# Recapitalisation announcement



## z109 (21 Dec 2008)

http://www.finance.gov.ie/viewdoc.asp?DocID=5609
(Courtesy Bulls&Bears on the 'pin)

Anglo:


> In relation to Anglo Irish Bank, the Minister for Finance announces an initial investment of €1.5 billion of core tier 1 capital to assist in restructuring the bank’s capital. The Government will continue to reinforce the position of Anglo Irish Bank and will make further capital available if required so that it remains a sound and viable institution. The investment will be in the form of €1.5 billion of perpetual preference shares with a fixed annual dividend of 10%. The preference shares carry 75% of the voting rights of Anglo Irish Bank. The investment is subject to the approval of the ordinary shareholders at a general meeting which will be convened as soon as possible. On the basis of positive contact with the European Commission, the Minister said he was confident that the Anglo proposal will meet with EU State Aid requirements when formally notified in due course.



BoI & AIB:



> Good progress continues to be made in the capital discussions with other institutions. In particular, subject to shareholder and regulatory approval, the Government has agreed with Bank of Ireland and Allied Irish Banks plc that they will each issue €2bn of perpetual preference shares to the State with a fixed annual dividend of 8%. These shares will have voting rights in respect of change of control and any changes in the capital structure. They will also confer 25% of the voting rights in respect of appointments of directors and 25% of the directors on the board, currently including any directors to be appointed in connection with the Government’s Guarantee Scheme.
> All the institutions may redeem the preference shares within 5 years at the issue price or after 5 years at 125% of the issue price. The preference shares are non-convertible and will be treated as core tier 1 capital by the Financial Regulator and are replaceable only with other core/equity tier 1 capital.


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## webtax (21 Dec 2008)

Perpetual preference shares - so this means that the government will be carrying all the risk with it's guartantee & recapitalisation while the shareholders stand to gain full benefit if the government aid works and the share prices recover in the coming years.

I have bought shares in BOI, AIB & ILP recently as a long term bet, but I still feel this government action with the taxpayers money is absolutely scandalous.


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## Brendan Burgess (21 Dec 2008)

Sounds to me like a great deal for AIB (of which I am a shareholder) and Bank of Ireland. 

The government is lending €2billion at 8% and they can repay this without penalty at any time over the next 5 years. 

The government must be virtually 100% sure that these banks are rock solid and that their management in future will be much better. 

The government is getting a good rate at 8%, but from a taxpayer's point of view, these preference shares should have some conversion rights.

Brendan


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## Brendan Burgess (21 Dec 2008)

It's worth reading the announcement in full, although the above are the key points. 

The banks have agreed to a programme of measures to increase lending to SMEs, first time buyers, the socially excluded and others.






> The Government need not be the principal source of this additional capital and encourages each institution to access private sources of capital. Nonetheless, the Government is prepared to underwrite further issuance of core tier 1 capital and both Allied Irish Banks plc and Bank of Ireland have indicated an interest in such an underwriting in an amount of up to €1 billion each.




So it looks as if the banks are planning to have a small rights issue.


The notes to the editors include the following:



> The State will be remunerated on an annual basis in respect of this investment with the equivalent of almost €500m in dividends, either in cash or in ordinary shares.


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## webtax (21 Dec 2008)

Brendan said:


> The government must be virtually 100% sure that these banks are rock solid and that their management in future will be much better.
> The government is getting a good rate at 8%, but from a taxpayer's point of view, these preference shares should have some conversion rights.



It will be hard to exercise proper control over the mgmt of AIB and BoI when they are only getting 25% of voting rights - it looks like they aren't even looking for any resignations from the current crop!

The 8% rate is very poor, Warren Buffet did his deals at 10% plus for warrants to convert to ordinary shares at their current price, UK govt got 12% and soverign funds got 14%.

The bankers must be delerious at how good a deal they pulled off - I think the shares will be in for a big jump tomorrow, which the government will explain as showing market confidence in their actions, but will really show what a great deal they are after giving the banks.


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## Duke of Marmalade (21 Dec 2008)

Brendan said:


> Sounds to me like a great deal for AIB (of which I am a shareholder) and Bank of Ireland.
> 
> The government is lending €2billion at 8% and they can repay this without penalty at any time over the next 5 years.
> 
> ...


That's my read _Boss_, but undoubtedly the markets will disagree.  8% and non convertible.  Still I wuda taken these up myself if given first refusal.


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## ecstatic (21 Dec 2008)

I think the government did the right thing.

1. AIB is not in a state of badness it has assets it can sell.
2. Government doesnt want to strangle the banks as liquidity issues.

For BOI its a better deal for in my opinion. 

Id also signup for preference at 8%.

Happy to have increased my AIB holdings on friday anyhows by another 5k shares.


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## ecstatic (21 Dec 2008)

If we strangle the money supply anymore we may go back to living in the caves people are under serious pressure at the moment. And im not just talking about the fat cats.


