State Gets 18% of AIB

AIB have released an interim management statement. As expected, the bank has not been able to pay the state its cash dividend of €280 million, so they are issuing shares for this amount instead. The NAMA bonds are referred to “enhancing our contingent liquidity resources.”

As an aside—and sorry to bring up Frank Fahey twice in two days—I’d note when I appeared on the radio with Deputy Fahey in February, he told listeners that the government would definitely be getting its cash dividend from AIB in May. I noted at the time that the coupon stopper was in place “to prevent the reduction of own funds by financial institutions which are still reliant on State aid to fulfil regulatory capital requirements” and so this was highly unlikely. To my mind, the fact that government politicians are sent out to continuously over-promise in relation to their banking strategy ultimately ends up just undermining their credibility.

Update: I just noticed that the Department of Finance press release contains the following:

The Minister explained:

“The €280 million in ordinary shares issued to the Fund will count towards the additional €7.4 billion equity capital requirement determined by the Financial Regulator so that AIB will meet the new base case capital standards.”

I’m not sure I understand this. The state is not putting any extra funds in, just receiving shares that dilute the existing ownership. Can the issuance of these pieces of paper in exchange for no money really raise regulatory capital? If this trick works, why can’t the bank’s ownership just issue a few million more shares to themselves for free? Then reaching the €7.4 billion target will be no bother.

35 thoughts on “State Gets 18% of AIB”

  1. @Karl – I think you are being rather generous using the term ‘over-promise’. Its not the wording I would have chosen.

  2. Re. Deputy Fatey – I think the FF PR strategy is to make one ridiculous claim after another in the mistaken belief that people only remember the last one you made and you can say you said something else about the other ones – if you used the words the PR company told you to use.

    @KW next time you speak to him, you could perhaps point out that even the dogs in the street knew this (unable to pay cash dividend) would happen so how come he didn’t. Are politicians so badly informed and out of touch? You of all people should be able to make mincemeat out of that guy but you are too polite sometimes!

  3. I’d have to second what Joesph says.
    Think of the irritation of the listeners, who hear the gombeenism win.
    Fahey knew exactly what he was doing.
    Saying that, no point getting George Lee angry either.

  4. When it comes to FF and economic predictions, I will forever think of this (http://bit.ly/diLJol) beaut:

    “We have a duty to tell first-time house buyers, young couples with no previous experience, that there is unbelievable value in the marketplace today. It will not last forever… I will remind the House, perhaps in 12 or 18 months, when prices have again increased by 25% or 30%, that they were told this by the Leader of the House on this historic day, the tenth anniversary of the Good Friday Agreement.”
    – Senator Donie Cassidy, April 2008.

  5. Play by the rules gents: the objective of the contest is not the National Interest but to be the biggest cute hoor in town. Karl, you lost.

  6. Frank Fahey

    “(Frank Fahey TD) caused controversy in Galway after speaking at a seminar organised by ‘Remax Auctioneers’ held at the radison Hotel in January 2009. He spoke at the conference urging first time buyers to “buy now as houses prices were as low as they would go”. House prices in Galway have seen a 20%-30% drop in the previous 18 months with little sign of the market stabilising. A number of people have questioned his judgement in the matter, as the seminar was organised by Remax Auctioneers and speakers were drawn from what could be seen as the “vested interests” in the property market in Galway. As of 2009, there were many people with negative equity on their properties, who had bought within the previous five years. A number of people have questioned the wisdom of the Fianna fail TD speaking at the seminar encouraging young people to buy now, despite many economists predicting further price drops in the housing market up to 2011 and 2012 and further exposing people to the danger of negative equity on their properties.’ wikipedia – has a reference link on there

    He is, to my mind, like so many of our current crop of politicians, an unspeakable hypocrite – his party, of which he appears to be a senior member pursued a set of irresponsbile and reckless economic policies since at least 2002 that have brought the country to the brink of insolvency with the result that the provision of basic public services continues only while we stay within the grace and favour of callous and unreliable international bond markets.

    This guy is a liability – in my opinion people ought responding to this type of misinformation more forthrightly and aggressively.

  7. Well, maybe not raise regulatory capital, but at least maintain it (as opposed to honouring the cash dividend). The State is reinvesting its dividend claim as new Equity Capital.

    I’m not sure what the problem is, the State is receiving the assets en lieu of cash, and the bank is not reducing its liquidity. The only losers are the current shareholders.

    I know, that AIB shares aren’t as good as cash, but nevertheless I think this is an entirely appropriate arrangement, flagged long in advance (albeit, not by some of the less financially sophisticated TDs).

    I’m not really sure what the point of this thread is. Are you suggesting a different solution, or just lamenting the financial acumen of backbench TDs? If the latter, then i’m afraid you can talk about this for years, but you will never have financial experts in every seat in the Dáil; nor would that be desirable.

