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Archive for January 6th, 2011

Consider the following medley of Bank of Ireland (BoI) facts:

(a) On 19th February, 2011 BoI is required to pay a dividend to the National Pension Reserve Fund in respect of the NPRF’s residual holding of BoI preference shares. You’ll recall that in March 2009, the NPRF invested some €3.5bn in 8% yielding BoI preference shares. In May 2010, ~€1.7bn of the preference shares were converted to ordinary shares and the interest rate on the remaining ~€1.8bn went up to 10.25% per annum. That means that on 19th February, 2011 BoI needs to pay the NPRF interest on preference shares in the amount of €214m. Last year ordinary shares were paid to the NPRF in lieu of cash because the EU had apparently decreed that banks in receipt of state-aid couldn’t pay cash dividends.
(b) Just before Christmas, BoI secured permission from the Commercial Court division of the High Court to pay cash dividends from certain capital reserves.
(c) The EC decision on 15th July, 2010 approving BoI’s restructuring still hasn’t been published – at six months, the delay seems like a record.
(d) On 28th November, 2010 our handsomely-rewarded Financial Regulator published his new capital requirements for the four non-zombified Irish banks (AIB, BoI, EBS and ILP). BoI was to raise an additional €2,199m of capital by 28th February, 2011
(e) On 17th December, 2010 BoI announced the results of a debt swap which saw a contribution of €700m to its additional capital target. This meant that the target to be reached in February 2011 fell from €2,199m to €1.5bn. (company announcement here)
(f) In October, 2010 BoI needed pay a price of 5.9% interest per annum on a 3-year State-guaranteed €750m debt issuance.
(g) BoI’s share price today is €0.34 valuing the company at some €1.8bn.
(h) The estimated NAMA haircut on BoI’s loans was put at 42% by NAMA in September 2010 and 40% by the Minister for Finance in October, 2010. This haircut compares to 60% for AIB, 67% for Anglo, 70% for INBS and 60% for EBS. I have previously suggested on here that the BoI estimated haircut looks too low.
(i) The State already owns 36.5% of BoI through its conversion of preference shares in May 2010 and its receipt of ordinary shares in lieu of cash dividend (on the then 8% preference shares) in February 2010.

So where is BoI going to find €1.5bn (€2,199m capital requirement less €700m contribution from debt swap in December 2010) in the next 54 days? Un-announced asset sales? A new share issue? And what about the dividend it needs pay the NPRF on the preference shares? And what about the NAMA haircut?

It would seem from this distance at this vantage point that the only feasible investor will be our much put-upon pension reserve. And that will mean the State takes majority control of BoI – more than 65% by my calculations which are

Existing stake in BoI – 36.5% (5.3bn ordinary shares in issue * 36.5% = 1.9bn shares)
New share issue €1.5bn at €0.34 per share – 4.4bn shares
New share holding – (1.9bn + 4.4bn)/(5.3bn + 4.4bn) = 65.3%

And of course that is before the February 2011 dividend on preference shares and any additional NAMA-haircut-causing capital requirement. And the IMF has insisted on a bottom-up review of BoI’s non-NAMA loans and off balancesheet exposures by the end of March 2011. It is hard not to see from here how BoI will avoid a fate similar to AIB’s and may well end up on Enterprise Securities Market by the middle of this year.

UPDATE: 10th January, 2011. Reports in the weekend press suggest that Bank of Ireland is showing leg to the Middle Eastern sovereign wealth funds. This follows recent promotional tours of the Middle East by the NTMA and the IFSC ambassador at large John Bruton. Does anyone seriously believe that Middle Eastern sovereign funds will be less demanding than the vulture capital funds  already circling our skies. The Sunday Business Post seems to dismiss China as a source of new funding which might be premature of that newspaper  – although there have been reports that China has invested in Portugese bonds it seems that there is still Chinese funding on offer and their State Administration and Foreign Exchange head Yi Gang only last Friday offered words of support for European bonds generally. Meanwhile the Independent reported last Thursday that the bank had submitted before the end of December its plan to raise the €2.2bn of additional capital demanded by the Financial Regulator (of which €0.7bn was raised in December through the debt swap). On Friday last head of the NTMA John Corrigan is claimed to have said that it was open to Bank of Ireland to apply for an extension to the deadline for raising the additional capital. As of today, the bank has less than 50 days to raise the additional €1.5bn.

UPDATE (2): 10th January, 2011. Bank of Ireland has issued a statement confirming that it has completed the sale of its Bank of Ireland Asset Management subsidiary for €57m to State Street and that the sale has contributed €40m to its Core Tier 1 capital. Only another €1.46bn to go! The bank makes reference to the EU Restructuring Plan which was approved on 15th July 2010 but the approval has still not been published six months later.

UPDATE: 11th January, 2011. According to reporting in today’s Irish Independent, BoI is about to offer a subordinated debt for equity swap that might see a contribution to Core Tier 1 of between €100-200m (the lower estimate seems to have more credibility according to unnamed sources). In addition the article claims “The bank has already raised €700m of the cash without hurting shareholders, but is likely to offer new stock to raise much of the remaining €1.5bn.” and “As well as the private placement, the bank will also do a rights issue, where new stock is offered to existing shareholders”. With 48 days to go before the 28th February, 2010 deadline for raising its Core Tier 1 to 12%, the bank would seem to be short some €1.36-1.46bn.

