Irish

Saturday 12 July 2014

Government 'bid to raise €1.6bn' from sale of stake in Allied Irish

Deal would recoup some of the cost of AIB bailout for taxpayers

Donal O'Donovan

Published 16/03/2013|04:00

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Finance Minister Michael Noonan has directed four institutions to make plans to slash remuneration costs
Finance Minister Michael Noonan: approached by bankers.

THE Government is likely to try to raise €1.6bn by selling a stake in Allied Irish Banks, according to reports.

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The sale of the AIB stake would help recoup some of the cost to taxpayers of bailing out the banks.

Banking magazine 'International Financing Review' is reporting that investment banks in London are circling the Department of Finance looking for a mandate to sell the AIB investment.

The news comes after Bank of Ireland cut its borrowing costs and raised €500m in a bond sale yesterday, continuing the good run of news from the financial markets for the country.

The €1.6bn stake in AIB currently being lined up to be sold is in the form of so-called 'contingent convertible capital', or CoCos for short.

In January, Finance Minister Michael Noonan signed off on a €1bn sale of a similar investment in Bank of Ireland, after being approached by bankers who said they could sell the stake. 'IFR' magazine also broke the news of that earlier deal.

Investment banks generally wait until they are certain of a sale before looking to secure such sales contracts.

CoCo bonds are a type of risky debt investment. The money is owed by the bank to whoever holds the bond. In the case of AIB that is currently the Government.

Unlike traditional debts that must be repaid no matter what, CoCo bonds are risky because they convert into bank shares if the bank gets into trouble.

It is why Mr Noonan has said he was keen to sell the CoCos as well as preference shares in the bailed-out banks, as long as there was no loss to the State on any deal.

Improving sentiment towards Ireland and the 10pc interest that the investment pays is understood to be the main selling point. There has been a radical drop in the 'yield', or income, that investors are able to secure in the markets in recent months, making the 10pc return on Irish assets ever more attractive.

Even the minister was surprised when the full €1bn Bank of Ireland investment was snapped up, and not a €500m share that was expected to go to investors.

The AIB and Bank of Ireland CoCo bonds were created during the bank crisis as just one of the ways that €64bn of taxpayers' money was pumped into the lenders.

Bank of Ireland itself paid 2.75pc to borrow €500m for five years in its latest bond deal since November when the bank was able to borrow on the markets for the first time since 2010.

Covered bond

The latest deal is another so-called 'covered bond' that is secured on bundled-up Irish home loans. The bank's borrowing costs have come down sharply since November, when investors demanded an interest rate of 3.125pc to borrow over three years, in an otherwise similar deal.

Meanwhile, Davy stockbrokers says Bord Gais and the ESB are a good bet for bond investors who want to take a punt on the Irish recovery story.

The semi-state companies have better credit ratings than the State, and their bonds continue to offer a relatively low-risk opportunity for investors, Davy said. The main Irish utilities are not expected to issue new bonds this year.

Irish Independent

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