Ireland's oldest bank, Bank of Ireland, has a month to live -- unless it can come up with the €1.5bn it desperately needs to keep its head above water.
This capital target, which arose from rules set by the Financial Regulator last November, must be hit by the end of February. Otherwise Bank of Ireland will become the fifth Irish bank to be taken over by the State.
Although it has long been considered the more conservative of the Irish banks, Bank of Ireland also engaged in profligate lending which left it, like its rivals, staring into a massive black hole of loan losses.
It lent money to the troubled developer Bernard McNamara and other investors for the €120m purchase of the Shelbourne Hotel in 2004. The hotel, valued at around €246m in 2007, is now worth €90m at most. The bank is also believed to have lent millions to embattled developer Paddy Kelly for his Baggot Street headquarters, which have since been sold.
Solicitor and property investor Brian O'Donnell and his wife's company owe BoI about €70m. Their firm has total borrowings of €886m.
Like AIB, Anglo Irish Bank, EBS and Irish Nationwide, the Government has poured billions of taxpayers' money into Bank of Ireland in a bid to get the bank back on its feet.
The €3.5bn poured into Bank of Ireland in the state recapitalisation of March 2009 appears to be money down the drain. Last August, the bank reported a loss of €1.25bn for the first six months of 2010 -- about a third of the March 2009 bailout money. The bank has so far only managed to repay €523m to the State.
Many believe it is impossible for Bank of Ireland to hit its capital target of €1.5bn by the end of next month.
"The bank has been given an impossible task," says Gary McCarthy, head of the Dublin office of the investment bank Collins Stewart. "If the bank goes straight out to the market and asks for fresh money from third parties, it's essentially asking people to invest blind. Investors don't know if their equity will be eaten up by further capital requirements or stress tests. The only people who will go in blind are the Government."
Oliver Gilvarry, head of research at Dolmen Securities, believes the majority of the €1.5bn will be raised through a rights issue.
"The ability of the bank to raise cash is very limited," says Gilvarry.
With so much uncertainty about what Bank of Ireland's balance sheet will look like in a few months -- or indeed this time next year, private investors are likely to be few and far between if a rights issue is launched.
The Government, which already owns 36 per cent of Bank of Ireland, is likely to be the only investor around to buy more shares, so a state takeover of the bank seems inevitable under a rights issue.
Ronan Reid, executive chairman of Dolmen Securities, said that although he believes Bank of Ireland is "in the best position of the Irish banks", its chances of raising the €1.5bn it needs to avoid state ownership by the end of February are slim.
"The odds of probability are against the bank," says Reid. "It only has a short time to raise that money and there's still elements of policy uncertainty around Nama Two (a State bank which could be set up to hold healthy bank assets) and the impact of the change of government."
Both the Government and Bank of Ireland have been doing their utmost to avoid a State takeover. In the run-up to Christmas, John Bruton and the National Treasury Management Agency are understood to have visited the Middle East to try entice investors there into the Irish banks. BoI has also reportedly held discussions with a number of Middle Eastern sovereign wealth funds. With a wealthy sheikh yet to raise his head, however, it appears those efforts have fallen on deaf ears.
The only get-out-of-jail card now left for BoI and the Government appears to be a complex debt instrument similar to that used by Warren Buffett when his company, Berkshire Hathaway, rescued Goldman Sachs a couple of years ago.
"Bank of Ireland needs to find an instrument that allows the Government to invest in the bank without becoming a majority shareholder," says McCarthy. "A hybrid debt instrument which can be converted into equity is probably the best way of doing that. It will be very difficult for the bank to try to raise that €1.5bn by traditional means."
Last Tuesday marked the last day of AIB's trading on the Irish Stock Exchange. AIB, which was fully nationalised just before Christmas, is now trading on the smaller Enterprise Securities Market (ESM), which is designed for companies worth more than €5m.
Bank of Ireland chief executive Richie Boucher no doubt watched AIB's demise into State control and quick exit from the Irish Stock Exchange with trepidation.
Boucher, who will be two years in the top job by the end of February, was left red-faced earlier this month when it emerged that he had given a Dail committee incorrect information about staff bonuses.
Unless he can come up with some Buffett-like wizardry, it looks like he will be red-faced again in 29 days' time as he watches his bank follow in the footsteps of AIB.
Sunday Indo Business