had it been paid; and (ii) any dividend withholding tax deducted
    or which would have been deducted, divided by the Stock Value (the
    “2009 Bonus Stock”) subject to the Bank not being prohibited by law
    from doing so. Such 2009 Bonus Stock shall be issued fully paid at an
    issue price equal to the nominal value of such stock by a capitalisation of
    reserves as provided in paragraph (h) of this Bye-Law; provided
    however that where the Bank has insufficient reserves to pay up the 2009
    Bonus Stock in full it may be required by a 2009 Preference Stockholder
    to issue its pro rata share of such 2009 Bonus Stock on the basis that the Bank shall pay up the issue price of such 2009 Bonus Stock in
    accordance with Bye-Law 6(I)(4)(h) out of a pro rata amount of the
    available reserves of the Bank, with the balance to be paid up by such
    2009 Preference Stockholder, provided however that the Bank shall not
    be required to pay up any part of the 2009 Bonus Shares out of the
    distributable reserves of the Bank in contravention of Bye-Law 4(F),
    5(F) or 6(F).

    … “shall be issued and allotted” … There is no cash option. The NTMA was saying it could wait for something that the Bank couldn’t do. [credit to the Indo, which has been making this point for the last few days]

  48. @ Karl Whelan

    The State got its 8% return on the Preference shares, as the “raving” Darragh O’Brien predicted, and you know it. The return was baked in the cake because of the conditions of the Share dividends:

    ” 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.”

    If the Preference Shares are converted to Ordinary Shares in the near future as many press reports suggest then they will no longer be Preference Shares. Darragh O’Brien’s statement about Preference Shares would no longer be relevent. Returns from Ordinary Shares will be in the form (eventually) of share of the profits distributed as dividends and capital gains, not a fixed dividend. AFAIK, Darragh O’Brien has made no comment about what dividend/capital gain might be expected from those instruments.

    @ Bond Eoin Bond

    I stand corrected on the price of the share issue. As you say, doesn’t make much differnce.

    As for Richard Bruton’s “The taxpayer is left short and the shareholders in Bank of Ireland are left short…” How could both sides be “left short”? Dreadful guff.

  49. @Declan
    “Yet 15.7% of that same asset is worthless, according to her. How does that make sense?”
    Because as the recapitalisation (which will involve further issuance, thus dilution, of ordinary shares) is not complete, the 15% is worth X where X is the percentage of the ultimate number of shares in the bank that the government has now taken for 250m

  50. @ Declan

    “The State got its 8% return on the Preference shares, as the “raving” Darragh O’Brien predicted, and you know it. The return was baked in the cake because of the conditions of the Share dividends”

    Ok, I see what you’re up to — you’re twisting my words to suggest I said something I didn’t.

    My comments on Darragh O’Brien were in no way to do with whether or not he “predicted” we would get a payment or not this year — the quotes I provided are not all to do with that issue. In fact, they came right after I pointed out that these will almost certainly be converted to ordinary shares so I was clearly referring to the long-term outlook for this investment. Your friend Deputy O’Brien was comparing this €7 billion preference share investment — which will have a very uncertain return — to investments in German government bonds. This was, and is, nonsense.

    While we’re at it, can you provide me with the relevant source for Joan Burton stating that the 15.7% is worthless?

  51. @ Declan

    thanks for your explanation above which i follow.

    however i understood the phrase “dead in the water” to mean that it was dead i.e not going to go ahead whereas it is full steam ahead

    nitpicking with language i be but…..

  52. @ BL

    when calculating how many shares may be issued in lieu of €280

    surely you would not expect the bank to take into account (or the taxpayer to have the right to expect the bank to take into account)

    future as yet, uncosted and not agreed, recapitalisations?

  53. @TOD
    well….thats a very interesting question. Point is that while we dont know the precise amount of the required future capital we do know that it will be substantial, and will in all probability dilute 10?15? times the existing ordinary share capital. So, the reality is that the 15% here will be diluted in the near future, regardless of whether the recap comes from the state or the private sector. So, the future value of these shares is worth a whole lot less than the 15%. How much, i dont know. But a lot….a lotta lotta lotta less.

  54. @Brian Lucey
    Some of the future recap is already baked into the share price, NAMA at 30% haircut for example. Basle III, future coupon dividends, preference share and subordinate debt conversions are not. Not yet, anyway…

  55. @Yogan
    Agreed. But
    a) the 30% haircut may be a great overestimation of the cut if Peter Kelly is anythign to go by! 98% falls in land anyone….
    The others are known unknowns.
    Do you agree that anyhow there will be dilution on a massive scale?

  56. @Karl Whelan

    “While we’re at it, can you provide me with the relevant source for Joan Burton stating that the 15.7% is worthless?”

    I did already, as did Bond Eoin Bond.

    “it now looks increasingly likely that the taxpayer will be left empty-handed ” Empty = zero. But taxpayer got 15.7% of the bank. So 15.7 of the bank = zero.

    “Irish taxpayers stand to lose €560m in 2010 alone” Dividend due of €560m. Taxpayers losses €560m. So taxpayers get €560m-€560m = zero.

