Bank of Ireland Capital Raising Plans

The Irish Times reports about Bank of Ireland’s capital raising plans here and provides links to all the relevant documentation so I don’t have to.

It is, of course, good news that there’s some sign that private investors are willing to invest in one of the Irish banks. Still (warning — malcontent comment alert) it’s perhaps best to put this in context. These private investors are now willing to do this because the Irish government is buying a portfolio of €12.2 billion in property and development loans from the bank, only €5.4 billion of which are performing, for €7.9 billion (assuming the initial 35% discount is applied to the whole book.)

The idea that private capital sources would renew their interest in investing in the Irish banks after loans had been transferred to an asset mangement agency was also an opinion offered last year by advocates of temporary nationalisation. Whether the route we’ve travelled to get to this juncture has been the right one is still an open question.

It is perhaps because there are still so many questions hanging over his approach to the banking crisis that Brian Lenihan persists with a rhetorical strategy in relation to the banks that largely depends on overstatements, half-truths and falsehoods such as his comments on Morning Ireland today about people who wanted to “nationalise the whole system”, about how temporary nationalisation would have lead to other banks becoming “just like Anglo” and how the bank guarantee scheme has been cost free, indeed how we’ve made a tidy profit out of it.

78 thoughts on “Bank of Ireland Capital Raising Plans”

  1. Sadly Lenihan skipped this opportunity to explain why we need a clearing system as much as a banking system.

    It would have sent out a clear message that Anglo and INBS are to be shut down …ideally as quickly as possible.

  2. It is a frightening comment that nationalisation would have Angloised the other banks. What this imples is that removed from the scrutiny of the markets Anglo saw no difficulty in wallowing in it and ‘fessing that it was hopelessly insolvent. If the Minister’s assertion is to be taken at face value, he is in effect saying that in the case of the quoted banks the NAMA haircuts were carefully designed to leave them solvent and thus market viable.

    I hope this is a mistake by the Minister and he asserts that the financial position of AIB/BoI would have been unaffected by temp nat (there are of course other valid arguments against temp nat).

  3. Temp Natting our clearing system would be important, nationalising the gambling industry created by Seanie and Fingers is farcical 🙁

  4. One question to ask is why the state is paying €1.80 per share for it’s preference share conversion whilst the private investors get a 15% discount and buy in at €1.53?

  5. We shouldnt confuse what the minister said re temporary nationalisation with any facts. Its a reflex action to go “na – na- na- na-na”. Or maybe Namanamama.
    Logically, if we take his statement at face value, AIB/EBS are now “as bad as anglo” and are “totally dependent on state funding”. Im sure that this is exactly the news that the markets need to hear on the morning that Greek 2y bond yields explode, with some (mild so far) contagion to the other PIIGS.
    What is sad is that the MSM allow the Iceland! meme to continue, and make no effort to pin him down, relying on crowdsourcing here and elsewhere.

  6. @CM
    See an analysis on this by Constantin G http://trueeconomics.blogspot.com/2010/04/economics-26042010-bank-of-ireland.html

    [quote]”the Minister does not appear to clearly understand the terms of conversion he agree to, as ‘market terms’ would mean that the state is converting at a current price (Friday close of €1.80) less cumulated dividends (2 years @8%), less the discount extended to the market (38-42%). ‘Market terms’ therefore would imply conversion at €0.88 per share, not €1 per share achieved.
    Finally, the Minister failed to negotiate a discount that should be due any large-scale investor. All in, the estimated overpayment of 11% is really a likely underestimate. In exchange for our money, we, the taxpayers, got a pile of over-priced shares which are about to be diluted!

    Looking closer at the details: BofI plans to raise €500mln from private placements with institutionals, priced at €1.53 or 15% discount on Friday close price. The main issue will be €1.2bn (net) with 38-42% discount. Preference shares held by the taxpayers will be converted at €1 per share (they were bought at €1.2 per share and paid no dividend), which actually means we de facto are paying €1.16 per share, while existing shareholders can get shares at as low as €1.04-1.06. Government-held warrants are priced at ca €491mln. [/quote]

  7. @ Brian Lucey

    Thanks for the analysis link – looking forward to the spin to come from Lenihan when (i hope) he’s questioned on this.

  8. From the B of I trading update:

    The Group has developed a model which it believes replicates the NAMA valuation methodology and has put a sample of €6 billion (approximately 50% of the loans which the Group expects to transfer to NAMA, including Tranche 1 NAMA Assets) through this model. The model indicates that, on this sample, the level of discount would be similar to that pertaining to Tranche 1 NAMA Assets.

  9. @Frank Galton – “The Group has developed a model which it believes replicates the NAMA valuation methodology”

    It ‘believes’ replicates…..

    Maybe this is a stupid question but doesn’t the bank ‘know’ how NAMA values the loans they are slinging across? It seems a funny thing to say.