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## Carramore (21 Dec 2008)

A few thoughts.  One is that bond-holders in the banks will be big winners.  The bonds that qualiry as Tier 1 capital were trading (in thin markets) at a fraction of their face value last week.  The government has now ridden to their rescue, as its preference shares will rank behind them in security terms.

Another thought is that, if we're to believe David McWilliams, the amounts being invested fall far short of the amounts that the banks will eventually need.  Therefore, the rights issues mentioned in the announcement will become very relevant and we as taxpayers will be underwriting them.

A third thought is what happens with Irish Nationwide.  If "informed commentators" are to be believed, its loan book is in a worse condition than Anglo's.  Presumably the government has to make sure that its business is wound down in an orderly manner.  That's going to cost us as taxpayers more far more than the excess "risk premiums" that we're going to get from Allied and Bank. 

The reference to 10% dividends from Anglo is a joke.  I wouldn't think there's a hope of getting a penny back, either in dividens or capital, from anything that the government puts into Anglo.

Finally, not a whisper about ILP.  What will happen to its share price tomorrow?


If we're to believe David McWilliams, this


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## barryl (21 Dec 2008)

Brendan said:


> It's worth reading the announcement in full, although the above are the key points.
> 
> The banks have agreed to a programme of measures to increase lending to SMEs, first time buyers, the socially excluded and others.
> 
> ...


 Brenden  what do you think shareholders will be offered for investing alongside the government?


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## darag (22 Dec 2008)

The statement that "The Government will continue to reinforce the position of Anglo Irish Bank and will make further capital available if required so that it remains a sound and viable institution." is odd seeing as it's obvious that they are a dead loss.  Beekeeper hits the nail on the head - their entire business model is finished.  At every stage during the last year, the markets have been a reliable indicator of the state of Anglo while their own statements on their viability and strength have been proven to be lies.  I simply find it very difficult to believe that the government are party to some inside knowledge about Anglo that justifies paying 1.5 billion for 75% of something which could be bought entirely for a sixth of that amount.  And in fact this 75% is very limited ownership - the government has no claim on future profits (not that there are going to be any).  This just does not make sense to me.  I understand that winding down a bank is a slow and delicate operation given the nature of their balance sheets but surely the government should have simply fully nationalised the bank - offering existing share-holders a small premium - and immediately announced their plan to start breaking it up and selling bits of it off.

With regard to the injection for AIB and BOI, I'm puzzled also.  Unless things are far worse than they seem, I didn't think that imminent collapse was the issue for these banks; instead the problem was tier 1 capital ratios.

This measure won't do anything long term for the share price for the two banks.  They're may be a bounce tomorrow but it wont last.  This money is more akin to bonds than to equity.

I feel that counting this money in their tier 1 ratios is something of a regulatory fudge.  The shares are de-facto 5 year redeemable preference shares with an option (which I suspect the banks have been told they are NOT to exercise) to convert into perpetuals at a cost of 25% of par value at the 5 year mark.

Many argue that non-perpetual perference shares should not be counted in tier 1 capital ratios.  Even under Basel, they are not counted as core capital.  It seems obvious that if you are under obligation to buy back the shares then this should be reflected in your balance sheet as a liability.  However this odd share structure seems to have been given the nod by our widely admired regulator to be included in the tier 1 capital calculation.  I suspect the stock market won't be fooled 'though.

On the other hand I'm not sure that this is a great deal for the banks either.   I release that issuing preference shares has advantages over selling bonds as you have the option to pay the money back when it suits you but they are paying a huge interest premium for this privilege (BOI are paying 3.75% coupon on the 2 billion worth of bonds they issued under the government guarantee).

The gain of 25% voting power for the government is of academic value in my opinion.  The government has considerable power over the bank's behaviour as it is.  I don't see this 25% adding anything to the pressure the government can currently exert.

This looks like a window dressing exercise to me to allow the government to be able to boast about doing something to improve the tier 1 capital ratios of the Irish banking sector while avoid taking the difficult necessary decisions. However I guess I'll keep my indignation in check until we see more details of what is being proposed.


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## tyoung (22 Dec 2008)

"the government are party to some inside knowledge about Anglo that justifies paying 1.5 billion for 75% of something which could be bought entirely for a sixth of that amount."

 I think that is wrong, Darag. The government's action values the bank at 500M. Outright nationalisation would expose the govt to possibly unknown future losses. If losses are spectacular, the current action at least allows them to limit their liability once the government guarantee lapses.


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## Brendan Burgess (22 Dec 2008)

The minister for Finance is on Morning Ireland now. He has actually said 

"This is not taxpayers' money. It is from the National Pension Reserve Fund". 

This really is unbelievable. 

It is also odd that he has not been challenged on this.


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## redstar (22 Dec 2008)

Brendan said:


> The minister for Finance is on Morning Ireland now. He has actually said
> 
> "This is not taxpayers' money. It is from the National Pension Reserve Fund".
> 
> ...