    “Taxpayers Facing Another €560m Down the Drain” Down the drain means nothing is left.

    Need I go on?

    @TOD

    Wouldn’t future recapitalisation be reflected in the low share price currently? So the State got a lot more shares for its €250m than it would have if the share price were higher and no dilution was coming.

  57. @Declan
    If you think the current share price fully reflects the future recapitalization inclusive of dilution, you should be piling into them on monday…..

  58. @ BL & Declan

    Yes – this might assist Declan to get some handle on a conceptualisation of ‘less than zero’ by Tuesday ………….

  59. @ Karl

    im not all the way along with Declan, but i am a good bit there.

    Joan Burton was either saying:

    (a) the taxpayer isnt getting cash, its getting shares instead, but its being left empty handed, therefore the shares are worthless

    or

    (b) the taxpayer isn’t getting cash, it isn’t getting anything in lieu of cash, and its therefore being left empty handed, therefore the dividend is obviously “worthless”.

    Given that we always figured shares would be issued if a cash payment wasn’t paid at some point (even if delayed), Joan Burton either didn’t understand this element of the pref shares, or she was playing politics with the fact that shares might be paid out instead of cash.

    Of more hilarity is the notion of Richard Bruton simultaneously trying to protect BoI shareholders as well as the taxpayer, and figuring that both are getting screwed in this transaction. You could argue for one or the other, but its very very difficult to come up with both.

  60. @All
    With 98% falls in development land we have clearly had a Japanese scale lending bubble (could it even have been worse?) So, are senior bondholders pre-Sept 2008 still off the menu or must we now take a bite?

  61. @ Declan

    So it turns out you have no source whatsoever for your claim that Deputy Burton said the 15.7% stake is worthless.

    You have cited a statement from Thursday at which point the government was claiming it was going to get a cash dividend at some point and that they were “in no rush” to collect shares. And you have used this statement from Thursday to claim that Deputy Burton has made a statement about the value of the shares announced on Friday being worthless (“Yet 15.7% of that same asset is worthless, according to her.”)

    I see now that you are the kind of person that repeatedly misrepresents other people’s positions. For that reason, I’ve decided not to waste any further time on you.

  62. @Oliver Vandt
    It looks like NAMA as is was the final product of Irish property fever. If the Japanese had tried NAMA would they really have been better off having their banks write down the loans significantly but not sufficiently? By doing so they would have dumped a huge amount of losses on to the Japanese taxpayer…who would then have had to write down the loans or take the losses….Did both Ireland and Japan hate the thought of a “firesale” so much that they have ended up doing longer term damage to their economies? The rulers of both obviously found the idea of letting domestic banks stay comatose and inviting foreign banks in to replace them too much.

    In a property collapse of Irish/Japanese scale is a bad bank inevitably doomed to corruption and failure, as Morgan Kelly suggested? Ireland and Japan are too deeply conservative societies with extremely arrogant, secretive, closely knit elites. Both of them faced giant collapsed lending bubbles. We may well look back and say that the Japanese approach, which contributed to the lost decade that followed, was not much worse than the Irish one. Let’s hope we don’t judge the Irish approach to have been worse.

  63. @Brian Lucey
    Yes, I believe the share price as of friday includes only the expected NAMA dilution and some small dilutions from a couple of obvious issues – a private capital raising of about 2.5 bn for BoI to raise its Tier 1 equity. Basle III is on the radar of only the nuts as is the residential mortgage book.

    I believe the equity shares currently in existence are essentially worthless, not necessarily Anglo worthless, but at least AIG worthless.

    But, thanks be, I am no master of the universe though, so it is mere guesswork.

  64. @Tony Demello
    “If the Japanese had tried NAMA would they really have been better off having their banks write down the loans significantly but not sufficiently? By doing so they would have dumped a huge amount of losses on to the Japanese taxpayer…who would then have had to write down the loans or take the losses….Did both Ireland and Japan hate the thought of a “firesale” so much that they have ended up doing longer term damage to their economies?”

    What a silly idea. If the Japanese had tried NAMA we wouldn’t still be getting headlines like these, would we?
    http://www.businessweek.com/news/2010-02-04/mitsubishi-ufj-shares-fall-as-bad-loan-charges-rise-update3-.html
    (4 February 2010)

    Eh, unless they tried it and it didn’t work…
    http://www.nytimes.com/2002/07/05/business/international-business-japan-s-bad-loan-agency-turns-a-profit.html?pagewanted=1
    (5 July 2002)
    (Note the Japanese NAMA was only allowed pay prevailing market price and had to make a profit…).

  65. @Tony Demello
    If the seniors don’t take the losses the taxpayers will. We now know for certain that there are huge losses. 70, 80, 98%….many will probably go over the 100 mark, when all costs are added in. This is a Japanese scale disaster. We also know that any money paid to shareholders or subordinate bondholders is a direct transfer of wealth from the taxpayer.