    I must be missing something.

  10. All that glitters etc.

    I’ll be keeping my crispy ten euro note in my wallet.

    Between green jersey teammates and my issues with the accuracy of annual reports, I think I’d pass on this once in a lifetime opportunity.

  11. @BWII
    The minister’s cat is a scaredy cat:
    “Temporary nationalisation would have lead to other banks becoming “just like Anglo””

    I agree with you entirely BW and share your hope that it was not another gaffe from a government that seeks to talk its way out of trouble and ends up revealing what it is trying to hide. Anglo, as we now know, was built on spoof assets and bluster financials. There was little in the way of income, with assets used to borrow short-term money to pay dividends with (or worse still, new depositors used to pay interest on existing). This is classic pyramid stuff. We know too that INBS was no different.

    Are we to believe that with a need to make a clean breast of it to avoid EU schlepping over state aid the other banks would also be exposed as pyramid schemes? I think so and have said so for some time. Anyone else?

  12. If that is what Lenny said it is either irresposible or damning:

    1) If it is incorrect (I hope it is) it implies that AIB/BoI are the same basket cases as Anglo if only they ‘fessed up like Anglo or got the same NAMA treatment as Anglo.

    2) If it is correct then he is admitting that nationalising Anglo has made its situation 20Bn worse.

  13. Off topic.

    The Euro circus gets into full swing.

    “The member states should not “toy” with European stability, she added, and demanded that all eurozone nations bring their fiscal deficits into conformity with the ceiling set out in the pact. “We cannot afford to water down the Stability Pact. No trickery can be allowed,” she said.”

    http://www.magazine-deutschland.de/en/artikel-en/article/article/merkel-statement-of-government-hours-ahead-of-eu-summit.html

    “And a warning to the EU: “The stability pact is not designed to hide the financial cheating of some states. We are not allowed to play with Europe’s future. I will vehemently defend this position in Brussels today.” One has to fight for the stability of the Euro. ”

    http://www.bild.de/BILD/news/bild-english/world-news/2010/03/25/angela-merkel-statement-on-greek-financial-crisis/greece-to-get-money-only-in-extreme-emergency.html

  14. Can anyone offer an explantaion as to the difference between a ‘Rights Issue’ and th ‘Placing’? Is the Placing merely the sale of the shares which were refused from the Rights issue?

    Also, Lenihan says there has been €900m profit. I know €491 is the dividend payment for current holdings but what exactly is the other €400m? The initial 15.4% stake?

  15. @ Rob

    a placing is to a pre-arranged insitution(s) at a pre-arranged price for an agreed amount of shares (roughly 327mio shares @ €1.53 each = €500mn).

    The rights issue grants existing shareholders of the bank the “right” to buy more shares in the bank at the €1.53 level (i think), but many of these shareholders may not take up the opportunity to buy more shares (especially small holders i would imagine). These shares that are not bought will then be bought up by the underwriter(s) instead.

  16. Thanks Eoin.

    While we are at it. The state is converting €1bn of its preference shares which will bring its total to €1.7bn.

    I thought the existing state holding was only around the €400m mark i.e. so €1bn + €400m = €1.7bn. Where have I gone wrong?

  17. @KW

    “Whether the route we’ve travelled to get to this juncture has been the right one is still an open question.” Very much so; right now direction also remains open, if unexplored.

    @Greg

    Good links. Tonight will be interesting. The necessary drift of more towards the centre. Hope they will know how to tell it as it is – locals don’t seem to have a clue … fact that we are in a ‘weird form of nationalisation’ which is almost certainly far from optimum for the serfs.

  18. @ Rob S

    the State currently has €200mn in ordindary shares (ie lieu of the missed preference share coupons) and €2.5bn in preference shares. The State will be converting €1bn of the prefs into ordinary shares, and taking a further €700mn of new ordinary shares through the rights issue (most of which will be paid for by selling back the equity warrants that the state also owns). So i think it should have around €1.9bn-2bn in total ordinary shares by the end of this. I think! This will represent a 36% ownership stake and a value for the entire bank of around 5.3bn.

  19. Regarding Falsehoods from Brian Lenihan.

    Brian is solely seeking to manage voters using this. The management of the investors is done via the budget cuts etc. The two dialogues are distinct and can be manipulated seperately; one via spin the other by applying the requisite cuts.

    This leaves people arguing on the basis of truth somewhat on the outside looking in.

    And is IMHO a strong argument for academics to be more forceful in their criticisms. Otherwise you play the FF game.

  20. The exact quote, at the 1h14m mark in Morning Ireland

    remember last year we were told we should temporarily nationalize this bank [B of I], there were others who argued it should be divided between a good bank and bad bank. Were we to have done that Bank of Ireland might well resemble Anglo Irish now and be hopelessy dependent on life support from the tax payer.

