Why is Bank of Ireland giving a dig-out to the Government with the Anglo promissory note transaction?

According to Laura Noonan reporting in the Independent, Bank of Ireland’s annual general meeting on Tuesday this week was a generally civilised affair. In recent years, shareholders have gone to some lengths to express their rage at the collapse in the bank’s share price from a peak of €18 to just €0.11 today – remember Gary Keogh who specially “matured” eggs in his garage and strapped them to his body to avoid them being confiscated by security before he could deploy them? – that was for an AIB AGM but the share price collapse has been similar to Bank of Ireland’s. Instead, at this year’s AGM we had a few civilised criticisms from what appeared to be smaller-scale shareholders including comments from Deputy Shane Ross. Nobody however seems to have questioned the role of Bank of Ireland in funding of the Anglo promissory note payment at the end of March 2012 – remember the Government didn’t borrow €3.1bn from the Troika to pay the promissory note as originally planned; instead the Government issued a new sovereign bond to Anglo (or IBRC as it is now known), NAMA gave Anglo €3.1bn in cash with Anglo pledging the sovereign bond as security and it is intended that in June 2012 that Bank of Ireland will reimburse NAMA with €3.1bn in cash which will be a loan for one year. What does Bank of Ireland get for this €3.1bn loan? It gets a profit of 1.35% of the loan value. How does it make a 1.35% profit? It uses the sovereign bond to borrow €3.1bn from the ECB at 1% and then lends that back to IBRC at 2.35%. Simples.

But what is confusing some observers is the fact that Bank of Ireland could go out today and buy an Irish sovereign bond which matures in April 2013 at a price at close of business yesterday which would give a return of 3.88%. Indeed given that Bank of Ireland will probably only acquire the bond in June/July 2012, the appropriate comparison might be the Irish sovereign bond which matures in January 2014 and was priced yesterday at 4.75%. And in both cases Bank of Ireland could use the bond to get a loan from the ECB at 1%. In any event, we can all agree that the 2.35% on offer from the Government with the Anglo promissory note funding is less than what is available on the open market today. So why is Bank of Ireland foregoing an open market transaction which could deliver it €120-150m in a year – and Minister Noonan indicates that Bank of Ireland will offer the loan for 364 days – when all Bank of Ireland is getting on the deal is a measly 2.35% of €3.1bn or €72m. In other words, Bank of Ireland is gifting the Government between €48-78m. Why?

Independent TD Stephen Donnelly today asked the Minister for Finance, Michael Noonan this precise question

“To ask the Minister for Finance if, in view of the arrangement on the March 2012 promissory note payment, if it is the case that, instead of borrowing the money for this payment from the Troika facility at 3.5%, the Government and State owned corporations will now be borrowing it at 2.35% from Bank of Ireland; if it is the case that Bank of Ireland could buy a comparable bond on the open market at higher rates; if this is the case, the reason Bank of Ireland will buy the bond to cover the promissory note payment; and the economic logic for same”

And this was the reply from Minister Noonan

“As the deputy is aware on 29th March 2012, I made the following statements on the matter to the Dail:

“The €3.06 billion of Programme funding that would otherwise have been used to make the promissory note payment should potentially allow greater flexibility around when and at what level Ireland returns to the capital markets.”

 It is proposed that IBRC will enter into a repurchase agreement with Bank of Ireland at margin of 135bps above the ECB main refinancing rate which is currently 100bps. The Troika funds continue to be available to the State at the appropriate funding levels. 

 The commercial terms and economic logic for proposed repurchase transaction between IBRC and Bank of Ireland is a matter for the board of directors of the respective banks. I note that the matter is subject to Bank of Irelands independent stockholder approval and I refer the deputy to the statement released by Bank of Ireland on the matter on 29 March 2012. 

 “As the transaction is considered to be a related party transaction under the Listing Rules, it will be subject to independent stockholder approval. A circular containing additional details of the transaction and the date of the proposed Extraordinary General Court will be posted to stockholders once the circular has been approved by the UK Listing Authority and Irish Stock Exchange.”

So there’s no justification of Bank of Ireland’s actions from the Minister. It is expected there will be an EGM at Bank of Ireland towards the end of May 2012 to ratify the decision of the Bank of Ireland board. But remember, the Government has a stake in Bank of Ireland these days of just 15% and about a third is owned by US and Canadian investors including the canny Wilbur Ross. The rest is mostly owned by large institutions, smaller-scale shareholders have been mostly wiped out. So regardless of the apparent economic stupidity of the transaction, if the shareholders agree to it, then it must make commercial sense. Minister Noonan was offered the opportunity to explain what appears to be a transaction that doesn’t make economic sense, and he did not offer an explanation.

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