    It would be astounding if a government so generally incompetent and so publicly dishonest about NAMA was, in private, totally honest about the collapsed Irish lending bubble and secretly pursuing a brilliant strategy. We can ignore all the spin. NAMA is a catastrophe. Civil society must now demand an immediate general election, preferably after the full facts are revealed, although I doubt they’re capable of it. This must be followed by a transformation of Irish governance and especially Irish financial and budgetary regulation. Never again.

    Now Tony, it’s time for the two of us to leave the irisheconomy.ie building for good.

  66. @ Frank Galton,

    I think your interpretation here is incorrect. I think it is only “in the event” that a cash dividend not paid that ordinary shares will be issued in lieu.

    However, it’s nice to know we provided the cash to boost the reserves (Stock Premium Account) in order that we might be paid Ordinary Shares in lieu of cash from that same Stock Premium Account.

    99% of the cash proceeds of the issue of the (Non-Cumulative Perpetual) 8% Preference Shares went directly to the Stock Premium Account.

    “Such 2009 Bonus Stock shall be issued fully paid at an issue price equal to the nominal value of such stock by a capitalisation of reserves as provided in paragraph (h) of this Bye-Law” .

    We are in effect paying ourselves a dividend (in stock) with our own money.

    I wonder how long it will be before we buy €7,000,000,000 of Ordinary Stock with the money we paid for Preference Stock.

    Ya see, the thing is Frank, had the Government suggested “buying” €7,000,000 of Ordinary Stock when the Preference Shares were bought we would have had complete control of the banks (we will end up there very shortly). But the Government didn’t want to do that (for whatever fundamentalist neo-con ideological reasons they had).

    Of course there is the minor matter that had we taken control of the banks NAMA would have been absolutely unnecessary. The bad assets could have been managed in situ.

    The price of the Ordinary Shares of BofI on 11th February 2009 was €0.61. The Market Capitalisation of the bank at that time was €613mm. That would have given the State an 85% stake in Bank Of Ireland.

    But there’s another point. Bank of Ireland was insolvent at the time. Investing €3.5bn in a company that had then, and still has, zero value would have been foolish. The shareholders and subordinate debt holders should have been wiped out.

    The bank should have been taken into Custody (Temporary Nationalisation). The €3.5bn (and maybe another €1.5bn) should have been put on the table and negotiations should have begun with senior debt holders about a debt for equity swap. That is, the State Guarantee should have been renegotiated.

    But for some reason (increased lending to small and medium sized enterprises?) the government chose not to do that.

    Now we are in the worst of all worlds.

    €7,000,000,000 gone. About to be converted at a fictional share price, When we could have had it for nothing and had a much stronger hand in negotiations.

    Some say that our Minister of Finance has been a master of the complexity of this fiasco (a fiasco created by our Taoiseach).

    I disagree. I think he got taken for a ride and just lost €7,000,000,000.

    I have said it before. The conversion of the Preference Shares to Ordinary Shares will not improve Core Tier 1 Capital by one iota.

    We got stuffed.

  67. Here’s a question?

    The Minister of Finance had the banks over a barrel. He could have made it a “legally binding obligation” that the dividend be paid in cash and on time or at his and only his discretion he might accept ordinary shares in lieu.

    He chose not to. Why?

    Why were the agreements framed in such a way that the Bank had the upper hand and not the Minister.

    “The EU Commission has indicated that, in line with its policy and pending its assessment of Bank of Ireland’s restructuring plan (which is required in compliance with State aid rules), the Bank should not make coupon payments on its Tier 1 and Upper Tier 2 capital instruments unless under a binding legal obligation to do so.”

  68. @Greg

    Good that you are still alive Greg.

    Woe is me at the mo – Seven_of_ Nine is not answering her phone; John the Optimist is off to advise Sharah Phelan in Kaliforn-ni-A; Minister O’Dea is no longer minister and I can’t refer to tanks anymore; and I’m sitting here trying to figure out how to eat on a dividend of ‘less than zero’ for the citizenry and it appears to be beyond me; me despair index is now 59 seconds from melt-down ……….. nite all!

  69. @Greg
    I hadn’t made the connection between the Stock Premium Account and the preference coupon. Does this mean that BoI could be a buyer on Monday? Of some 15.7% of themselves in the open market? That appears to be the bald text of the rule, but the BoI stock exchange release states:
    “the Directors of the Bank
    of Ireland announce that on 22 February 2010 it will issue and allot to the NPRFC
    184,394,378 units of Ordinary Stock being the number of units equal to the aggregate cash
    amount of the 2010 dividend of €250.4m divided by 100% of the average price per unit of
    ordinary stock in the 30 trading days prior to and including today’s date. Application will be
    made in due course for the listing of these units of stock. This increases the units of Ordinary
    Stock of Bank of Ireland in issue to 1,188,611,367.”

    So it is clearly a dilution.

    PS I think you are a little hung up on the face value of the shares. Many ordinary shares are issued with a nominal value of 0.01c. Microsoft, for example, from its articles of association:
    “The total number of shares of stock that the Corporation shall have authority to issue is 24,100,000,000 shares, which shall consist of 24,000,000,000 shares of common stock, $0.00000625 par value per share (“Common Shares”) and 100,000,000 shares of preferred stock, $.01 par value per share (“Preferred Shares”). ”

    Otherwise, I don’t disagree with you.