  21. @yogan
    “Anglo, as we now know, was built on spoof assets and bluster financials. There was little in the way of income, with assets used to borrow short-term money to pay dividends with (or worse still, new depositors used to pay interest on existing). This is classic pyramid stuff. We know too that INBS was no different.”
    Are you saying that if Bernie Madoff was operating here – that in all likelihood his business would have been classified as systemic and the guarantee and bailout applied?
    I suspect you are right you know. In the US operators of Ponzi schemes (well – in some cases at least) get jailed. Here they walk away with bonuses and pensions.

  22. Excellent explanation Eoin. Thanks, didn’t realise they were taking €700m ‘new’ ones.

    I’ll have to look into the Equity Warrants but even at a glance if only ‘most’ of that €700m was paid by them then surely that indicated some new funds will new used by the Gov?

    Complex stuff.

  23. @ BL
    I think Constantin is a little confused on what is going on.
    First of all there was a placing of just short of 327m shares for cash to institutional shareholders at 1.53 per share or a 15% discount to Friday’s close
    Secondly there is a placing of just under 576m share to the NPRF at 1.80 in a switch with the NPRF 8% Prefs at 100. I think CG is wrong in that the latter were issued at par.
    However, with other bank prefs trading at 10% yields the NPRF Pref would be trading under par-possibily in the 80s. So the Bank of Ireland is paying over the odds for the Pref and offering the shares at 15% over the odds. I think the pricing is chosen so as not to crystalise a loss for the NPRF.

    In both cases, the placees will have the right to subscribe for new shares at a 38-42% discount to the TERP. These new share will probably be priced below 80p. Institutional shareholders will settle with cash while the NPRF will swithc its prefs at 100 again.
    Then there is a rights to raise 1.2bn of which 0.2bn or so will go to the placees. This will probably be done below 80p
    Lastly there is a debt for equity swap that does not amount to much.

    All told the TERP is at a small premium to tangible book value per share which is at the upper end of the range in Europe. Lloyds was done at about a 10% discount.

    On another note, the coupon on the remaining prefs steps up to 10.25%.
    All told the state has done a better negotiating job with this package than at any other point in the crisis.

    Finally,finally, the NPRF will generate a profit on the sale back of it warrants.

  24. @Tull
    “Secondly there is a placing of just under 576m share to the NPRF at 1.80 in a switch with the NPRF 8% Prefs at 100. I think CG is wrong in that the latter were issued at par.”
    This is the bit that has me stumped. I understood that the terms of the preference share issue were that they could be converted at par for the average share-price over the preceding thirty days. Is this only applicable to the dividend in lieu shares?

    I do find it somewhat odd that you consider the state diluting itself to be a great deal…

  25. @Eoin
    “the State currently has €200mn in ordindary shares (ie lieu of the missed preference share coupons) and €2.5bn in preference shares.”
    3.5 bn, no? It will have 2.5 bn at the end of this process and 36% of common equity.

  26. I can’t speak for everybody, but I’ll be opting into the share offering, had they been nationalised I wouldn’t, I think that belief is widely held amongst investors.

    We’ll never know how else it may have turned out because we can only comment on what happened, not on the supposition of what may have been. BOI. If the capital raising works then we did the right thing, if it doesn’t then it’s proof we didn’t do it right, the proof as they say, will be in the pudding. It’s really that simple

  27. @Tull
    “Lastly there is a debt for equity swap that does not amount to much.”
    1,885 million does not amount to much? Indeed, the amount of the rights issue seems to be dependent on how many want to be paid back in cash or in equity.

    Meanwhile, the end result of this is that the state’s effective shareholding goes from 34% to 36%. Indeed as the bank says, a key benefit of the method is to:
    “Limit Government ownership: the net proceeds of the Institutional Placing and the Rights Issue (excluding the NPRFC Rights Issue Undertaking) are underwritten by a syndicate of underwriters thus ensuring that the maximum Government ownership of Ordinary Stock arising from the implementation of the Proposals will not be higher than 36%. In addition, the Proposals include the cancellation of the NPRFC’s Warrants, which will reduce the potential for the NPRFC to increase its stockholding in the Bank further following the implementation of the Proposals.”

    For state read taxpayer. For bank read badly managed gambler. For NPRFC read lunch guest. For ungrateful see screw you.

  28. The prefs were not convertible at any time into equity. The payment of the coupon in shares was at the average trading price of the previous thirty days.

    I don’t think the state is diluting itself this time. At the time of the issuance of the prefs it took a 25% stake in warrants. It increased this to about 35% on a fully diluted basis with the shares in lieu and now it ends up with a 36% stake in a fully recapped bank. Along with this it cashes in it warrants

    It also gets a 2.25% increase in its coupon on the remaining prefs with a further step up in 2013.

    It would seem to me that the DOF and NTMA have raised their game this time and got proper terms for their money. Whether they had help with the paper, we will never know.

