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).

>
>
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(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:

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’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.

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.

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.

“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.

However. Share price now €1.19

Issue price €1.36.

Current unrealised loss = 12.5%

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.

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:

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?

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

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.

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.

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?

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

“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!

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.

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…

“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.

There is Irish accountants for you

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.

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!