It is hard not to suspect that Bank of Ireland is in a shockingly perilous state at present. We are waiting more than three months now for the publication of the EU Decision on the bank’s restructuring (the Decision was announced on 15th July 2010 and as is usual the Decision was to be vetted for confidential information before publication – that this vetting has taken over three months is prompting suspicion about the content of the Decision). The bank last week announced a sale of its subsidiary, Bank of Ireland Asset Management, for €57m to US financial services giant, State Street. Apparently the sale was a condition of the EU granting approval of State-aid and its wider restructuring proposal but because we haven’t yet seen the Decision it is not clear why the disposal was necessary. Last week also saw the bank place GBP £300m of 3-year debt at an interest rate of 5.75% which of course excludes issue and other costs including payment for the State-guarantee. According to BoI’s interim report for the first six months of 2010, the bank has an interest margin (simplistically the difference between the interest rate it must pay for its finance versus what it achieves on its lending to customers) of 1.41%. If BoI is borrowing from the market, as it did last week, at 5.75% then it needs to lend that out at 7.16% to maintain its June 2010 lending margins. And those margins are below the long term averages of at least 1.75%. September 2010 also saw a bizarre decision by Ireland’s Minister for Finance, Brian Lenihan, to raise the threshold on BoI loans to be transferred to NAMA from €5m to €20m. This has the effect of deferring a crystallisation of the true level of losses on these loans and consequently causing a capital hole that might necessitate the State providing additional capital which would tip State-ownership from 36.5% today to over the 50% mark and majority State control. Tough times for Bank of Ireland.
And today the bank is reported to have announced a new debt placing, this time for €500m repayable in 2 ½ years. It is not entirely clear from the Irish Times story and indeed there is nothing on the Bank of Ireland website or it would seem any stock exchange notification to confirm the interest rate payable on this borrowing (the Bank of Ireland investors website seems to constantly link to “pages not available”) – the Irish Times say “410 to 420 basis points more than the benchmark mid-swap rate, according to two people with knowledge of the sale” and “euro-denominated financial bonds due in one to three years and bearing a rating equivalent to the Irish government’s AA- at Standard and Poor’s pay an average spread of 130 basis points”. German 3-year rates are trading at 1.22% this morning so I would expect the rate offered here to be that plus 4.15% or 5.37% in total. Factor in issue costs and the price of the State-guarantee and you are possibly looking at over 6%. Depressingly this new debt needs to be State-guaranteed, and of course our State bond debt is trading at near record levels (6.6% on 10-year bonds as I write this) which might part explain the high interest rates.
That Bank of Ireland is borrowing at levels which would seem to place annual interest well over 6% seems like commercial madness. When its Standard Variable Mortgage rate is 3.4% here (and just 2.99% in the UK), when businesses expect to be able to borrow at Euribor + 1-3% (roughly up to 4% today), it is plainly madness for Bank of Ireland to seek debt at such high interest rates unless it’s being shovelled into credit cards or personal finance. Unless it has no choice but to borrow at these rates. And that is why Bank of Ireland may well be in a very perilous state today.
UPDATE: 28th October, 2010. Simon Carswell at the Irish Times seems to have better information on the debt issue. No notification yet to the stock exchange or announcement from BoI, so let’s assume Simon is correct. The debt issued was €750m, not €500m as reported by the Irish Times yesterday. The interest rate on the debt is 5.9% (not 5.4% which was my interpretation yesterday of what the Irish Times had reported) which presumably excludes issue and other costs including the cost of the State guarantee. The issue was oversubscribed 1.3 times at €1bn and apparently buyers are widely spread, so this is not an ECB or closed sale, it’s the real McCoy. The bloody great elephant in the room with the pink tutu on gving a rendition of The Prodigy’s “Firestarter” is that this debt is totally uneconomic and highlights just how perilous a position BoI has reached.
UPDATE: 29th October, 2010. Whilst the markets are making their own minds up on BoI (currently trading at €0.50 a share), the media continues to ignore the pink tutu-wearing, Prodigy-impersonating singing elephant in the room – that borrowing at 5.875% excluding costs and State-guarantee fees in a euro market where mortgages and business loans are sold at 3-4% is madness. The FT (free registration required) concentrates on the process of the sale – originally it was to be for €500m but demand at €1bn pushed the offer up to €750m. There were 68 accounts which bought the debt and most were from continental Europe (with only 35% in the UK and Ireland – oddly enough there don’t seem to have been any other buyers from North America or the Far East). “This deal demonstrates Bank of Ireland can access the market and that’s been one of the critical concerns about the sector” said a chap from Deutsche Bank. It demonstrates far more than that I think.