  29. @ yogan

    The rights issue and the D for E will be 1.885bn. The swap will amount to a few hundred million at best.

    I could not comment on the 2nd half of your statement.

  30. @Tull
    From the BoI capital raise document:
    “as at 23 April 2010, the last practicable date prior to the date of the publication of this Circular, the Irish Government, through the NPRFC, held 15.73% of the Bank’s Existing Stock. In addition, the NPRFC holds, as at the date of this Circular, the Warrants to subscribe for additional Ordinary Stock which, if exercised (assuming no other increases to the capital stock of the Bank or to the NPRFC’s stockholding), would result in the NPRFC holding a total of 34.3% of the Bank’s issued Ordinary Stock as enlarged by the exercise of the Warrants.”

    Instead we will cash in €1,036,000,000 (face value) of preference shares, the warrants and our existing stock and get, eh, 36% of ordinary stock.

    We’ve just spend over a billion to buy 1.7% of a bank that is worth 6.5 bn…

    Please tell me I’m wrong. Please tell me this is still a good deal.

  31. @Karl
    So….let me get this right
    “I can’t speak for everybody, but I’ll be opting into the share offering, had they been nationalised I wouldn’t, I think that belief is widely held amongst investors. ”

    Scenario A : the state asks you to pay , say, 15,000e to purchase N shares. These are from a rights issue. you happily fork over
    Scenario B: The state asks you to pay, say, 15,000e to purchase N shares. These are from a reprivatisation of the bank. You say no.

    Have i got it right? In both cases you get the same amount of claim (additional – lets assume that either there was an arbitrated or market valuation on the nationalised shares ,which would only be the case if it was 100% state owned, an unlikely scenarion at all times for BoI) on cashflow in the future for the same outlay. But the source of the shares is the determining factor? What am I missing?

  32. @Tull
    “The rights issue and the D for E will be 1.885bn. The swap will amount to a few hundred million at best.”
    Not if they all take the equity?

  33. @Tull
    Acutally, the NPRF gets the 491 in exchange for warrants in cash, right? So it is 545 million for 1.7% extra?

  34. Is there a downside for the State in releasing its warrants? What protection will the State have if the (newly increased) coupon on its preference shares is not paid. Perhaps more importantly, should the State not convert all its preference shares to ordinary shares: would that not allow it to share in any uplift in the bank’s fortunes? Is the reason that the preference shares are not all being converted to confine the State to a minority shareholding, notwithstanding that the remaining preference shares are critical to the bank’s capital reserves?

  35. @BL, karl deeter,
    It is precisely because of statements like this that astute observers of behavioral economics are more likely to consistently beat the market.

  36. @Garo
    “It is precisely because of statements like this that astute observers of behavioral economics are more likely to consistently beat the market.”
    What statement now exactly?

  37. Yogan
    you are failing to take into a/c thatBOI was recapped today to meet regulatory requirements…at long last.
    3.4bn in new equity was raised of which 491 was used to repay warrants and 100m was used to pay investment bankers fees.
    The state as a 35% sharehloder would have been expected to put in 1.2bn in round numbers to maintain it share and not be diluted.
    The state did not commit any extra cash today, it switched 1.8 billion of prefs up the capital structure and took out 500mm in cash. It maintains a 36% share holding in a recapped bank.

    In addition it gets 2.25% per annum on its remaining preference share.

    The state has been pretending that the prefs were ordinary equity. It was pretend equity -only loss bearing in liquidation. Nobody other than the old Irish regulator and a few odds and sods here recongised it as loss bearing…sorry!!

  38. Tull
    If its such a great deal for the existing and new shareholders, would it not be so for the state *thats you and me* to do so also. But then we might have the horrid sight of a well capitalised bank with 50% plus state ownership. ICELAND! ICELAND!
    As is pointed out elsewhere (ok, the pin)
    “The two step process is designed solely to limit the state’s shareholding in the bank and at the same time magically reduce the preference shares. BoI, according to their prospectus, now plan to buy back the rest of the preference shares before they have to pay us any dividend. “

  39. @tull
    “The state did not commit any extra cash today, it switched 1.8 billion of prefs up the capital structure and took out 500mm in cash. It maintains a 36% share holding in a recapped bank.”
    The state spend 1.7 bn for 1.3% and 491 mn in cash. The 491 mn in warrants is, as far as I can see, the market value of the warrants.

    The deal was structured in two parts, purely to limit the state’s ownership. Why did the state’s purchase of additional equity, to the tune of 1 bn euro, not happen at the same time as the rest of the capital raise? The state diluted its own shareholding that it had just bought!

    This is the worst deal I’ve ever seen. What will Mr. Buffet say?!