  70. @ David O’Donnell

    “Good that you are still alive Greg.”

    Rumours of my death are continually exaggerated.

    “Woe is me at the mo – Seven_of_ Nine is not answering her phone”

    The reason Seven Of Nine is not answering your calls is she’s busy.

    With me.

    Not wishing to turn this into politics.ie but the O’Dea issue worries me to the core.

    That man, a Minister of our Government, lied. He should have resigned on the spot. He didn’t.

    The political parties Fianna Fail and the Green Party, and some ragbag Independents, gave him a vote of Confidence.

    Then he resigned anyway (never mind why).

    The thing is David, can I have any confidence in this government and its strategy with regard to the banking system.

    How do I how as a Citizen that other Ministers are not lying?

    This worries me to the core.

  71. yoganmahew,

    “Does this mean that BoI could be a buyer on Monday? Of some 15.7% of themselves in the open market?”

    I don’t think I follow you there.

    There is no “open market” operation.

    It’s all just bookkeeping. The shares will be issued “on the books”. No cash need change hands.

    The €7,000,000,000 cash already changed hands (under a fog of propaganda) from the Citizen/Taxpayer to Bank of Ireland and AIB.

    All that is required now is a little bookkeeping entry.

    I’m thinking about the “hung up” thing.

    I’ll get back to you. I am not hung up on it.

    This was designed.

    Microsoft can do what they want with their shareholders.

    It is an entirely different thing for a Minister of Government to behave as if €7,000,000,000 was invested in a company that had the patent rights to three dimensional television when he was in fact giving €7,000,000,000 to insolvent financial institutions.

  72. yoganmahew

    “So it is clearly a dilution.”

    Yes it is clearly a dilution of €7,000,000,000 of Citizen/Taxpayer money to zero.

    And all it required was a bookkeeping entry.

    No debate. No opposition from Fine Gale, Labour or Sine Fein.

    Just a bookkeeping entry.

  73. yoganmahew,

    OK. The “hung up” thing.

    I’m not hung up about it. I am persistent.

    As I have said, Microsoft can do what they want with their capital structure. Pets.com did what they wanted to do with theirs.

    “US$300 million of investment capital vanished with the company’s failure”

    Pets.Com can and did do what they wanted to do with their shareholders.

    Frankly, I don’t give a damn what Microsoft do with theirs.

    What I do give a damn about is €3,500,000,000 of Citizen/Taxpayer money (hard cash) being described as €35,000,000 on the balance sheet of a bankrupt financial institution. And the balance of €3,465,000,000 being used to convince the Citizen/Taxcpayer that somehow this was all for the good of the country.

    I would have preferred to see the €3,500,000,000 solidly positioned in the balance sheet of Bank of Ireland (if it had to be put anywhere near that cadaver) as an absolute liability to the Irish People.

    The Minister had other ideas.

    The Minister called the Citizens to “Patriotic Duty”.

    When did it become the patriotic duty of Citizens to forgo €7,000,000,000 of their treasure to satisfy a bunch of complete bankers?

    I’m not “hung up” about this.

    I am and will be persistent about it.

    As I have said above,

    “The bank should have been taken into Custody (Temporary Nationalisation). The €3.5bn (and maybe another €1.5bn) should have been put on the table and negotiations should have begun with senior debt holders about a debt for equity swap. That is, the State Guarantee should have been renegotiated.”

    That’s why I’m annoyed. That’s why I am persistent.

    Instead of using €3,500,000,000 as an ante to the big game the Minister converted it into €35,000,000 before he even sat down at the table.

    The Minister lost the game before he started playing.

  74. Excellent points Greg. FF and the Government will always dominate the airways because their message is simple and consistent.
    To combat this, we (whoever that might be) also need a clear and consistent message that Joe Public can buy into and use as a counter-argument when sitting in the pub with this mates.
    Until ‘we’ get on the same hymn sheet, the government will walk all over us.

    Bring back the ’46 Economists’!

  75. @ YM

    you do realise that Tony Demello and Oliver Vandt (and therefore E65bn and lots of other names) are the same person, right? And you do realise that the craziness has reached an end point (clinically) with him posting to himself above, right (Oliver Vandt @ Tony Demello)? And you do realise that by the moderators not limiting the clear excess craziness they have given his (their?) insanity merit and justification, right? I’m off to the pub…

  76. @ Greg

    Greg, are you not missing the point, is the minister not in complete mastery of his finance brief? Are you questioning our dear ministers call to Patriotic Duty? They would never throw our money way, burn it in a pile in Stephen’s Green yes, but throw it away? Never!

  77. @Karl Whelan

    May I ask a couple of questions (with my journalist hat on)?

    Do you think there was ever any actual intention to pay this €250m dividend in cash?

