Bank of Ireland Issues Ordinary Shares to the State

ICELAND, ICELAND, ICELAND!!!!!

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?

@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…

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.

@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).

@ 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.

@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.

@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.

@ 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?

@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…

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.

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?

@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.

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.

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!

@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 🙂

@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.

@Declan

15.7% of Sweet-f**k-all = sfa = zero One cannnot eat abstractions!

@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

@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?

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?

@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.

@ 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?

@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 ……

@ 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.

@ 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?

@ 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?

@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…

@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.

@ BL & Declan

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

@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?

@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.

@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…).

@ 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.

@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!

@ 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.

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.

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.

@ 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…

@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.

@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.

damn you Ym…. gazumped me!

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.

@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….

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.

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.

@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?

@ 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.

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?

@ 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.

@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.

@ 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.

@ 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: