Archive for October 31st, 2010

The short answer is “I don’t know” but this is precisely what this modern day inverse of Robin Hood is about to do – take €5.4bn from our National Pension Reserve Fund (NPRF) to buy shares in Allied Irish Banks (AIB and for our international friends again has nothing whatsoever to do with Anglo Irish Bank which is known here domestically simply as “Anglo”), and he is making the NPRF buy the shares at €0.50 each when two days ago, on Friday last they closed at  €0.337 per share meaning that the NPRF will incur a loss of €1,760m from the start. The NPRF was set up to fund future pensions of ordinary citizens from 2025. AIB meanwhile had a market value of €364.2m of which we, the State, own €66.7m (that shareholding is from the conversion of our 8% dividend due on the €3.5bn preference shareholding in May 2010 to ordinary shares). According to the latest AIB accounts (the Interim Report for the first six months of 2010) the bank appeared to have over €4bn of junior (or subordinated) bondholders (note 32 on page 87). As we know, we can legally require these junior bondholders to accept a haircut on their debt. So, why is Brian Lenihan forcing our pensioners to pay €1.8bn to bail out the remaining €297m of private AIB shareholders and €4bn+ of subordinated debt holders? This entry examines the issue.

The history

In 2009 the government passed into law the Investment of the National Pensions Reserve Fund and Miscellaneous Provisions Act 2009. This allowed the government to “direct” the NPRF to make certain investments or underwrite certain share issues. To date there have been two transaction – in 2009 the investment of €7bn (€3.5bn apiece) in AIB and Bank of Ireland (BoI) preference shares and in April 2010 the direction to convert BoI preference shares to ordinary shares as part of that bank’s attempt to raise €3.4bn of fresh Tier 1 capital. Here is the timeline of that investment.

31st March 2009 – Directed investment of €3.5bn in BoI 8% preference shares

12th May 2009 – Directed investment of €3.5bn in AIB 8% preference shares

20th February 2010 – BoI pays the 8% dividend (for 10.5 months) in ordinary shares then worth €250.4m

26th April 2010 – Minister for Finance Lenihan announces participation of the State in the forthcoming BoI capital raising programme and the conversion of some of the State’s preference shares to ordinary shares. The NPRF issued a statement providing a little more detail on what was proposed.

13th May 2010 –  AIB pays out its 8% dividend (for 12 months) in ordinary shares then worth €280m

29th October, 2010 – The NPRF publish their Q3, 2010 performance report in which they confirm the €7bn invested in AIB and BoI in 2009 is now worth an overall total of €6.615*

29th October, 2010 – the following is the performance of world stock markets from 20th April, 2010 (the mid-point of the two investments in AIB and BoI in 2009).

The present decision

“The past is a foreign country, they do things differently there” – So says one of the most famous opening lines in a novel, the Go-Between by LP Hartley. Using the current vernacular, the past is the past, we are where we are, that decision last year to invest in BoI and AIB was, from an investment point of view ill-judged and yielded poor results but it is done. The decision announced in April 2010 to underwrite the BoI share issue was also ill-judged as the shares have collapsed in value. World stock markets had one of their strongest rallies in history over the period of the investment and the NPRF had one hand tied behind their backs as they were forced to invest (“directed”) 1/3rd of their then total funds of €22bn to prop up two banks. All of that is tragic and exasperating for sure, but it is the past and can’t be undone. This entry is about the present and a decision that can be reversed.

On 30th September, 2010 on the big bang day for Irish banking (“Black Thursday” if you wish), the Minister for Finance, Brian Lenihan, issued a statement early that morning which set out some of the detail of total costs of bailing out the banks. The statement had the following reference to AIB “In order to afford every opportunity to AIB to raise as much as possible of the required capital from the markets and to minimise further Government support, it has been decided that this capital requirement will be met through a placing and open offer to shareholders of AIB shares to the value of €5.4bn. This transaction will be fully underwritten by the National Pension Reserve Fund Commission (NPRFC) at a fixed price of €0.50 per share and is expected to be completed in 2010 subject to shareholder and regulatory approval. If necessary, the NPRFC’s underwriting commitment will be satisfied by the conversion of up to €1.7bn. of its existing preference shares in the bank into ordinary shares along with a new cash investment for the balance of €3.7bn in ordinary shares. This transaction structure assumes the sale of AIB’s stake in M&T Bank and disposal of other assets in due course.” And that is it. There was a further statement in the Dail later that day in an exchange on another unconnected issue with the NPRF in which the Minister again stated “In my statement on banking issued this morning, I announced, in order to afford every opportunity to AIB to raise as much as possible of its new capital requirement of €7.9 billion from the markets and to minimise further Government support, that it has been decided the bank’s capital requirement will be met through placing an open offer to shareholders of AIB shares to the value of €5.4 billion. This transaction will be fully underwritten by the National Pensions Reserve Fund. The use of the National Pensions Reserve Fund to recapitalise our main financial institutions on commercial terms is the most appropriate and prudent use of the fund to assist in meeting the financial challenges we are facing”. Later that day, AIB issued a statement which included “A €5.4 billion equity capital raising will be launched during November which will be completed before 31 December 2010.  This equity capital raising will be fully underwritten by the National Pensions Reserve Fund Commission (“NPRFC”) at a fixed price of €0.50 per new ordinary share, which represents a discount of approximately 9.4 per cent to the official closing price of an ordinary share on the Irish Stock Exchange on 29 September 2010.  The capital raising will be structured as a placing and open offer and existing shareholders will be invited to subscribe for all or part of their pro rata entitlements.  New institutional shareholders may also be permitted to subscribe for new shares under the offer.” And that is it. There has not been a peep or murmur from our politicians or media about the fact that we are now about to buy AIB shares and overpay their true value by €1.8bn. It is true that the shares collapsed from €0.40 to €0.337 a share in the past week but the shares have traded at below €0.474 a share since the announcement and we have been staring at a €1bn+ loss since 18th October, 2010.

