Friday 15 December 2017

BoI targeting €3bn in new capital to buy state warrants

Joe Brennan

Bank of Ireland (BoI) is planning to raise a higher-than-expected €3bn-plus as it seeks to buy out the Government's right to take a quarter stake in the group in four years' time, the Irish Independent has learned.

It marks an increase from the €2.7bn signalled by Finance Minister Brian Lenihan last week in his watershed speech on the future of the banking sector.

As previously reported by the Irish Independent, the largest and most complicated capital-raising deal in Irish corporate history would involve three strands.

These include a €1.5bn-plus rights issue, fully guaranteed by four investment banks; a conversion of up to €1bn of the State's €3.5bn of preference shares in BoI into ordinary shares; and a €500m debt-for-equity swap involving some of the group's riskier bonds.

The group, headed by Richie Boucher, plans to use some of the proceeds to buy back the Government's warrants -- entitling it to acquire 335m shares, or a 25pc stake, in 2014.

Unusually, negotiations with the Department of Finance currently centre on paying market prices for the warrants, rather than also considering how the value of the shares might rise over the next four years.


This would normally be calculated under the so-called Black-Scholes model for pricing derivatives.

According to current market prices, the payment could end up between €450m and €500m.

This is based on the difference between the price at which the State would be entitled to buy the shares, at an average of 37c-apiece, and the current trading price, at about €1.75.

This part of the deal is likely to raise objections from opposition parties, who could argue that BoI could end up taking out the warrants on the cheap.

However, it is countered by the fact that the State would be allowed to convert its preference shares into ordinary stock at a deep discount to current trading prices, according to sources.

And, crucially, market players say BoI would not have been able to attract investment banks to underwrite a rights issue if it had not been able to demonstrate how it can avoid majority state ownership.

"A failed rights issue would lead to the Government having to pump further billions into Bank of Ireland. Whereas, as things stand, Bank of Ireland currently is the only lender in the country that stands a chance of returning some money any time soon," said a senior Dublin-based fund manager.

Observers believe announcements during the week on BoI's plans to deal with the group's €1.6bn pension deficit and raise mortgage rates were carefully timed to show shareholders that the bank is getting its house in order before going cap-in-hand to shareholders.

Meanwhile, BoI is awaiting the all-important outcome of its EU state-aid restructuring plan.

People familiar with the situation have said that Brussels has hardened its stance in recent months, pressing BoI to agree to the sale of the group's UK business bank and broker-sourced mortgage book.

There are also concerns that the European Commission may spring a few surprises on BoI as negotiations enter the final stages over the next weeks.

Market players are concerned, in particular, about the future of the bank's life and pensions operations.

Irish Independent

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