    On what legal basis can the European Commission stop a cash payment being made (i.e. surely the agreement is between the bank and the government/taxpayer so what ‘right’ do they have to interfere in this transaction)? Even in the Dept. of Finance response, they say it is a ‘request’ from the EC not to make these payments.

    Is it a fairly safe bet that this tranche of shares is going to end up being worth less than €250 million in the not too distant future? Either if the share price goes down or if recapitalisation takes place then through normal dilution you would get in those circumstances.

    Why has it taken the EC literally months to review the business plan (hence the reason for the request not to pay this money) when any competent team from say PWC etc. could do this job in a few short weeks?

    I didn’t quite get the point about this coupon not being cumulative/doesn’t accumulate. Are we saying that if it doesn’t get paid then nothing is owed?

    Is the next tranche likely to be paid in cash (or the first one from AIB which I think is due in May) or can we just expect more shares?

    Don’t the existing shareholders have any comeback on the board for just diluting their shareholding without their say-so? Or did they just give some kind of blankey ‘do what you need to do’ at the last AGM?

    Is there any real chance of attracting private capital to either of these banks when time comes to pump the next round of recapitalisation in or is the taxpayer going to pick up the full tab?

    How come John Corrigan (who should know?) was saying just days before that cash was expected and didn’t know what was actually going on?

    Is the writing on the wall? Are we simply slowly creeping towards a very very expensive nationalisation of these two banks?

    Any other comments welcome.

  78. “Labour’s Joan Burton on Thursday issued a statement about the due dividends saying the ” taxpayer will be left empty-handed.””

    There is Irish accountants for you

  79. @Joseph
    “Even in the Dept. of Finance response, they say it is a ‘request’ from the EC not to make these payments.”
    You don’t turn down a request from the mob unless you are sure you are bullet-proof (and then they will just stab you). My guess is that the EU competition authority could find any one of a dozen reasons why the business plans of the banks do not add up. Not just the Irish banks, any banks in the EU. So when they ask you to do something, you ask “how high?”

    “Why has it taken the EC literally months to review the business plan (hence the reason for the request not to pay this money) when any competent team from say PWC etc. could do this job in a few short weeks?”
    This would be like the competent team that said that all was well with the banks weeks before they were nationalised?

    “Is it a fairly safe bet that this tranche of shares is going to end up being worth less than €250 million in the not too distant future?”
    Yes. If this was all the equity stake that was required, there would be hope of return, but there is already 3.5bn of preference shares, another 2.2bn (?) of NAMA recap, another 1.7bn to get to 8% core tier 1 and then an unknown quantity of Basel III rules which, at the moment, look stiff on the Irish banks. While Basel III would, in the past, have been a cert to be watered down, there is a stirring of change in the wind.

    “Are we saying that if it doesn’t get paid then nothing is owed?”
    Yes. Preferred stock must be non-cumulative if it is to be included in Tier 1 capital (according to wikipedia 🙂 ). And changing this would have implications way beyond the government and banks issue in Ireland. It would be a gross distortion of competition rules. Mr. Corrigan must surely have known this? Either his honesty or his competence must now be in question. You can’t just say “ah shure we’ll sort that out later”. It was an astonishing statement to make, whatever was going on behind the scenes.

    “Is the next tranche likely to be paid in cash”
    If the dividend stopper is still in place, which it may well be all the while the banks are in receipt of state aid, then we will get shares.

    “did they just give some kind of blankey ‘do what you need to do’ at the last AGM?”
    Not at the AGM, but at the EGMs concerning the recapitalisation measures where they amended their articles of association to allow these preference shares – in the first place to allow an increase in the number of preference shares and in the second for the conditions attached (e.g. 25% voting rights, payment in kind etc.).

    “Is there any real chance of attracting private capital to either of these banks when time comes to pump the next round of recapitalisation in or is the taxpayer going to pick up the full tab?”
    I think the ‘markets’, such as they care (and I think Mr. Buffet may have scared them off by going in too early – @Eoin will be able to give a more reasoned view, however, 🙂 ), want to see a realistic estimation of the losses that will happen and how they will be paid for. They want to see that they will be able to make a profit at some point. That profit will have to at least match what is available elsewhere. At the moment, the Irish banks still look insolvent. Until they change that, the taxpayer is the only game in town.

    “How come John Corrigan (who should know?) was saying just days before that cash was expected and didn’t know what was actually going on?”
    See above. I don’t know the answer to this. As you say, he should have known. What could possibly happen on thursday night/friday morning that could be such a gamechanger beyond an Indo article and the comments it attracted on the internet? Is that really how deficient policy at the DoF is? Never mind the DoF, is the NTMA that far behind the eight-ball?

    “Is the writing on the wall?”
    The writing has been on the wall for nearly two years now. At least, that’s when I first realised it. Others realised earlier. Morgan Kelly for example.

  80. @ Joseph
    KW may or may not reply….for what its worth heres my views…..