Makes me wonder - what are Brian Lenihans qualifications for the job of Finance Minister ? Isn't he a barrister or something ?
Surely its during these hard times that we need someone who is qualified in the subject matter he is making decisions on.
Its akin to a waiter doing dentistry


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## Duke of Marmalade (22 Dec 2008)

_Boss_, I listened to that interview. I thought overall it was a very polished performance - this guy didn't get a First in law for nuffin'. Yes he was playing a bit with words there but I'm inclined to forgive him. There is a bit of a difference between investing the NPRF and lashing on a 5% extra levy on us for example. I think there is even a difference from borrowing at today's expensive Ireland Inc rates. His main point was that he is getting 8% per annum for this investment.

_Darag_, the preference shares *are* perpetual and are perfectly acceptable as Tier 1. Also preference shares imply no value whatsoever for the value of a company, no more than bonds do.  8% coupon compares very favourably with the 12% and 14% costs of similar instruments in UK banks


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## Brendan Burgess (22 Dec 2008)

I genuinely don't think that he realises that the taxpayer owns or is responsible for the NPRF. If any of the banks loses the new money, the taxpayer will be at a loss. 

I take your point that he considers 8% to be a good return. But is it a good risk adjusted return? I am not sure. On pure investment terms, the NPRF could have probably bought some less risky investments at a higher return.

brendan


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## Duke of Marmalade (22 Dec 2008)

Brendan said:


> I genuinely don't think that he realises that the taxpayer owns or is responsible for the NPRF.


Never thought of that, that would be embarrassing.  However, I don't think a clever guy like BL could be that dumb after spending the last 10 weeks in the constant company of the top financiers in the land.  No I think he was playing with words.


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## z109 (22 Dec 2008)

Duke of Marmalade said:


> _Darag_, the preference shares *are* perpetual and are perfectly acceptable as Tier 1. Also preference shares imply no value whatsoever for the value of a company, no more than bonds do.  8% coupon compares very favourably with the 12% and 14% costs of similar instruments in UK banks


By one measure of Tier 1 ratio. From a Collins Stewart note quoted on FTALphaville:
[broken link removed]


> This moves headline Tier 1 ratios up to 9.6%-10.6% for the Irish which compares unfavourably with the 12% average of the UK domestic banks. Further, equity Tier 1 (the most important measure, in our view) is unaffected as this is a non-equity injection. Irish banks therefore continue to show an average equity Tier 1 ratio of 5.5% which is materially weaker than the 8.6% average of the UK domestic banks and the level to which most European banks are being recapitalised (mostly more than 7%).



The 8% compares favourably for the banks, not for the taxpayer. Having said that, I understand the need to keep the banks operating and short of pumping massive amounts into them, not charging them too much is one way of freeing capital for lending.


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## Duke of Marmalade (22 Dec 2008)

_Yog_, I am getting 'orribly confused. From the same blog:





> Sadly, this is wrong form of capital
> Much as the government and banks consistently describe this as core Tier 1 (which it is), it is not equity Tier 1 which is an important difference in the capital structure of the banks. Firstly, it does not share the equity dividend nor confer control (ex-ANGL) therefore meaning Irish taxpayers lose out on potential upside as the Irish economy reflates at some point in the future. This differs from the UK bailout. Secondly, equity would likely be better received by ratings agencies and the funding markets.


This seems very contradictory. OTOH it is argued as a bad deal for the Irish taxpayer and OTOH the markets (i.e. representing the ordinary equity) don't like it either. I can only think that this capital structure is much more volatile from the ordinary equity point of view, which would be a negative, but it is much less dilutive if there is a recovery. 

And I don't understand the point about the funding markets at all, surely their only concern is that they have sufficient buffer and should be indifferent as to the make up of that buffer.


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## z109 (22 Dec 2008)

Duke of Marmalade said:


> _Yog_, I am getting 'orribly confused. From the same blog:This seems very contradictory. OTOH it is argued as a bad deal for the Irish taxpayer and OTOH the markets (i.e. representing the ordinary equity) don't like it either. I can only think that this capital structure is much more volatile from the ordinary equity point of view, which would be a negative, but it is much less dilutive if there is a recovery.
> 
> And I don't understand the point about the funding markets at all, surely their only concern is that they have sufficient buffer and should be indifferent as to the make up of that buffer.


Yeah, I can't say I understand it either! Perhaps johnboy or Sunny can shed some light?

One thing that I think has been discounted that shouldn't be is the relative stability of the government as a preference share-holder. They can play the long game so it is much more stable, even if in a volatile instrument, than, say, private equity in the same instrument. No?


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## ecstatic (22 Dec 2008)

8% is a good return. 

Id take it myself if i had a few billion going!

How much did the NPRF return this year>?

Im guessing a lot less than 8%.


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## ecstatic (22 Dec 2008)

There is no risk involved Brendan not for the AIB deal. 

Im unsure about BOI.

Just look at the assets.


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## Brendan Burgess (22 Dec 2008)

Ecstatic

I am an AIB shareholder and I think that the risk is low. 

But believe me, there is risk.

"Just look at the assets". 

It is very difficult to assess the assets of any bank which is heavily lent to property. I am sure that they are in surplus, but there is a tough market out there and it's getting tougher.

Brendan


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