  8. Karl,

    I don’t agree with your final paragraph. If AIB paid the dividend in cash and the Government then immediately reinvested that as new share capital, that would clearly go towards the €7.4 bn requirement. Economically, that’s what is happening here. Similarly, it should count as new capital if there were a debt for equity swap in respect of any AIB debt held by the NPRF (assuming, of course, that agreement could be reached on an appropriate valuation.) Your proposed trick doesn’t work because the bank is not getting rid of any liability, it would just be like splitting the shares.

  9. @Karl

    It depends what were the projections underlying the 7.4Bn. If these projections assumed the coupon would be paid then the fact that shares have been issued instead legitimately counts towards the 7.4Bn.

  10. @Ger
    “but you will never have financial experts in every seat in the Dáil; nor would that be desirable.”

    True. But when non-experts claim expertise, if not omniscience, it is legitimate to criticise. And very legitimate to criticise when not very well intentioned amateurs have the capacity to very real damage.

  11. Anyone know at what price we are actually getting those AIB shares?

    Any predicitions for where that price will be in a few months time?

  12. @ Karl

    its a debt for equity swap. As Brian Woods notes, if the 7.4bn didnt take account of this ordinary share issue, then it would reduce down this requirement.

    And i think you know therefore that the “why can’t the bank’s ownership just issue a few million more shares to themselves for free” analogy is very poor and wrong. You need to be able to issue against a liability that is then cancelled.

  13. @ Eoin

    I don’t agree it’s a debt for equity swap. Preference shares are not exactly debt — indeed our regulator counts tham as core tier 1 capital, though most regulators don’t do this.

    However, if you’re saying that the alternative to paying out the €280 million was that this amount would be added to the bank’s liabilities in some fashion, then yes, relative to that case, the equity capital from issuing shares in exchange for nothing is €280 million higher than under that counterfactual.

    But I still don’t see how, on its own, this move puts the bank €280 million closer to meeting the €7.4 billion target.

    And the “few million shares for free” comment was just a quasi-humorous analogy to make the conceptual point clear.

  14. @ Karl

    the debt im referring to is the coupon obligation. Its not a listed or issued debt, but none the less its an obligation and so is essentially the exact same. They could pay the security guards in ordinary shares in lieu of their wages and it’d be the same principle.

    So, as a result of reducing down their outstanding liabilities (ie the coupon) they obviously dont have to raise as much capital. No?

  15. It’s definitely not debt for equity, as the bank is not losing any debt.

    It’s a reinvestment of dividends, accompanied by a rights issue for the same amount.

    Therefore, the State’s share grows, the money which would have been paid out of AIB as a dividend is converted into common equity and the remaining shareholders pay for it through loss of ownership.

  16. @ Ger

    it had a cash debt of 280 mio. This is now cancelled and has been replaced with an ordinary share issue to the debtholder. We get to the same end point though.

  17. Karl,

    On the topic of Deputy Fahy or any other Gombeen for that matter; i personally would love to see the gloves come off. As time on tv or airwaves is finite, soundbites are king. So more comments from independant academics like:

    ‘You are wrong!’
    ‘Why are you lying?’
    ‘That is a lie’
    ‘Why are you treating the public with contempt?’
    ‘Stop drooling and put some pants on’

    would be very welcome.

    P.S When are we going to see John the Optimist return from his self imposed exile?’

  18. @ Eoin

    Ok, we can agree that:

    1. Issuing shares in return for nothing doesn’t raise equity capital. However …

    2. If the CB in its PCAR exercise had assumed payment of a cash dividend (even though they would have known that it was clearly not going to be paid) then the non-payment of this dividend reduces the amount of equity that has to be raised relative to the cash payment counterfactual.

    But back to why I raised the point in the first place. The announcement is clearly being signalled as somehow “good news” for the bank in its campaign to raise sufficient equity capital when in fact it is not.

    In any case, I can see where this will go. Your response will be that if Scenario 2 is correct then the statement is factually correct. To which my response is that 99% of people reading the statement will think that AIB actually raised €280 million this way. To which you’ll say “why would anyone think that?” and then I’ll give up!

  19. Karl, the next time you are to appear on any show with Fahey or any of the other gombeens, use the commentators on this site to collect a list of 5 quotes from that person that are obviously ridiculous like the two examples above. When they start going all bat shit on you, just respond with those five comments and say that i don’t see why anyone with such a poor record of economic forecasting or whatever else should be allowed on this show. Ok maybe something not that outrageous but you know what I mean?