    Do you think there was ever any actual intention to pay this €250m dividend in cash?
    > yes. Why not? That would have been what both the govt and the bank would have preferred
    On what legal basis can the European Commission stop a cash payment being made (i.e. surely the agreement is between the bank and the government/taxpayer so what ‘right’ do they have to interfere in this transaction)? Even in the Dept. of Finance response, they say it is a ‘request’ from the EC not to make these payments.
    > AFAIK its because else they start to look at this and go “oh, state aid….must investigate”.
    Is it a fairly safe bet that this tranche of shares is going to end up being worth less than €250 million in the not too distant future? Either if the share price goes down or if recapitalisation takes place then through normal dilution you would get in those circumstances.
    > imho, hell yes
    Why has it taken the EC literally months to review the business plan (hence the reason for the request not to pay this money) when any competent team from say PWC etc. could do this job in a few short weeks?
    > yes….they could. Would the review be any good tho? Would it look at all the ramifications across the entire European banking system?
    I didn’t quite get the point about this coupon not being cumulative/doesn’t accumulate. Are we saying that if it doesn’t get paid then nothing is owed?
    > yep. That’s what it means
    Is the next tranche likely to be paid in cash (or the first one from AIB which I think is due in May) or can we just expect more shares?
    > depends doesn’t it on the EU
    Don’t the existing shareholders have any comeback on the board for just diluting their shareholding without their say-so? Or did they just give some kind of blankey ‘do what you need to do’ at the last AGM?
    > blanket approval to the scheme
    Is there any real chance of attracting private capital to either of these banks when time comes to pump the next round of recapitalisation in or is the taxpayer going to pick up the full tab?
    > that’s the 54b euro question isn’t it!
    How come John Corrigan (who should know?) was saying just days before that cash was expected and didn’t know what was actually going on?
    > thou shalt not pull a somers (especially when your just in the job…)
    Is the writing on the wall? Are we simply slowly creeping towards a very very expensive nationalisation of these two banks?
    > what rough beast, its hour come round at last…

  81. Eoin: you are saying that the shares the NPRF have been given in lieu of dividend have value. I don’t doubt that they have some value or other, from the point of view of a trader who you might ask to buy or sell them.

    The problem from the point of view of the investor is that the NPRF and the State is in the business of distress capital here. The State and the NPRF are together the investor of last resort. BoI has value only because the State guaranteed the banks when no one else would and the NPRF invested in an emergency situation. This value is what the venture capitalists call a ‘post money valuation’. The difference between a pre-money valuation and a post-money valuation is because well funded companies are inherently more valuable than underfunded ones for reasons that should be obvious, especially for a bank.

    The NPRF and the State are the key investor here. If the bank is unable to meet its cash calls, they should be getting any new shares at the pre-money value, i.e., as if it had never invested any money at all. Anything more is an enormous premium for the shares.

    This situation is *not* like stock in a FTSE 100 or even NASDAQ company. It’s an investment in a company which is only barely solvent, in a situation where no one else is prepared to get involved. It’s very much like investing in a small local service business that has been hit by the downturn (which is essentially what BoI and AIB are).

    PS: I am talking about the investment situation here, not the legal situation. Obviously, BoI have the perfect legal right in the circumstances to hold onto the government’s money and hand over a small amount of shares instead. However, this just shows that the deal done did not properly protect the provider of the distress capital.

  82. @Joseph

    “very very expensive nationalisation of these two banks?”

    I think so. Remember, the banks could have been nationalised for under a billion each not so long ago. The 16% shares issued by BoI have already lost 10% of their value based on Fridays close and could lose more when markets open tomorrow. Also, bear in mind that the €3.5 billion invested in the prefs was effectively borrowed money (via NPRF and NTMA) at say 5.5% so the net interest, if the coupon had been paid, would have been only 2.5%. This bears no relation to the risks associated with investing in a technically insolvent bank – the ROI should have been nearer 100%.

    A further point relating to the pref shares. These could be converted to 25% ordinary shares in four years time. This would require a quantum leap in BOIs share price to justify the original investment. This ignores any dilution arising in the coming months/years. For the State to retain its holding, it would need to provide additional funds (good money after bad) and could also be obliged to take up shares in its capacity as an underwriter (funder of last resort). So, in answer to your question, nationalisation could prove very expensive and painful to the taxpayer and the longer it is drawn out, the more expensive it will be (for the taxpayer). The clowns that created this situation are laughing all the way to their fat pensions, salaries and fees!

  83. @Antoin
    “BoI has value only because the State guaranteed the banks when no one else would and the NPRF invested in an emergency situation.”
    Sadly true – it rather makes the NPRF’s position of holding the preference shares at issue value rather dubious? As long as they keep pumping money in, the shares are worth what they paid for them….

  84. @Brian Lucey
    Welcome 😀
    Just glad we gave the same answers… yours have the admirable quality of brevity…

  85. Declan said: “Now, can you explain how 1.26 = Sweet-f**k-all = sfa = zero?”
    .
    .
    I can.
    If you go to the market with your, um, €250mln worth of shares and try to sell them all … then “0” is what you’ll leave the price at when you’re gone.

    The bank’s equity is a zero but in the mean time we’ll take a few amateurs’ cash.

