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.

Issuance of BoI Shares

Today’s media coverage of the Bank of Ireland share issuance contained a number of inaccuracies, which to be fair, probably isn’t too surprising given the complexities of the issues.

On RTE’s Drivetime show, its reporter said that the share issuance occurred because the European Commission was preventing banks from paying dividends on the preference shares. Technically, this isn’t correct. The Commission is preventing banks from paying coupons on subordinated bonds. These bonds, in turn, have dividend stopper clauses and it is these clauses that prevented the payment of the cash dividends.

This is perhaps a technical distinction and it may be difficult to get across the true picture in a short space of time. More misleadingly, however, when I appeared on The Last Word today, I heard Fianna Fail TD Frank Fahey state that the Commission had merely put a hold on cash dividend payments to the government while it is assessing BoI and AIB’s restructuring plans. Fahey thus asserted that in a few months time, AIB’s business plan would have been approved and the government would be receiving the cash dividend from AIB in May.

However, as I noted last week, the coupon stopper is in place “to prevent the reduction of own funds by financial institutions which are still reliant on State aid to fulfil regulatory capital requirements.” It seems likely that AIB will still be reliant on state support in May so by that reasoning the coupon stopper is likely to still be in place.

I’ve been a little surprised that there has been no coverage of the fact that the shares were paid out despite the NTMA CEO John Corrigan and the Minister for Finance both stating in public last week that they could wait to collect the cash dividend. It appears, however, that Bank of Ireland’s own bylaws required it to pay out the shares on the deadline day (see this report by the Independent’s Emmet Oliver). It seems a little strange that Mister Corrigan and the Minister were not aware that the shares were going to be issued.

Governor Honohan’s characterisation of the whole affair as “untidy” seems about right (comments reported on the Six-One TV news). He is, of course, also correct that this payment is small beer compared with the amount of recapitalisation that the banks are going to need after the NAMA transfers. With AIB transferring €24 billion to NAMA, and BoI transferring €15.5 and mooted discounts of about a third, recapitalisation requirements will be a lot more than €250 million. But the fact that €250 million acquires 15.7% of BoI tells us that a far more serious dilution of ownership is on its way.

Bank of Ireland Issues Ordinary Shares to the State

Despite NTMA chief John Corrigan’s position last week that the state expected to receive its cash dividend of €250 million from Bank of Ireland at some point soon and so would not be getting ordinary shares in lieu, the Bank has today announced that they will be issuing ordinary shares for this amount to the government on Monday February 22. Announcement here. The Department of Finance response to is here. Hat tip to commenter Frank Galton.

Preference Shares and “Guaranteed” Returns

The European Commission continues to instruct Bank of Ireland to stop paying coupon payments on lower tiered bonds unless the payments are legally binding. Which brings us back again to the €280 million that is due to the Irish state from Bank of Ireland this Saturday.

The Commission’s request that the bond coupons not be paid triggers a “dividend stopper” clause for the government’s preference shares: These bonds have a claim that is senior to the preference shares, so this clause ensures that the holders of preference shares can’t get paid before them. This means we won’t be getting €280 million in cash from BoI this weekend.

State In No Rush to Collect Dividend

You may remember that about this time last year, the state’s investment of €7 billion in preference shares of the two main banks was regularly touted as a great investment, with the 8% dividend playing a big role in helping to reduce our budget deficit. The story in relation to these dividends has now gotten a bit complicated and it now appears that instead of getting €560 million this year, we’re perhaps getting nothing.

As discussed here before (here and here) the EU Commission does not like the idea of taxpayer money going into the banks only to be paid out to subordinated bonds. For this reason, the Commission has prevented AIB and Bank of Ireland from paying coupon payments on certain bonds. This has triggered “dividend stopper” clauses which prevent the banks from paying cash dividends on the government’s preference shares, which are due on February 20 in the case of Bank of Ireland and May 13 in the case of AIB. This in turn would trigger the right of the National Pensions Reserve Fund Commission (NPRFC) to acquire ordinary shares equivalent to the amount of the dividend. And €560 million is a large amount of money relative to the current stock market capitalizations for these banks.

However, it turns out that NTMA are not keen on collecting these shares for the taxpayer. Via Bloomberg, the Irish Times reports:

Speaking at a Dáil committee in Dublin today, Mr Corrigan said failure to pay the coupon won’t automatically lead the government to take a bigger stake in the lenders. The NTMA chief executive said he would prefer the banks to pay the coupon in cash rather than shares. He said he is “in no rush” to collect the shares, and will await a European Union decision on the coupon before deciding how to proceed.

In relation to not being in a rush, it is true that the NTMA don’t have to take the shares. The original announcement stated:

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 at a time no later than the date on which the bank subsequently pays a cash dividend on other Core Tier 1 capital.

Since the banks are not currently paying out dividends on ordinary shares, then it is clear that the shares don’t have to be issued, though it is less clear as to who makes the decision to get shares issued—the banks or the government.

It would be interesting to know the exact nature of this EU decision-making process that Mister Corrigan referred to. The Commission has already made its judgment on the payments to subdebt holders and it has adopted a consistent stance on this issue with other EU banks. There doesn’t seem to have been any conversion of the subdebt to some other form of claim that wouldn’t have a dividend stopper. So what exactly are we waiting for? A bit of clarity on this would be nice.