High time to move on Anglo Irish
Sunday December 14 2008
THE Government is poised to nationalise Anglo Irish Banks this weekend following intense talks on Friday with the troubled financial institution.
Banking sources say that Anglo has finally realised that it needs a huge injection of cash to survive and has asked the Government to underwrite a massive rights issue. Analysts insist that the Government is far more likely to buy the bank and manage its portfolio, now valued at under €300m.
With the Anglo Irish share price now down to under 40¢ and the entire Irish banking system worth just €3.3bn, recapitalisation of the six Irish-owned banks cannot be postponed for much longer.
Despite the mountain of bad debts on their books, a combination of the National Pensions Reserve Fund and the main investment institutions could easily fund a recapitalisation without recourse to the private equity houses.
By Friday the total value of the four quoted Irish banks, AIB, Bank of Ireland, Anglo Irish and Irish Life & Permanent, was down to just €3.3bn. This compares with their combined value of €57bn in February 2007. The 94 per cent collapse in the value of Irish bank shares reflects the market's view that the Irish banks face massive losses on their property-based lending.
While all of the Irish banks desperately need an injection of fresh capital, it is the situation at Anglo Irish which gave the most cause for concern. At Friday's 38¢ share price, the bank has a market value of just €286m. This compares with gross assets of €101bn and a loan book of €72bn. At the current share price, investors have basically written off Anglo's existing €4.1bn equity.
So what future, if any, do the Irish-owned banks have? Would it be better if the Government allowed the banks to go under rather than throwing good money after bad?
If the banks go belly-up they will take most of the economy with them. Some sort of recapitalisation will be required. The only question is what form it will take. Unless it wants to hand control of most of the Irish banking system to the private equity houses, then the Government will have to play a major part in recapitalising the banks. It can do this by raiding the €19bn National Pensions Reserve Fund.
The simplest way of recapitalising the banks would be for the Government to underwrite a massive rights issue in the Irish banks. However, such a course of action is risky.
For a start, two of the Irish-owned financial institutions, the Irish Nationwide and EBS are member-owned building societies and not quoted on the Stock Exchange.
Secondly, it is extremely unlikely investors would have any appetite for new Anglo Irish or IL&P shares.
Any recapitalisation would have to be accompanied by a massive consolidation of the Irish-owned banks. Only two Irish-owned banking groups, one based around AIB and the other around Bank of Ireland, are likely to survive the cull.
Recapitalising and consolidating the banks only goes so far towards solving the problem.
Any fresh capital going into Irish banks should be of two kinds. Government should subscribe for a large slug of preference shares. These shares should pay a hefty coupon. There should also be a rights issue of new ordinary shares.
This twin-track recapitalisation limits the Government's downside, as the preference shares would rank ahead of the ordinary shares if any of the banks went bust, and would eventually be repaid.
A further benefit is that existing institutional bank shareholders would, in the medium term, end up with a much larger stake in the banks once the preference shares were repaid.
- DAN WHITE
