Strategic investor for AIB would be best for Ireland Inc
Like a wild animal caught in a trap, Allied Irish Banks decided this week that it would be better to chew off some of its legs than end up in the captivity of the Government.
Even being given the chance to do this is a major triumph for AIB managing director Colm Doherty, who was staring down a barrel at majority state ownership as he went into crisis talks with the Department of Finance and financial watchdog last weekend.
Eighteen months after the introduction of the banking guarantee, Finance Minister Brian Lenihan had been getting tired of waiting for the banks to sort out their capital issues.
His so-called 'Super Tuesday' Dail address during the week was to give clarity, at last, to what stakes he would end up taking in both AIB and Bank of Ireland.
The problem was that Doherty, just four months into the top job, had only really gotten to a stage where the market was comfortable that he was a man with a plan. He wasted little time after the group's dismal annual results early last month, raising €445m through a restructuring of some of the group's riskier bonds.
He also made it clear that foreign asset sales would be sold off in the second instance -- leaving investors in little doubt that its US investment in M&T and UK business bank would be put on the block. Investors would only be tapped after all other 'self-help' options were explored.
And Doherty was at pains to point out that going back to the State would be a last resort.
But heading into last weekend's crucial talks, it appeared the game was up. The new head of financial regulation, Matthew Elderfield, had made it clear he was looking for all the country's lenders to raise enough capital so that their equity ratios would not fall below 7pc at the bottom of the cycle.
Separately, the department wanted to hammer out last weekend what AIB could realistically raise from asset and share sales, before agreeing -- ahead of the critical Tuesday statement -- the shareholding the State expected to end up with in the bank.
The talks were already more advanced with BoI.
The Richie Boucher-led group is known to have long envisaged the conversion of a tranche of taxpayers' existing €3.5bn investment into ordinary shares as he plotted a three-pronged capital raising.
Boucher, who this week unveiled a pre-tax loss of €2.9bn for the nine months to December, driven by €4bn of bad loan losses, is expected to hit the markets with a €1.5bn-plus rights issue as soon as Brussels delivers its say on the bank's restructuring plan. This is said to be at an advanced stage and is expected within weeks.
The final element of BoI's capital plan would see it seek to raise about €500m by offering to convert some of its subordinated bonds into shares. All told, BoI has been told by Elderfield to find €2.66bn, which, unusually among all the NAMA participants, is in line with what the market had been expecting.
Most analysts had figured AIB would need to raise up to €5bn to hit a 7pc equity ratio. But they were taken aback when the Elderfield announced that the group would need to generate €7.3bn to 'bombproof' its balance sheet against mounting bad loan losses. (The haircut faced on the first of its NAMA loans alone had hit a higher-than-expected 43pc.)
Market observers were even more astounded when Elderfield revealed that the two main banks had been given 30 days to come up with a plan -- and until the end of the year to execute it, before going back with the begging bowl to the State. This concession only had AIB in mind. And it was hard won.
"The private sector will have an opportunity to participate in AIB's capital raising," Lenihan told the Dail. "If sufficient private capital is not available, it is probable that the State will have a majority shareholding."
AIB announced immediately after the speech that it had retained Morgan Stanley and AIB Corporate Finance to advise on the sale of M&T and Bank Zachodni WBK, the group's prized Polish unit. The UK business, including its 48-branch First Trust bank in Northern Ireland, was also put on the block.
Though, strangely, there has been no mention of any of the potential 'strategic investors', which Doherty had pointed to at the results briefing in early March.
It is likely that a sale of the profitable and growing Zachodni unit would be enough to kill off any interest among the potential partners that Doherty had said were in the frame.
But could AIB and the Government be missing a beat here? Would it not be best to hold on to the Polish operations -- Brussels permitting, of course -- as a carrot to get a major strategic investor on board AIB?
Aside from providing much-needed capital to the bank, it could also bring a crucial long-term funding line, which is what the bank -- and the broader economy -- really needs. The kicker for the investor would be that AIB would almost certainly be more profitable from the outset as its funding costs came down.
The issue is all the more pressing as governments around Europe come under growing pressure to wean their banks off guarantee schemes by the end of this year.
Analysts in Poland believe that Societe Generale, BNP Paribas, HSBC and Banco Santander could be interested in buying Zachodni.
It would be a much more favourable solution for Ireland Inc to redirect any potential interest through a stakeholding in AIB itself. Of course, neither AIB nor the Government would want a situation where the bank fell under the majority control of a foreign bank.
We've all learned the hard way how liquidity is sucked back within national borders the minute an international financial crisis hits.