Bank of Ireland launches hard sell
THE problems surrounding the payment by Bank of Ireland of the €280m coupon (interest) it owes the Government on the State's €3.5bn preference shares show just how difficult it will be for Ireland's oldest financial institution to raise €2.5bn in a rights issue. Last week, BoI announced that it was changing its year end from March to December -- never a good sign. More importantly, the first details began to emerge about its planned €2.5bn fund-raising. While there has yet been no official announcement of the fund-raising, it seems that BoI is planning a mixture of raising fresh private-sector capital and converting some of the government's preference shares and some of its existing bonds into ordinary shares. With BoI now expecting to write off at least €6.9bn in the three years to the end of March 2011, its need for fresh capital is obvious.
But where will it get that capital? With the State having already pumped in €3.5bn, it will be extremely reluctant to further increase exposure to our embattled banks. In practice it may have little choice. Most of the new capital going into BoI will come either directly or indirectly from the State through some combination of converting the preference shares and the coupon owed on them into ordinary shares with most of the private capital coming from the conversion of BoI bonds into equity.
Regardless of what form the fund raising will take, one thing is certain: existing BoI shareholders are going to see their stakes massively diluted.