  86. Hmmm looks like that value of €250m has already taken a bit of a dive as the markets opened this morning. ‘The value of shares can fall as well as rise’ is still a good health warning I guess.

  87. yoganmahew: well, you could revalue the shares if you wanted, but what’s the point? Really this whole thing (recapitalisation, NAMA, whatever comes after NAMA) is an exercise to defer the bad debt of the banks, which the government has essentially assumed, over a long period. This needs to be done but in itself won’t restructure the banking sector.

  88. @Antoin
    If you are going to offset the GGD with the contents of the NPRF, you’d want to be sure that you are going to get your money back. Otherwise you might be accused of misrepresenting the net debt position of the state. If the banks do end up nationalised, the preference shares are worthless, no? (Well, not worthless, just that we will be reducing the amount of dividend we can pay ourselves on common shares by the amount paid on preference shares – we are only hurting ourselves).

  89. @Greg

    No hard feelings on Seven_of_Nine – glad to know she was in safe hands – I was naturally enough a mite concerned, what with all those Ferengi in apparent control of the holodeck at the mo!

    @Declan

    Well Declan, have you figured it out yet? Or are you merely a Ferengi spinner?

  90. The whole point of the FIRE “economy” is that it actually destroys value in the whole economy, the more it grows.

    Thankfully, it is not growing now. We shall not miss it. The problem is that a lot of folks who are stupid or venal or both are now without a job or will be soon.

    The whole point of the FIRE sector, after the bare minimum employed, for the real number go to 1982 stats, they merely confirm the bubble values as that is how they make money. They do not advise people not to “invest”. Reality is not what they “do”.

    BOI is a zombie. We need a good bank, that people can buy and sell shares in, with a sound capital base. It cannot be disentangled from the wreckage easily.

  91. @ David O’Donnell,

    Some Ferengi Rules of Acquisition ignored by property developers.

    Never pay more for an acquisition than you have to.
    Small print leads to large risk.
    Never confuse wisdom with luck.
    Always know what you’re buying.

  92. @Greg

    Cowboy Ferengi in other words – not even the real mule, so nothing left to skin ………….. merely a big black-hole to fill ……… and not a worm-hole to get us out of this in sight ………….. 58 seconds to melt-down.

    @All
    Breaking News:
    Anglo-Irish Bank to take over 200+ Traditional Head-Shops in the UK from dear ol London Town!

    “The bank will shortly announce its financial results for 2009, which are expected to show large-scale impairments and a very large after-tax loss. The company shored up its capital position last year when it took €4bn of funding from the State.” !!! ‘took’ ……. or ‘was gifted’?

    http://www.independent.ie/business/irish/anglo-to-take-control-of-hundreds-of-pubs-in-the-uk-2073486.html?from=dailynews

    On Naa-Maa [Indo, M Dineen]

    NAMA is failing abysmally to deliver on its promises

    http://www.independent.ie/business/irish/nama-is-failing-abysmally-to-deliver-on-its-promises-2073483.html?from=dailynews

  93. Has the NPRF converted at the wrong price and lose 38.8m in the process?

    http://www.bankofireland.com/includes/investor/pdfs/nprfc.pdf

    “As a consequence of this and, in accordance with Bye Law 6(I)(4), the Directors of the Bank
    of Ireland announce that on 22 February 2010 it will issue and allot to the NPRFC
    184,394,378 units of Ordinary Stock being the number of units equal to the aggregate cash
    amount of the 2010 dividend of €250.4m divided by 100% of the average price per unit of
    ordinary stock in the 30 trading days prior to and including today’s date. Application will be
    made in due course for the listing of these units of stock. This increases the units of Ordinary
    Stock of Bank of Ireland in issue to 1,188,611,367. As a result the NPRFC will own 15.73 per
    cent of the issued Ordinary Stock (excluding the NPRFC Warrant Instrument).”

    Existing #ordinary shares: 1,004,216,989
    # new shares: 184,394,378 (apparently worth 250.4m)
    Current #ordinary shares: 1,188,611,367
    New shares as %age of Current: 15.5%
    If 15.5% of BOI is worth 250.4m, then this implies a market cap of 1.6bn. This seems high.

    My problem with their calculation is it doesn’t seem to account for the dilution effect of the new shares. To quote again from the passage above – “€250.4m divided by 100% of the average price per unit of
    ordinary stock in the 30 trading days prior to and including today’s date.” I would argue that the calculation should be based on the mkt cap rather than average share price.

    Their calc implies an average share price of 136c and a mkt cap of 1.36bn during the 30 trading days. This seems about right. However, I think the NPRF should have received 250.4m/1.36bn (18.4%) ownership.

    Using the 1.36bn mkt cap and 15.5% ownership, the value of the NPRF’s investment is 211.5m some 38.8m off target.

    What am I missing?

  94. @Ahura Mazda

    Does this cover it?