  40. @Brian

    You seem to have an ideological phobia about banks remaining in the private sector.
    Yes the state and BOI have negotiated a deal wherby state control is kept below 50% for a long as possible. The Pin is not quite accurate on the issue of the dividend. It is most likely to be paid in shares in 2010 and possibly in 2011 but in cash in 2012. So the state will in all probability end up with around 50% stake in BOI by 2013.

    We have not yet got to AIB. There is little prospect of state control below 50% unless they pull a rabbit from a hat. Indeed luckily for you, full nationalisation is in prospect.

    The only problem with state controlled banks is that those pesky capitalists in USA do not like lending to them and they tend to add the Sovereign and the bank together to get to a limit. There is very little issue with state involvement along the lines of LLOY and RBS.

  41. We agree on the fact that the deal was structured to limit state ownership.

    This is not the worst deal you have ever seen
    *12b into anglo that is worse by far
    *7bn in prefs at 8% when they should have been 15%…not great.

    To me the concept of spending is putting extra cash in. In this case we just switch form pretend equity to actual equity.

    I do not fully understand your question on the 1bn please clarify.

  42. @Tull
    “The Pin is not quite accurate on the issue of the dividend. It is most likely to be paid in shares in 2010 and possibly in 2011 but in cash in 2012. So the state will in all probability end up with around 50% stake in BOI by 2013.”

    Oh come on Tull, read the document!:
    http://www.bankofireland.com/includes/investor/pdfs/capital_raising/capital_raising_announcement_non_us.pdf
    “The purpose of the Proposals is to raise Equity Tier 1 Capital and as such any net cash proceeds will be used in the day‐to‐day operations of the Bank and also a portion of the proceeds will be used to meet the requirements of those electing to take cash under the Debt for Equity Offers (up to a maximum of €1,135 million) and the Warrant Cancellation (€491 million). Over the medium term, and subject to regulatory approval, the Directors may seek to apply a portion of the proceeds to redeem some, or all, of the outstanding 2009 Preference Stock provided they are satisfied that the Group can maintain appropriate capital ratios and they deem such action to be in Stockholders’ interests as a whole. As set out in Part V (Unaudited Pro Forma Financial Information) of this Circular, the proceeds raised and/or capital generated from the Proposals together with the other pro forma adjustments are expected, in aggregate, to increase the Group’s Equity Tier 1 Capital Ratio by 2.7% to 8.0% on a pro forma basis as at 31 December 2009, taking into account the costs and expenses of the Proposals including the Warrant Cancellation. €491 million of the proceeds of the Placing and the Rights Issue will be required for the purpose of funding the Warrant Cancellation.”
    The purpose of raising the money is to pay back the preference shares. Without getting credit flowing again, without getting a majority state ownership, and without Matt ‘guitar’ Murphy…

  43. @Tull
    “This is not the worst deal you have ever seen
    *12b into anglo that is worse by far
    *7bn in prefs at 8% when they should have been 15%…not great.”
    Fair enough 😀

    The 1bn is in relation to the structure of the deal. The state got to buy 1 bn euro worth of shares in part 1, then to dilute itself in part 2…

  44. Read the document yourself. BOI will be loss making in the next two year. Therefore it is unlikely that its CT1 ratios will go up much over the next two years.

    Therfore, there is not a cat in hells chance that the proceed of this capital raise will be used to buy back preference shares in the next three years.

    You have got to grant the regulator some credibility. Do you think Elderfield is a fool? Also do you think the EU would not be on to this in a flash. LAstly, who is going to be in Govt in 2012. If BOI want’s to repay the remaining pref, it will have to make money or raise more equity.

  45. @ BL

    Option 1: Nationalise, Clean – up, Sell back

    Option 2: Clean-up, encourage as much private sector recap, State takes up the slack

    I agree not much between the two. Option 1 is logistically more messy; difficult to row back from a nationalisation.

    In theory only difference financially is that existing shareholders might get more out of (2) than out of (1) but, in theory, the State should compensate shareholders in Option 1. BoI is not Anglo, it is solvent if we believe the NAMA valuations. So the effect should be financially neutral. I think the right course was chosen.

  46. @ Yogan

    understand you now. the state clearly had to have an equity position toparticipate in the rights. It is to do with preemption rights. Indeed the sudden arrival of new shareholders on the ordinary register is a bit of an issue. But at least it means the existing stupid sharehlders are left with only 20% of the company. If it were up to me it would have been less.

  47. Will the State/NPRF be the underwriter on the rights issue?

    In the 30th March speech the MoF said, re AIB, “The private sector will have an opportunity to participate in Allied Irish Bank’s capital raising. If sufficient private capital is not available, it is probable that the State will have a majority shareholding in Allied Irish Bank as a listed entity”, effectively saying that the State would fill whatever gap was left by the private sector.

    No such statement was made re BoI. In their case he envisaged a minority stake if the capital raising went OK. Is the c.35% State shareholding a minimum, assuming all goes to plan?