UPDATE (1): 17th January, 2011. Ireland’s  Sunday Tribune citing “an institutional investor source. ” says that the Department of Finance has recently sought to extend the deadline for recapitalising Bank of Ireland to 12% of Core Tier 1 from 28th February to May 2010 (in line with the deadline for Irish Life and Permanent) but were rebuffed by the IMF, EU and ECB. So BoI now have 42 days to raise some €1.5bn. Tick tock…

UPDATE (2):  17th January, 2011. Reuters is reporting, citing “two people with knowledge of the talks” , claims that BoI is trying to cook up a scheme whereby the State can inject funds which qualify as Core Tier 1 but which wouldn’t give the State majority control and which could later be exchanged for third party capital. There is no detail as to how this miracle might work but it seems that BoI is desperately grasping for non-State capital solutions.

UPDATE: 21st January, 2011. With 38 days remaining for BoI to raise an additional €1.5bn there are rumours that BoI is about to embark on a new debt-swap which might see some capital enhancing value generated from an estimated €750m of subordinated debt though the suggestion is that it might only raise €200m. There is also emerging “noise” about the State making a further injection in BoI but via some Philosopher’s Stone of a vehicle which would not entail the State increasing its stake. BoI is required to pay a €214m dividend to the NPRF in 30 days on the NPRF’s residual holding of BoI preference shares.

UPDATE: 31st January, 2011. Share price closes below €0.31 at €0.304 – if the preference share dividend of €214m is paid in cash in three weeks then the State’s shareholding will increase from 36.5% today to 50%+.

UPDATE: 3rd February, 2011. News that Bank of Ireland has made an offer on €300m of subordinated debt for an exchange at 56% haircut (that is, €168m profit to BoI which would be a contribution to the outstanding ~€1.5bn capital raising target). The bondholders have until 9th February, 2011 to respond. BoI’s capital raising target is €2.199bn, a December 2010 debt-swap yielded €700m and the sale of BIAM yielded €56m so the remaining capital target is €1.44bn but there may be other operations at the margins that might affect this figure.

UPDATE: 6th February, 2011. This is the Bloomberg story from late on Friday last, suggesting that an agreement might be in the offing at BoI which might see a State injection of liquidity via “non-voting shares”.  Bloomberg don’t disclose the parties to the “agreement” but if they are BoI, the NTMA and the DoF then that will be meaningless in the context of the IMF/CBI/ECB/EU on the other side of the table. It will represent a major loss of face to the other side of the Memorandum of Understanding if the government needs inject ~€1.3bn (€2.199bn less €0.7bn debt-swap profit in Dec 2010, €0.057bn for BIAM and up to €0.168bn from the Canadian debt-swap announced last week (though that initiative seems to have been scotched according to this Bloomberg article “the lender will postpone a plan to offer to convert some of its subordinated bonds into shares until after the central bank’s capital and liquidity reviews”)) via “non-voting shares” because these are not “equity shares” – “equity shares” mean full capital risk and full voting rights. And by the way, separately I believe the government will need convert its AIB Convertible Non-Voting shares to ordinaries by 28th February, 2011 also.  Of course the CBI/ECB/IMF/EC might concede an extension of time (backtracking on a previous rebuff) or dilute their demands to liquidity rather than capital. I don’t think they will. It is particularly important to the ECB that confidence in Irish banks be restored because there is now €180bn + of ECB and CBI special liquidity in Irish banks. Backtracking on a key plank to the Memo of Understanding will not bolster that confidence.

UPDATE: 8th February, 2011. Bank of Ireland has issued a press release in response to recent press reporting and speculation about the €2.199bn capital requirement imposed on the bank as part of the IMF/EU bailout last November 2010. The press statement says “the Bank is discussing a number of structures with the State to raise the requisite Core Tier 1 capital by 28 February 2011. The Bank’s objective in these discussions is to facilitate a subsequent stock offering to stockholders, at a point when there is likely to be further clarity following the Prudential Capital Assessment Review (PCAR) and Prudential Liquidity Assessment Review (PLAR) which are due to be completed by the 31 March 2011. None of these structures has been approved by or agreed with the State, and there is no certainty as to which, if any, of the structures under consideration will be adopted.”

UPDATE: 10th February, 2011. BoI announces the results of its debt-swap offer for Canadian dollar-denominated subordinated debt. There was a 38% take-up amongst the c€300m nominal value bondholders to exchange their securities at a 56% haircut. The capital accretion from the debt-swap is €45m leaving just over €1.4bn to raise by the 28th February, 2011 deadline (€2.199bn less €700m from Dec 2010 debt-swap, €40m from BIAM disposal and now €45m from this debt-swap). The status of the 28th February, 2011 deadline is unclear following a statement today by Minister Lenihan that if the Opposition wrote to him to honour the deadline then he would.

UPDATE: 11th February, 2011. It seems the February 2011 recapitalisation deadline is becoming a political football that has been kicked out of the park. The two main Opposition parties have responded to the invitation (or poison chalic challenge according to some) yesterday by Minister Lenihan regarding the recapitalisations and both have said that they will not agree to recapitalisations today. And indeed both have gone further in what seems to me to be the signs of reneging on the IMF/EU bailout agreement – Labour is reported to have said, according to the Irish Times, that the “party would not put any further capital into Bank of Ireland, AIB and EBS building society before renegotiating the bailout with the International Monetary Fund (IMF) and the EU”. FG is signalling that the recapitalisations should take place after the stress testing and PCAR/PLAR exercises which are due to be completed at the end of March 2011. And indeed there does seem to be something of putting the cart before the horse in recapitalising a month before you know the extent of the capital requirements.

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