Tag: AIB

AIB Subordinated Liabilities Order

One item that hasn’t been discussed on this blog in recent weeks is the Subordinated Liabilities Order issued by Minister Noonan in relation to AIB’s debt instruments. I guess everyone knew this was coming so the order in itself was no big deal. However, the order is now getting some attention (here and here) due to the fact that it appears to mess with existing capital hierarchies. In particular, it appears to have left the preference shares owned by the Irish government untouched while adjusting the terms of subordinated debt.

This seems to me like a bad idea. I’m all in favour of seeing subordinated bondholders in AIB get wiped out given the enormous extent of state support that has been required to keep the bank going. But if you are going to do this, then you should respect the hierarchy of claims that exists.

Many of us have questioned the wisdom of the protection of senior bondholders in Irish banks at the expense of a potential sovereign default. However, those who have argued in favour of protection of senior bondholders have generally made points about the need to maintain the reputation of the domestic banking sector in light of its huge ongoing funding gap. If this is our approach, then is it wise to get a reputation as a country which randomly up-ends existing claims hierarchies at the whim of a Minister?

Pension Reserve Fund Set to Make €1.8 billion Loss on AIB Shares

NAMAWineLake blog performs yet another valuable public service and points out that Brian Lenihan’s statement of October 30 told us that “AIB’s upcoming €5.4 billion will be fully underwritten by the National Pension Reserve Fund Commission (NPRFC) at a fixed price of €0.50 per share.”  Unfortunately, the shares closed on Friday at €0.337.

This means the Pension Reserve Fund looks set to make an instant loss of €1.8 billion when it purchases these shares. There is, of course, an alternative. Cancel the underwriting, nationalise the bank and appoint an assessor to value the shares. If, for instance, the shares were valued at their closing price on Friday, this would cost us €364 million. Which sounds better? Losing €1.8 billion or losing €364 million. Is it worth €1.4 billion to retain a tiny private ownership share?

It is also worth raising the question of whether the current process we are going through with AIB is the right one. Rather than being so sure that the bank just needs another €5.4 billion to fix it, why not remove the current upper management immediately, introduce new management charged with fully assessing the bank’s loan book and then decide what to do with it?

If AIB is deemed to be deeply insolvent at that point, we are already (albeit slowly) developing a template for dealing with banks of this kind. This would involve splitting AIB into a good bank and a bad bank, leaving the €4.5 billion in subordinated debt in the bad bank and perhaps negotiating with with the holders of these securities to reduce the amount of public funds required to cover the losses.

If the losses at AIB are larger than the authorities currently envisage, then there are strong arguments against continually putting taxpayers money in to protect other providers of risk capital.

AIB Sell Stake in Polish Bank

AIB have (finally!) sold their 70% stake in Polish bank Bank Zachodni for €3.1 billion (press release here). The bank reports that the disposal

will generate c. €2.5bn of equivalent equity tier 1 capital towards meeting AIB’s Prudential Capital Assessment Review requirement set by the Irish Financial Regulator.

As I understand it, there are two elements to this €2.5 billion figure.

Page 225 of the bank’s 2009 annual report states

The market value at 31 December 2009 of the shareholding in BZWBK S.A. of €1.5 billion (2008: €1.3 billion) exceeds the carrying amount including goodwill of the investment by €0.09 billion

In other words, the stake in Bank Zachodni was valued at €1.4 billion on AIB’s balance sheet. So AIB has sold this asset for €1.7 billion more than this carrying value, triggering a corresponding increase in the bank’s equity.

In addition, because the Polish bank’s balance sheet was integrated into AIB’s consolidated balance sheet, the disposal allows AIB to deduct €10 billion from its risk-weighted assets (see page 35 of the 2009 annual report). With a target Tier 1 equity ratio of 8%, this implies a reduction of €800 million in the amount of equity the bank is required to have to meet its target (this is the part of the general Honey I Shrunk the Bank survival strategy). Added to the €1.7 billion gain on the sale, you arrive at the €2.5 billion figure.

This is a positive outcome but it’s not too far ahead of expectations as I understood them. For instance, a nice analysis from Barclay’s Capital a few months ago assumed the sale would generate a profit of €1.3 billion, which would put this €400 million ahead of that. The Barcap analysis foresaw the bank converting €3.3 billion of its €3.5 billion in preference shares into common equity, with the state then having €3.3 billion of €5.5 billion in common equity for a 60 percent ownership stake.

Keeping everything else unchanged, the additional €400 million from today’s sale would see the state converting €2.9 billion to common equity, which would still see it having a 53 percent stake (2.9 / 5.5 = 0.53).

Of course, the baseline 60 percent stake of that analysis may have been a bit low (others have been more pessimistic) and there’s lots of other moving parts to this analysis. However, today was a step in the right direction for AIB in its quest for the ultimate prize: 49.999% state ownership.

More Comments on AIB’s Half-Yearly Report

I surely have better things to do with my time but, yes, I spent the evening reading AIB’s half year report (with the Airtricity boys doing us proud in the background.) As John already noted, the report has a lot of pretty bad news in it, so I thought I’d point out some sort of positive news (before getting back to the bad stuff).

Liquidity Situation

The good news? Despite concerns that have been expressed about a looming “wall of cash” moment, AIB looks as though it’s in a position to get through to the end of the year paying back all its debts, though this may require ECB assistance.

Continue reading “More Comments on AIB’s Half-Yearly Report”

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.