  48. From the BoI announcement – “Citigroup Global Markets U.K. Equity Limited (“Citi”), Credit Suisse, Davy, Deutsche Bank AG and UBS Investment Bank are acting as joint bookrunners and underwriters.”

    If the issue doesn’t go as planned, can/will the State step in to take stock from the underwriters?

  49. @ Greg

    Thanks for posting those links, Frau Merkel speaks the truth. These statements must put a shiver up the spines of our NAMA SPV engineers and our creative accountants in the DoF with their promissory notes and Bills of exchange. Looks like Irelands national debt will hit 24% shortly. As for the stability and growth pact, yes we broke it, continue to break it and think that we should be able to masquerade and massage our figures at will. After all, we are Irish we are not serious people they should know that. Frau Merkel is a spoil sport, but somehow I think there will not be too many Germans investing in BoI especially in hindsight after the “light touch” regulation on depfa bank which cost them a mere 100bn.

    Then again, was it not Von Lenihan und company that claimed that it was his officials that told Eurostat how they must treat the 4bn given to Anglo. Mein Gott, I thought he could not get any more delusional but it seems he runs Eurostat too.

    Von Lenihan, will soon learn that the markets do not buy into barrister speak for very long and that you can fool most of the people all of the time but only if thy live in Ireland and their surname is not Lucy or Gurdgiev . He should also keep an eye on the German Verfassungsgericht and the four professors of the apocalypse who do not come bearing Greek gifts.

    If only, our economy could run on platitudes rather than record levels of sovereign debt, if only that debt did not have to be serviced by a seriously shrunk economy and now they tell us we cannot lie with the figures. If only?

  50. WOW
    Excellent point!
    I have suggested that this analysis of “what the minister or NAMA is up to” is a waste of time. Either it works and it costs the taxpayer less or it doesn’t.

    The effort should be to identify where the real economy will settle, now that the inflating factors aside from NAMA, have ceased. When will we know that recovery is truly “just around the corner”. The Japanese are struggling and are now into 200% GDP public debt. They still have no hope! Are we to suffer the same fate? NAMA not selling land suggests, yes. NAMA selling land suggests no. The timing is important. The longer it takes the more it costs the taxpayer. The Japanese banks did not sell off their non-performing securities.

    As Iceland had no real stake in the systemic importance of “their” (pirate, parasite) banks, they may have suffered less than Ireland, except there is now a 5,000,000,000 entry to EU fee, payable to England and Netherlands……. All they lost was the potential dividends, salaries etc all of which were very recent. Ireland’s bubble banks were sucking out our juices for decades.

  51. There is a bank in South Dakota that has suffered no runs since establishment, I think, before the 1930’s depression and is still in business. That is right, in the USA it is a state owned bank. Publicly owned. Well run.

    Doctrinaire capitalist idiots fuelled the banking bubble in Ireland.

    There appear to be some on this blog. They will find adapting difficult.

  52. @Pat Donnelly – When will we know that recovery is truly “just around the corner”.

    Didn’t you know? We have already ‘turned the corner and the worst is behind us’ ?? BL said so in the December budget.

  53. Just looking at the lead story in today’s IT after the placing yesterday – Lenihan telling us that BoI has emerged from crisis. “The Government maintained that the real financial benefit would be that the recapitalised bank would “now be in a position to provide credit to Irish businesses and households as the economy recovers”.

    It’s 6am and I can’t be bothered to comment on this drivel. I must go out and see if I can get into more debt today.

  54. @tull mcadoo
    “Therfore, there is not a cat in hells chance that the proceed of this capital raise will be used to buy back preference shares in the next three years.”

    This is probably the worst part of the deal structure.
    BOI will do everything possible in order to repay the preference shares.
    That means it will lend next nothing over the next few years in order to rebuild its capital.

    The complete opposite of the stated raison d’etre for the bank recapitalization.

  55. @BL: Apologies for the ambiguity. I was referring to karl deeter’s remark about wanting to invest now but not if the bank had been temporarily nationalised.

  56. @tull mcadoo
    “Therfore, there is not a cat in hells chance that the proceed of this capital raise will be used to buy back preference shares in the next three years.”

    @D_E said:
    “This is probably the worst part of the deal structure.
    BOI will do everything possible in order to repay the preference shares.
    That means it will lend next nothing over the next few years in order to rebuild its capital.

    The complete opposite of the stated raison d’etre for the bank recapitalization.”
    Exactly my concern.

    I hold no candle for nationalisation, pre/postemptively or whatever, but there are two things I want to see:
    1. The state getting a fair whack for saving the bank.
    2. The bank being in a position to resume normal business.

    What I fear is that the bank will increase mortgages and reduce deposit rates to enable it to accumulate cash to repay the preference shares. Now what was that I heard on the news this morning?

  57. @Frank Galton

    This is fantastical as it implied another €1.75+bn impairment provision is coming to BoI courtesy of its NAMA portfolio.

