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Bank of Ireland moves out of intensive care unit
Read more about: Economy, NAMA 
According to Wall Street Journal ($) the B of I fund raising plan to be revealed tomorrow: €3.4 billion in total funds. Half will come from the government (=National Pension Reserve Fund) converting half of the €3.5 billion preference shares into ordinary stock. €500 million will come from an unnamed (and probably domestic) group of institutional investors, €200 million from some bond holders converting debt to equity (the mechanism mostly precluded in Ireland because of the guarantee), and €1 billion from a rights issue not underwritten by the government. The regulator asked them to raise €2.7 billion so it looks they are going to use €700 million to buy out the warrants that entitle the government to buy a 25 percent share in the bank.
The good news:
They wouldn’t be outlining this plan unless they were sure they could meet it, so it looks like Ireland will have at least one bank with reduced reliance on the government (albeit now with huge moral hazard since they got back from the brink with the government support and there is still no mechanism to ensure any other outcome the next time around).
The less good news: the various amounts of money above seem carefully chosen to ensure that the government does not end up as a majority owner in the Bank. So the preference share conversion which on its own would have done so is counterbalanced by the new money raised from other sources. There is a difference between a bank raising just enough money not to be government owned and a bank capable of being a substantial lender and absorbing the losses still to come on residential mortgages.
The regulator asked them to raise €2.7 billion so it looks they are going to use €700 million to buy out the warrants that entitle the government to buy a 25 percent share in the bank.
As your post suggests, what a scam.
I’m trying to put a number on the size of the scam.
According to the original warrants –
Warrants attached to the Preference Shares give an option to purchase up to 25% of the ordinary share capital of each bank existing on the date of issue of the New Preference Shares. The strike price of the first 15% of the Warrants exercised by the State shall be €0.975 for AIB and €0.52 for BOI. The strike price of the balance of the Warrants shall be €0.375 for AIB and €0.20 for BOI.
Bank of Ireland’s share price is now around €1.80. So now the warrant is worth between €1.30 and €1.60 per share. From here on the details of the calculation are tricky and I am probably getting something wrong but B of I has about 1 billion shares in issue, so 25% of that means that the warrants were entitled to about 300 million shares (to own a quarter of the expanded pot) — meaning that even now with B of I share price depressed by all the fundraising, the warrants are worth over €400 million. And the warrants wouldn’t have been exercised for years when the share price would be far higher with the toxic shite dumped in NAMA and B of I the dominant bank in the Irish market.
P,
According to the Department of Finance Statement:
“When this deal is complete:
The State will hold a valuable approximately 36.5% share of the bank
The State will continue to hold approximately €1.78 billion of preference shares and these will earn a higher coupon of 10.25%
The State will get €491 million profit for its warrants
The State will receive some €51 million in fees for conducting this deal”
Has someone got their facts skewed?
@Veronica. “Has someone got their facts skewed?”
Not at all. The Department of Finance don’t deal in facts.
There’s a comment thread on Irish Economy trying to sort out whether the government overpaid on the preference share conversion and perhaps got too little for the warrants (my view is that they exercised the warrants too soon –the share price has a lot of upside thanks to NAMA). On the other hand, the negotiations were apparently handled by NPRF rather than D of F so that gives me a bit more confidence in the deal.
P,
Had a look at that thread on irisheconomy.ie. not very enlightening though, since it broke down fairly quickly into arguments between the ‘Temp Nats’ faction and the pragmatists plus the usual futile hurling of abuse in all directions.
@ Setanta,
The DOF do deal in facts. They may not always respond appropriately to those same facts, but they most certainly have to deal with them.
Veronica: The Dept of Finance (or have they changed the name) deals in selected facts and opinions designed to suit particular political objectives.
“The State will get €491 million profit for its warrants. The State will receive some €51 million in fees for conducting this deal.” Money still grows on trees?
Furtunately the truth is beginning to dawn on even the most gullible. Now that invesors bad debts have been off-loaded to the taxpayer the investors are back in the name of competition, the economy, jobs, helping people who need loans etc.
Back to business as usual.