How is Bank of Ireland repaying its debt?
Yesterday Bank of Ireland announced a set of deals that will allow it to repay a €1.8bn rescue loan, the last remaining part of the state bailout of the bank.
The debt owed is in the form of €1.8bn of so called preference shares. If that debt was not repaid by March, the amount owed would increase by €460m, thanks to a clause in the original deal built in to encourage early repayment.
To finance the repayment it has begun raising cash from investors through two separate transactions.
Step one is a placing of new ordinary shares to the tune of €580m. It is open to existing and new shareholders that want to invest.
Because the bank is raising more than 5pc of its own value the deal is done through a structure called a 'cash box' but the effect is to bring in a portion of the cost of paying off the Government in cash.
The new shares will add up to 9.99pc of BoI stock. A 'cash box' deal is where the new equity is raised through a specially created company, that the bank then buys with shares. It should make no difference to investors, but means the lengthy process needed to get shareholder sign off on a transaction of this scale can be avoided.
The new shares were placed at 26 cents each, a slight discount to yesterday's stock price of just over 27 cents.
The new shares will rank equal to all existing shares in the bank, including full entitlement to dividends and voting rights.
Raising new shares will dilute ownership for older shareholders – including the State – but only slightly, and the overall deal cuts the bank's interest bill.
The second element of the deal is to buy the remaining €1.3bn of the debt that is not being paid off with the new cash. This will be bought back from the Government with the proceeds of what is in effect a new borrowing deal, though the cash is raised through a private placement rather than as a public instrument.
BoI has set up a company called Baggot Securities, which will raise the €1.3bn from investors – thought to include the likes of major BoI shareholders like Wilbur Ross and Prem Watsa.
What they are buying is a very similar investment to the one being sold by the State.
It is structured as preference shares, a type of debt that has no fixed repayment date but unlike ordinary shares entitles holders to regular dividend payments.
The interest rate on the new deal is 10.24pc, an attractive return on what now looks like a safe bank to invest in.