  20. Karl

    i dont consider this “good” news, more a case of a silver lining to the non payment of the coupon – the 280m isnt simply vaporising into nothing, as im sure some would contend, its (a) giving the state a shareholding (obviously) and (b) its ultimately getting the capital requirement down by the same amount (though the State would ultimately be the backstop here anyway, so its debateable how silver the lining is). But if you’re surprised that the government will try and paint this in a postive light, then im confused, cos you seem like an intelligent fellow who would know that thats exactly what government’s do all the time!!

    But i didnt post on here to debate that side of it, i simply posted in response to your question – “Can the issuance of these pieces of paper in exchange for no money really raise regulatory capital?”. As the Obaminator would say, Yes It Can.

  21. @Joseph
    “Sorry – that was a typo…”
    Use the proper term – it was “Fat(ey) Finger Syndrome”..

  22. @ Eoin

    Well, as usual, we’re going around in circles of apparent disagreement without actually disagreeing! The issuance of pieces of paper for no money can’t raise regulatory capital. The cancellation of cash payments can reduce required equity raising if your requirement figures included the cash payments (which everyone apart from Deputy Fahey knew wouldn’t be paid.)

    And, of course, I’m not too surprised that this is being spun as positive (at this point I’m waiting for “Lenihan says NAMA causes sun to rise in the morning”!) I’m just pointing out that spin is what it is.

  23. KW – I agree with those who argue that there is a mountain being made out of a molehill. AIB essentially said to Finance – we OWE* you 280m in cash due to a dividend obligation. We can’t pay this DEBT* because not because we didn’t make provision but the Eurocrats won’t let us pay it to you, however if you INVEST* 280m in our shares no money needs to change hands and our obligation to you is spent.

    * as might be understood in plain English as opposed to how it may be rendered in an Economics text.

    AIB issuing shares to itself does not satisfy any counterbalancing cash obligations, it is clearly apples and oranges.

  24. @Mark Dowling

    H’mmm – it’s in a range of 1.32 – 1.38 today.

    Just saw something funny about Greeks cutting deficits (I think it was in the Guardian) – if at first they don’t succeed in cutting it then they must Troy, Troy and Troy again. 🙂

  25. @Joseph, Mark

    The price we’re getting the shares for is the average price over the last 30 days, €1.413

  26. Prices are not values.

    If we stand for nothing we will fall for anything.

    Revolution is in the mind and does not require destruction of property or life. Ireland is becoming poorer when everything of Yeats’ poem is true.
    Wake up those of you who aspire to a better country!

  27. The last trade I noticed this morning was at €1.28 – the direction seems obvious to me. And the Euro was at $1.245 and they’re shooting people in Thailand and there was a bomb blast in Greece yesterday…

  28. With respect,the discussion is missing the main point – it is brilliant that the State is getting more equity !I was firmly in the temporary nationalisation camp and seeing any piece of the equity come our way cheers me .
    Our banks may not be good at the basics of lending money and getting it back but they will be world class at price gouging in a time of much less competition.If they stick to the ‘utility’ business they will be mega-profitable.

  29. @Karl

    You make a point that the world and his mother knew AIB would not be able to pay the coupon. You seem to be then arguing that, based on this likelihood, Lenny should have announced that the capital requirement would be 7.1Bn. I am quite sure that if he had done that and now was telling us that this 280m is extra capital and counting towards the 7.1Bn you would be crying foul (rightly).

    The fact is this 280m is very real, it is not a paper trick. The taxpayer has been denied a coupon of 280m but in return owns more of the bank.

  30. @ BW2

    I wasn’t saying that the state isn’t getting something. Clearly, they are. I was saying that, on its own, this transaction does not raise the equity capital of the bank.

    Also, some of the stuff that’s been written above about this transaction raise equity capital because it cancels debts is not correct. Dividends on equity show up in the profit and loss account when they happen. The bank’s balance sheet did not have an item showing a €280 million liability that now gets canceled out.

    What may be true, though we don’t know, is that the Regulator may possibly have assumed payment of a cash dividend when coming up with the €7.4 billion.

    In any case, boring stuff. It is what it is.

  31. The point iself is boring to be sure. Of more interest is why this is being raised as a sort of “gotcha” in the first place and also the knee jerk rejection of Eoin’s simple explanations by the anti NAMA constituency.

  32. @ Karl

    you’re worried more about the mechanics of it rather than the underlying point – even if it went straight to the p/l account, rather than the capital positon, retained profits (now larger thanks to the cancellation of the 280mio ‘expense’) DO go to underlying capital position. That is after all the basic reason behind the EU’s decision to stop coupons – to allow for the rebuilding of capital bases.

    As you said, the only real key consideration is whether the 280mio payment formed part of the regulators assumptions or not. There seems to be a fairly definitive statement from Lenny suggesting that he regulator assumed payment (because it was never actually ‘cancelled’ until the payment date), and as such, as BWII noted, its basically much ado about nothing.

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