Is there an alternative? Yes there is and I take you back now to January 2009 when Anglo was nationalized (in the sense that the State took over the bank 100%). The Minister’s statement began “The Government has today decided, having consulted with the Board of Anglo Irish Bank Corporation plc (“Anglo”), to take steps that will enable the Bank to be taken into public ownership. This decision has been taken after consultation with the Central Bank and the Financial Regulator which has confirmed that Anglo Irish Bank remains solvent. Anglo Irish Bank is a major financial institution whose viability is of systemic importance to Ireland. Anglo has a balance sheet of some €100bn with a substantial deposit base which the State is determined to safeguard. The Government has made clear that it will ensure its continued viability. Anglo Irish Bank will continue to trade normally as a going concern, with appropriate Government support as necessary. All Anglo employees remain employed by the company.” AIB is in the same position today. As for Anglo the shareholders lost their money “With effect from 21 January 2009, your shares have been automatically transferred from your ownership to the Minister of Finance’s ownership.” and “An Assessor will be appointed by the Minister for Finance to assess whether compensation should be paid to those persons whose shares will be transferred to the Minister for Finance and, if so, to determine the fair and reasonable amount payable as such compensation. At this time, it cannot be said whether you will receive any compensation or, if you are entitled to compensation, how much you will receive.” This is what should happen with AIB now. In addition, there must be a negotiation with the €4bn+ of junior bondholders whereby they can be forced (legally forced I should add, as with Anglo’s and INBS’s junior bondholders) to take a substantial haircut on their debt. Senior bondholders would be unaffected (for the time being).

The question posed here has been “why is the Minister effectively robbing pensioners to bail out shareholders and junior bondholders”. The answer is probably that the government has a strategy of keeping two “Irish” banks at all costs. Why? National vanity? National security? Legacy? Truthfully I don’t know but it seems completely wrong to take pensioners’ nest egg and use it to prop up private shareholders and junior bondholders. And what is almost beyond belief is the silence from Opposition politicians and the mainstream media.

*Thanks to commenter Scarab for very helpfully providing the breakdown of the €6.615m 30th September 2010 valuation of our €7bn investment in 2009 as follows (I must admit that I am still checking the figures):

Investment in 2009 by the NPRF in AIB/BoI – €7bn

In Feb 2010 BoI paid their 8% dividend to the NPRF with 184.4m ordinary shares.

In May 2010, the NPRF converted €1,662m of preference shares to ordinary shares in the rights issue and acquired an additional 1,715m shares

On 30th September, 2010 BoI shares were worth €0.62 each. Therefore at that point, the NPRF’s investment in BoI was worth a total of (184.4+1,715) ordinary shares at €0.62 each plus the residual preference shares €1.837bn to give a total of €3.015bn

In May 2010 the AIB 8% Preference Share dividend was paid with 198.1m ordinary shares which were worth €0.51 at 30th September which when added to the €3.5m investment gives you a value of €3.601m for AIB.

The total of €6.615bn in the NPRF statement comprises the €3.015bn for BoI and €3.601bn for AIB (€0.001bn rounding).

UPDATE: 1st November 2010. On Irisheconomy.ie it was pointed out that there was a written question by Labour deputy leader and finance spokesperson Joan Burton on 14th October, 2010 (question and answer below). The closing price on 14th October for AIB shares was €0.428 which would have given a loss of just under €800m.

Deputy Joan Burton asked the Minister for Finance if the National Pension Reserve Fund will participate in and underwrite the Allied Irish Banks rights issue at a fixed price of 50 cent per share irrespective of its prevailing market price at the time of the rights issue; and if he will make a statement on the matter. [36866/10]
Minister for Finance (Deputy Brian Lenihan): In my statement on banking on the 30th September last I indicated that AIB is to raise €5.4bn of capital through a placing and open offer to shareholders of AIB. The transaction is to be fully underwritten by the National Pension Reserve Fund Commission (NPRFC) at a fixed price of €0.50 per share and is expected to be completed in 2010 subject to shareholder and regulatory approval. I am advised that it is the normal practice in underwritten transactions that the underwriting price is fixed at announcement.



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