“The transaction was well received in the market and indeed the bond traded a few points higher in the after-market during its first few days of trading. This reflects a market recognition of a very successful transaction for Ireland, one in which we have exited this element of support to our banks with a profit. It points to a recognition that Ireland is successfully working to correct the very deep failings that have affected us in the past number of years.” Minister for Finance, Michael Noonan responding to parliamentary questions this week.
If Minister for Finance, Michael Noonan thought he had drawn a line under the one of the largest disposals of state assets since he came to office, with two perfunctory statements – here and here – issued on the Department of Finance website, well, it seems he has another thing coming.
In truth, there have been larger disposals of loan portfolios at the state-guaranteed banks – Anglo, AIB and Bank of Ireland have disposed of loans relating to US properties which have topped €10bn. But at this stage, the disposal of the €1bn of so-called “Contingent Capital Notes” or CCNs of CoCos, last week was a major event. And a few sentences on 9th January 2013, firstly announcing the imminent sale and then confirming the sale a few hours later, were never going to be enough in a democracy which is sharpening up after the catastrophic decisions in this crisis.
In the Dail yesterday, Minister Noonan confirmed the effect of the disposal was negative in terms of this year’s deficit. In oral questioning he confirmed the proceeds from the sale will be 100% used to pay down national debt, and unlike the imminent disposals of Bord Gais Energy, none of the proceeds from the sale of the Bank of Ireland CCNs will be used to stimulate the economy. The sale will INCREASE the deficit in 2013 by €64m comprising lost interest on the CCNs of €100m less the interest reduction in servicing the national debt of €100m less the interest reduction in servicing the national debt of €36m – seems we pay an average of 3.6% interest per annum on our national debt so the €1bn repayment will cut €36m from the annual cost of servicing the national debt.
But when challenged yesterday in the Dail during oral questions yesterday, about this detrimental effect on the deficit in 2013, Minister Noonan shrugged it off saying December 2012’s better than expected Exchequer figures would take care of it. Try having the cuts to the respite care grants reversed using that line!
In oral questions yesterday, the role of Michael Torpey in the transaction was queried. Michael was until this week the head of the Shareholder Management Unit at the Department of Finance. Minister Noonan announced his move to a plum role at Bank of Ireland this week. Minister Noonan said that Michael was on holiday in Australia since 14th December 2012, and that he will not be taking up his role at Bank of Ireland for three months, which the Minister says provides a “cordon sanitaire”. It was stressed during questioning that no aspersions were being cast upon Michael Torpey. Sinn Fein last night challenged the Minister on the “cordon sanitaire” and pointed to the 2-year break promised in the Programme for Government.
Minister Noonan did give us all a good laugh yesterday when he claimed the fact the CCNs traded at above the sale price was evidence of “a very successful transaction”. Has it not occurred to him that it was evidence that the CCNs were sold below market value, which begs questions about whether the market had adequate notice of the sale.
Minister Noonan can expect weeks of questioning on the transaction, and yesterday there were at least three questions from Sinn Fein’s finance spokesperson Pearse Doherty and Labour TD, Kevin Humphreys, which revealed little about the actual transaction, though we learn more about its effect on the deficit, and that NCB was seemingly the sole third party engaged by the Department of Finance.
Deputy Pearse Doherty: To ask the Minister for Finance following the announcement that negotiations to sell Bank of Ireland Contingent Capital Notes had concluded, if he will confirm the way he ensured that all potential buyers of the CCNs had equal access to all information required to make an investment decision.
Deputy Pearse Doherty: To ask the Minister for Finance following the announcement of his Department on 9 January 2013 that negotiations to sell €500 million to €1 billion of Bank of Ireland Contingent Capital Notes has concluded, if he will confirm if the sale had been discussed by the Board of Bank of Ireland; the date or dates on which it was discussed and if he had been lobbied or received requests from other investors in Bank of Ireland or their representatives urging a disposal of the CCNs..
Deputy Kevin Humphreys: To ask the Minister for Finance if, in respect of the sale of the €1 billion note of contingent capital in Bank of Ireland, the sale was handled by the National Treasury Management Agency or his Department; if the sale was advertised; the way the sale will impact on the Exchequer deficit for 2013; and if he will make a statement on the matter.
Minister for Finance, Michael Noonan: I propose to answer questions 176, 177 and 208 together.
As announced by my Department last week the State was successful in disposing of its entire €1 billion holding of Contingent Capital Notes (CCN’s) in Bank of Ireland. The transaction followed an initial approach by a number of investment banks to the Department late last year which indicated that there was sizeable investor interest in the State’s CCN instruments and particularly the holding in Bank of Ireland. The Sale was managed by officials in the Department’s Shareholder Management Unit, with many years’ experience working in financial markets and was not only timed to take advantage of the improving sentiment towards Ireland and its banks but the huge rally seen in international debt markets which has continued into 2013.