    At December 31st 2009, loans for NAMA €12.24bn, provision €2.78bn, net €9.46bn. If they only get 63% of the value that would be net €7.71bn. Implies total provision of €4.53bn. So an incremental €1.75bn. On top of this would be write-downs from related derivatives.

    But the analysts at banks/brokers are likely to be all geared up to do the placing/ rights issue and may forget to mention this (or have already modeled it).

  58. So the Government wil be left with €1.8bn in Preference Shares after this?

    Indo is reporting €2.8bn, surely that is a mistake?

  59. H’mmm … things seem to have moved from ‘manageable’ to ‘easy’ now.

    http://www.irishtimes.com/newspaper/breaking/2010/0427/breaking48.html

    I recall the first time I ever went water ski-ing. After getting up first time and then doing a couple of laps around an island just off the beach, I started thinking how ‘easy’ this is…….. about four seconds later I discovered just how hard water is when you hit it at 40mph. Ouch!

    It’s not pride that comes before a fall, it’s a lack of vigilance.

  60. @ Yogan

    Let me get this straight. You want the govt to get a return on its money as implied by “fair whack”. This means to me that depsoit rates which are already 1% above Euribor have to come down for certain.
    It also means lending rates have to rise. Of course the banks will have to be careful about how they do this for fear of tipping more people/business over the edge.

    @ D_E
    I do not follow your logic. Post the recap BOI has sufficient equity capital to pass the FR stress test. It is also under an edict from the EU to shrink its loan book in the UK and divest ICs. Therefore, its loan book will shrink. So to generate interest income and cover its costs, it is gong to have to expand its Irish loan book at highwer margins too… somehow. Otherwise how can it turn a profit.

  61. @Tull
    “Let me get this straight. You want the govt to get a return on its money as implied by “fair whack”. This means to me that depsoit rates which are already 1% above Euribor have to come down for certain.
    It also means lending rates have to rise. Of course the banks will have to be careful about how they do this for fear of tipping more people/business over the edge. ”
    Nope. I want the state (not the government, as such) to get its fair whack by getting a fair whack of ownership of the bank. I don’t much care how this ownership is exercised, whether it is split into competing groups who are free to manage/blind trust/sell their holdings, how much the future dividends are etc.

    Just that the state is not artificially disadvantaged by the pursuit of a failed and discredited model of ownership – that majority private sector ownership is the best thing and that limiting the ownership portion of the state and paying back state preference shares are desirable explicit objects.

    I understand the need both to increase the core equity ratio and to anticipate Basel III, but there are other methods to reduce preference share-holdings; contingent convertibles, even taken to Rabo’s extreme are one such method.

    Most of all, I would like to see an end to the spoofing that BoI is somehow ‘fine’ because the taxpayer has been stiffed. That all will be okay both with the institution and the credit market in Ireland. That all this is going to end up costing us nothing and might even turn a handy profit for the taxpayer har har. It is spoken as lies except where it is being spoken as ignorance.

  62. Yogan,

    wow thats long and willtake time for me to understand and digest.

    Where is the evidence that the taxpayer has been stiffed this time on BOI?
    Sure we were stiffed on Anglo and stiffed on the Prefs but not this time.

  63. @Tull
    “Where is the evidence that the taxpayer has been stiffed this time on BOI?”
    Because of the two-stage process. The tax payer is converting 1 bn of preference shares to equity at 1.80

    Then they are buying into the discounted rights issue with 700 mn of preference shares to prevent that 1 bn and their previous (preference dividend) shareholding from being diluted. What would the shareholding have been if there had been no first round conversion and all 1.7 bn had bought at the discounted rights price?

    The selling of the warrants also has ‘sweetheart’ written all over it.

    And I never believe “this time it’s different” 🙂

  64. Yogan

    Their pre rights share holding was 16%. Thus they could only take up 16% of the rights issue. The only way they and take up 685m of a 1.8bn right issue is by buying extra shares. This they are doing in a placing.

    BTW, exiting their 8% prefs at 100 is a great piece of business. If you were to sell this in an open market transaction, I doubt whether you would get more than 80.

    They are getting fullmarket value for the warrants. I am not a legal expert, but I don’t see how having a warrant exercisable in 5 years time, gives you the right to participate in a rights issue now.

  65. I don’t believe in “this time etc” but I am pleasantly surprised that the govt got a better deal at the third attempt. I do not know if it due to the fact that
    i) policy formulation for the Bank’s has been transferred to NTMA
    ii) if the quality of the Invesment Banking advice has improved or
    iii) if the CB/Regulator is more competant
    iv) the EC is in the background
    or if it merely down to the fact that if you put an infinite number of chimps in a room they will eventually write the great novel.

  66. Nice to see Blankfein squirming at th senate committee – on Bloomberg right now – “Goldman Sachs are scum” as Max Keiser says.

