Payment due to State loomed like financial dark cloud for bank
In recent weeks, it looked as if there was a certain momentum building around Bank of Ireland, as it positioned itself to minimise the ultimate stake taxpayers would hold in the bank.
The group surprised investors at the start of the month by launching a debt restructuring package and generating €405m of much-needed equity at a time when the bank faces multi-billion euro discounts on NAMA loans.
Then, on Wednesday, BoI caught the markets totally off-guard again by announcing it had moved its year end from March 31 back to December 31.
This was widely seen as setting the group up for a massive three-strand €2.5bn equity raising exercise as early as five weeks' time. It was believed that through a €1bn-plus rights issue, a €500m debt-for-equity swap and partial conversion of the State's €3.5bn preference shares into ordinary shares would enable them to get their house in order.
By moving its year end, the bank avoided the six-week "closed period" from its normal March year-end. Quoted firms cannot issue market-moving news during a "closed period".
But even as a number of investment banks, including Credit Suisse, Deutsche Bank and UBS, were lining up to partially underwrite -- or guarantee -- a rights issue, a dark cloud was gathering on the horizon: an €250m interest payment to the State.
BoI had known since early December that it was facing a massive problem regarding the payment of the 8pc annual coupon -- or interest payment -- owed to the Government for its preference share investment.
Brussels had already demanded that Allied Irish Banks not make coupon payments on certain subordinated bonds until the European Commission had concluded its review of the bank's restructuring plan.
This triggered a so-called "dividend stopper", which would prevent AIB paying a coupon on the Government's preference shares when due on May 13, unless Brussels had agreed the plan before then.
The problem for BoI is that it faced a coupon payment today and it knew that due to a bye-law agreed at an extraordinary general meeting (EGM) last March it was legally obliged to either pay the first €250m due -- either in cash or ordinary shares. The question is why did BoI not seek to amend the offending bylaw at its most recent EGM last month?
After all, John Corrigan, the head of the National Treasury Management Agency (NTMA), which controls the State's bank investments, made it known in recent weeks that the State wanted cash and not shares -- and that he was preparing to wait until after the upcoming Brussels ruling to get it.
But BoI was left with no choice last night but to agree to pay in shares -- giving taxpayers a direct 15.7pc holding in the bank as of Monday. The State also holds warrants -- or the right -- to take a 25pc stake in the bank in four years' time, as per the original recapitalisation agreement last year.
BoI now faces the prospect of going to the markets to sell shares, with the State already holding an effective 40pc stake. Of course, there is a fear now that this will put off some prospective investors.
It had been expected that the Government would chose to convert a tranche of its €3.5bn preference shares into ordinary stock at the time of the upcoming fundraising. It will have to limit this conversion if it does not want to end up with a controlling stake in the bank.