Saturday 24 February 2018

This is very bad news for existing shareholders

George Garvey on the questions posed by the latest twist in the banking crisis

What does the share payout mean for you?

The Government's decision to accept interest payments in ordinary shares instead of cash on its Bank of Ireland preference shares brings the propspect of majority state ownership of Ireland's oldest bank much closer.

  • What's the difference between ordinary and preference shares?

In normal times preference shares are more like bonds than shares. They pay out a fixed coupon or interest rate, 8pc in the case of Bank of Ireland, but, unlike ordinary shares, cannot vote at shareholders' meetings. They are also, like bonds, usually repayable at the end of a fixed term. But these aren't normal times. When, as now, Bank of Ireland can't pay the interest in cash the State can demand to be paid in ordinary shares.

  • Why can't Bank of Ireland pay the interest in cash?

The EU has banned banks receiving state aid, including Bank of Ireland, from paying out cash interest to most holders of so-called subordinated capital. This includes the €3.5bn of preference shares which the State pumped into Bank of Ireland last year. These carry an 8pc interest rate, which would have entitled the State to €280m a year. Now that the EU has banned cash payments the Government is taking ordinary shares instead.

  • What does it mean for existing Bank of Ireland shareholders?

This is very bad news for Bank of Ireland shareholders. The new shares will give the Government a 15.7pc stake in Bank of Ireland. When added to the warrants giving it the right to purchase up to 25pc of the shares, which it received at the time the preference shares were issued last year, it gives the State an effective 40pc stake in Bank of Ireland. This is serious dilution with more to come.

  • How will Bank of Ireland's capital-raising plans be affected?

Last month Bank of Ireland announced plans to raise up to €2.5bn of fresh capital. While Bank of Ireland would dearly love to raise most of this capital from private investors this is almost certainly not going to happen. In practice, most of the new capital is likely to come from converting the Government's preference shares into ordinary shares. This makes it virtually certain that Bank of Ireland will fall into majority state ownership within the next few months.

  • What does it mean for Bank of Ireland customers?

It is unlikely to have much impact in the short term. The Irish banks remain desperately short of capital. Without capital they can't make the new loans which Irish businesses and consumers so badly need. Yesterday's move does nothing to change this situation. With the Government still desperately strapped for cash, increased state ownership of the banks won't free up the funds for lending.

Irish Independent

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