The transaction when announced saw the State presented with the opportunity to dispose of a minimum of €500 million of its position at a price of par. This stemmed from an underwrite provided by the consortium of banks – UBS, Deutsche Bank and Davy – having done a preliminary assessment of market appetite for the notes. In the end the book build process generated significant excess demand to enable the State to dispose of its entire holding in the bonds at a price of 101% of their par value plus accrued interest. This generated a profit for the State of €10 million. Taking account of the coupon paid to the State last year, the taxpayer has earned a total return of over 15% in the space of 18 months.
My officials had full visibility during the book build and pricing phases and were also provided with some valuation advice from NCB Stockbrokers which helped inform their judgement. The transaction was well received in the market and indeed the bond traded a few points higher in the after-market during its first few days of trading. This reflects a market recognition of a very successful transaction for Ireland, one in which we have exited this element of support to our banks with a profit. It points to a recognition that Ireland is successfully working to correct the very deep failings that have affected us in the past number of years. In recognising this, however, we must also acknowledge that this after market price is for a very small volume of stock compared with the €1bn size of the transaction.
The transaction settled on Tuesday the 15th of January and the State was paid proceeds of just over €1,056 million, comprising principal of €1,000 million, interest accrued of over €46 million covering the period 29th July 2012 to date, and a profit of €10 million. As we will use the proceeds of this sale to reduce the State’s indebtedness, it will reduce the critically important debt/GDP ratio by 0.6 per cent.
The Exchequer effect for 2013 is as follows. Due to the reduction in our national debt we have a consequent saving in debt servicing of about €36m this year. We also received €46m interest instead of the €100m interest we had expected. This means that the Exchequer is down about €54m on the receipts side. Taken together with the debt service saving, the net impact is only about €18m in Exchequer terms in 2013. The 2014 Exchequer effect is estimated to be €64m which is the interest differential between the Exchequer borrowing rate and the Bank of Ireland interest rate.
The State’s investment in these instruments dates back to the 2011 PCAR exercise, and the successful exit from a large portion of this position represents another step along the road to normalising the State’s relationship with the banking sector. It is government policy to separate the State from its’ banks, a policy which I believe has shared support in this house. This policy will see the State this year remove the guarantee of bank deposits and liabilities which dates back to September 2008 and it also requires us to exit our bank investments over time and when conditions allow. It is true that as the CCN investments were earning the State a generous 10% return per annum, the exchequer will have to forgo this income but will also reduce its risk exposure to the banking sector. The State made this investment only out of necessity and it is pleasing that we have been able to exit this portion of our investment early and profitably.
I can further confirm that I was not lobbied nor received requests from other investors urging a disposal of the CCN’s while Bank of Ireland have informed me that as one would expect with a transaction of this nature, it was discussed and considered at appropriate levels in Bank of Ireland including at the Board. However the Bank does not provide further disclosure on such deliberations.
NAMA Wine Lake 
@nwl
There was a thread last week on ie on this.
What marketing do you think shoud have been done on this, do you think NCB should have been advertising this in the papers to retail investors as a precipice bond? How long would that have taken with proper explanations?
I suppose if they had, the public would have been able to snap it up if they were bullish on Irish banking and have no reason to complain if it wasa all sold in the market.
Bear in mind that they were trying to off-load into a high market and
1) they didn’t risk announcing an attempt to sell, then finding they had to cancel because of some market movement out of their conrol.
2) it was part of a marketing strategy for Irish debt and having investors make an immediate small profit tends to make them more likely to invest in the next sale.
@Grumpy, at this stage, we have just scratched the surface of the disposal of €1bn of our assets. I would be very surprised if the sale was not challenged, scrutinised, poked and prodded now that the politicians are back from holidays.
When the State disposes of an asset, especially a €1bn asset, it must be (a) scrupulous and (b) show itself to be scrupulous
I would imagine the above will be the first of a series of blogposts on the sale, and perhaps your questions will be answered. It is for the Government to justify its approach to the sale, and when we have a surprise announcement during the (political) holidays, an unusual security being sold, the market valuing the security in excess of our sale price as evidenced by the prices traded after it was sold, the head of the government subdepartment responsible for the sale off to a plum job immediately after the sale – the implication of Michael Torpey being on the other side of the world is that he was not involved in this sale, but if the films of Paul Hogan have taught us anything, the Aussies do have means of staying in touch – and the bank’s deliberations on the subject being off limits, you can expect much more questioning. And perhaps then, we will have something to debate. At present, we have questions that are being slowly answered.
Have we got revolving doors in Ireland as well? Is it realistic to expect public officials to act with saintly sagacity in their deals with institutions they may be considering as future employers? Is it outrageous to suggest that our inglorious banks might not be above using such positions as leverage in their dealings with the civil servants?
Department of Finance officials should be permanently barred from working in any Irish financial institution. Existing former officials in the banks should also be removed and barred. Nothing less will restore public confidence in the independence of the Department of Finance from the casinos it is supposed to be regulating.