  67. @Tull
    “They are getting fullmarket value for the warrants.”
    Current value perhaps. Future value? I doubt it.

    Besides the basis for the warrants is:
    “Following this recapitalisation, the State will not hold ordinary shares in either bank (other than existing NPRF holdings), but it will have an option to buy shares in five years time at a predetermined strike price, thus providing the State with the potential for a significant return. ”
    Clearly this has all been thrown out the window anyway!

    “BTW, exiting their 8% prefs at 100 is a great piece of business.”
    Well, not really. They have no requirement to sell, indeed, they are holding them at par, so selling at less will crystallise a loss. As it is, they are sitting on a 27 mn euro loss today having bought at 1.80.

    “The only way they and take up 685m of a 1.8bn right issue is by buying extra shares. This they are doing in a placing.”
    But why were the private capital charged 1.53 (a 15% discount) for the 500 mn they bought of the placement? This rather gives the lie to the idea that the preference shares paying par was a good deal. Considering the government preference shares were paying in either equity or at 8%, I don’t see any reason they’d be trading about 80. There isn’t a market in them anyway, so it is supposition, but logically speaking they are a no lose bet (equity to the value of cash or cash).

  68. Weren’t ACC a state owned bank? when did Rabo buy them and how badly were they run to leave Rabo with a AAA credit rating?

    unless they’re the exception that proves the rule.

  69. Yes the idea of the prefs and warrants was smart allicy. It was inserting what was effectively debt instrument into a bank a pretending it was equity. Every other country from UK, France, US used them. The TaRP being the notable example. The UL was the first to abandon it and go straight back to ordinary equity. In a crisis, investors onlly wan to know about tangible equity not pretend equity.

    They had to “sell” the prefs to buy the shares or stump up cash from the NPRF. You can value the prefs using Bloomberg and because the coupon is too low, the stock would be trading well below par. So in effect, the NPRF is paying over the odds for the equity and receiving over the odds for the prefs. This part of the transaction was done over the odds to conceal the fact that the origianal prefs were a dumb deal & shortchanged the taxpayer.

  70. @Tull
    “n effect, the NPRF is paying over the odds for the equity and receiving over the odds for the prefs. This part of the transaction was done over the odds to conceal the fact that the origianal prefs were a dumb deal & shortchanged the taxpayer.”
    I don’t disagree with you, my beef, though, is that the preference share agreements only allow for the banks to redeem the preference shares at par. There is no mechanism for them to redeem them at the market value of other preference shares. They are essentially fixed in value. As they have no secondary market, they are also fixed in price – the only customer is the bank itself and the price is set in the banks articles (of which the preference share agreement forms part).

  71. Can some please explain the rights issue to me. Why are the existing shareholders getting shares at a 40% discount when the institutional investors are paying 1.53? I’m confused. Will the share price trade at the discounted price when the rights issue is closed. Please help.

  72. Just remember in a depression we will have far less business for banks to conduct. People and businesses will borrow less. So the banks need for capital will be less. But their loss of capital by bad debts will increase as the depression deepens.

    All the capital will be lost until a few years before the turnaround, hence the importance, JOSEPH, of knowing when that will be. I naively believe that we can set out some clues to that.

  73. Janine

    A right issue is a offer of new shares to all existing shareholders on the register on a a given day. Usually it is in proportion to their existing holding i.e 1 new share for each share they hold at the given day. In addition it is usually priced at a discount to entice shareholder to participate.

    THe two placings done this week at 1.53 for the instutional share holders and 1.80 to the NPRF were to get them onto the share register to qualify for the rights. This is somewhat contraversial aspect in that it dilutes existing shareholders. As of last Friday there were about 1.1bn shares qualified for the rights issue but after the placings the number of shares rises to 2bn.

    The rights issue will be done at a discount to the existing share price-probably around 75p and there will be something like 1 new shares issued for each existing share. It could be 1.2.

    In theory the shares should trade down to the weigthted average of say 1.50 +0.75 on completion. Say 1.125 or so. From then on they trade up and or down in accordance with the markets assessment of the value of the shares.

  74. Can anyone actually tell me if it is worth my while buying B of I shares at 0.55p……I’m an ex banker and it has been offered with all sorts of “opt out” scenarios. The one which says “do nothing” basically says that if I do nothing, the shares will be offered to other investors and, if they sell above the amount offered to me, I will get a cheque for balance. Is it worth “doing nothing” or should I just opt to sell back to Bank now and only get a few hundred euro for the “priveledge” of offloading them early.
    I have no confidence whatsoever that anyone, with the possible exception of David McWilliams, actually knows what they are talking about!! Does any Banker or Economist actually know how Economies work and if so……..should I sell or hold out in the hope that some other idiot will buy above the offered price to me and I might at least make a few bob, if the shares rise any time soon!! HELP !

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