    6. The rights attaching to the euro Preference Stock shall be as follows:

    (I) 2009 Preference Stock

    (4)Bonus issue of Ordinary Stock

    (d) “Average Stock Price” in this Bye-Law means the average price per unit of Ordinary Stocks in the 30 Trading Days prior to the Relevant Instalment Date, with the price for each such Trading Day from which the average is to be derived being determined as follows:

  95. @ Greg,

    I’m being a tad mischievous. The actual approach taken implies the mkt cap of BOI has increased by 250.4m because it hasn’t paid the cash coupon. My alternative suggests not paying the coupon shouldn’t change the mkt cap. You could make a case for both scenarios.

  96. @ David O’Donnell

    “Cowboy Ferengi” indeed.

    Of course the same rules apply to NAMA and its children the SPVs.

    The real Ferengi have already bought all the property next to the Stargate so they can make the jump before the Derivatives Debt Star takes aim.

    :mrgreen:

  97. @Ahura Mazda
    @ Greg

    The fact that BOI was scheduled to pay a coupon (or shares) has been known for a long time, therefore (insofar as the market is efficient) the payment is already ‘baked into’ the share price. This is why there is no dilution effect to be accounted for when issuing shares rather than paying cash.

    Of course, the fact that the shares are as high as they are indicates that the markets are probably not efficient in this case – this is most likely due to the short sale ban still in effect.

  98. @ AFY

    I disagree. Dilution of existing shareholders did occur.

    The fact that some of that dilution may have already been reflected in the price is irrelevant.

  99. @ AFY

    I’ve changed my mind (though not fully). The €250mm liability no longer exists but reserves are reduced by the nominal value of the shares issued being offset against the Stock Premium Account.

  100. @ Greg

    What makes you think that the share premium account is reduced following the allotment of the BoI shares?

    Company law greatly restricts the uses to which a share premium may be put by a company.

  101. @ TOD

    Sorry for the length of this reply. I hope I’m right. Because if I’m wrong …….

    “What makes you think that the share premium account is reduced following the allotment of the BoI shares?

    Company law greatly restricts the uses to which a share premium may be put by a company.”

    I see your point TOD.

    I think you are referring to S62 of the Companies Act 1963.

    http://www.irishstatutebook.ie/1963/en/act/pub/0033/sec0062.html#zza33y1963s62

    Application of premiums received on issue of shares.

    (2) The share premium account may, notwithstanding anything in subsection (1) be applied by the company in paying up unissued shares of the company (other than redeemable preference shares) to be issued to members of the company as fully paid bonus shares, in writing off

    ( a ) the preliminary expenses of the company, or

    ( b ) the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company;

    or in providing for the premium payable on redemption of any redeemable preference shares or of any debentures of the company.

    I think this is redundant by Statutory Instrument SI No 89/2008

    http://www.entemp.ie/publications/sis/2008/si89.pdf

    Which is a holding instrument giving effect to European Communities (Public Limited Companies – Directive 2006/68/EC).

    Which will be covered by legislation under the Company Law Reform and Consolidation Act 2010, as described by the Company Law Review Group. (http://www.clrg.org/companies-bill.aspx)

    Part A3 Share Capital http://www.clrg.org/cuuploads/editor/file/A3.pdf Chapter 7 – Distributions – Head 55 – Bonus Issues.

    The Bank of Ireland is using reserves to “cover” the nominal value of the bonus shares issued under its By-Laws. http://www.bankofireland.com/includes/investor/pdfs/bye_laws.pdf

    (I) 2009 Preference Stock

    (4) Bonus issue of Ordinary Stock

    (a) If an instalment of the 2009 Preference Dividend is not paid on the relevant Dividend Payment Date pursuant to Bye-Law 6(I)(2) (a “Relevant Instalment”), each 2009 Preference Stockholder shall be issued and allotted on the Bonus Stock Settlement Date (as defined in Bye-Law 6(I)(4)(f)) the number of units of Ordinary Stock as is equal to:

    (i) the aggregate cash amount of the Relevant Instalment in euro which would have been payable to the 2009 Stockholder or would have been received had it been paid; and (ii) any dividend withholding tax deducted or which would have been deducted, divided by the Stock Value (the “2009 Bonus Stock”) subject to the Bank not being prohibited by law from doing so. Such 2009 Bonus Stock shall be issued fully paid at an issue price equal to the nominal value of such stock by a capitalisation of reserves as provided in paragraph (h) of this Bye-Law; provided however that where the Bank has insufficient reserves to pay up the 2009 Bonus Stock in full it may be required by a 2009 Preference Stockholder to issue its pro rata share of such 2009 Bonus Stock on the basis that the Bank shall pay up the issue price of such 2009 Bonus Stock in accordance with Bye-Law 6(I)(4)(h) out of a pro rata amount of the available reserves of the Bank, with the balance to be paid up by such 2009 Preference Stockholder, provided however that the Bank shall not be required to pay up any part of the 2009 Bonus Shares out of the distributable reserves of the Bank in contravention of Bye-Law 4(F), 5(F) or 6(F).

    >
    >
    >

    (d) “Average Stock Price” in this Bye-Law means the average price per unit of Ordinary Stocks in the 30 Trading Days prior to the Relevant Instalment Date , with the price for each such Trading Day from which the average is to be derived being determined as follows:

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