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State poised to take stakes in two big banks
27 December 2009 By Cliff Taylor
The government is preparing to take a significant stake in both AIB and Bank of Ireland, by converting some of its preference shares in the banks into ordinary shares.
The move is expected in the new year, as part of a programme to recapitalise the two main banks. The government injected €3.5 billion into each of the banks last year, and will now use these funds to take the significant shareholdings.
The banks are preparing to start transferring their major property loans to the National Asset Management Agency (Nama),which will involve taking significant losses due to the write-down on the value of the bad loans. These losses will deplete the capital held by the banks and leave them needing new funds from investors.
However, the amount of money they need will only become clear when the Nama process gets under way early in 2010.
With limited options to raise private capital, both banks are likely to rely on the state for much of the cash they need.
This will involve the government transferring some of the cash it holds in preference shares into ordinary shares, giving it a direct shareholding.
Given the extent of the Nama write-downs, the state may end up with a majority stake in the banks, particularly in AIB, which market analysts believe faces a bigger write down than Bank of Ireland.
Based on the current AIB share price, the conversion of more than €1.1 billion-worth of preference shares would lead to a state shareholding in AIB of over 50 per cent.
The banks will also seek to raise cash by selling assets - AIB has the option of selling holdings in Poland and the US - and will see whether they can also attract private capital as part of a restructuring programme.
Converting the preference shares gives the state a direct shareholding, as opposed to the current situation where it holds 25 per cent of voting rights and warrants which can be converted into ordinary shares in five years’ time.
While the preference shares are counted as Tier 1 capital by the Financial Regulator, the markets will want to see the banks recapitalised with ordinary share capital. However, the state will be foregoing the 8 per cent dividend it was due on the preference shares.
Holding ordinary shares is also riskier, although it could yield a return to the state, if the banks return to financial health in the years ahead. Separately, the state may also be able to sell on the warrants it purchased with the preference shares.
AIB announced earlier this month that it had been ordered by the European Commission to stop paying interest on some debts, including the state’s preference shares.
Discussions have been going on between the banks, the government and the European Commission about restructuring plans the banks have submitted.
Any recapitalisation plan needs Europe’s approval.
The commission will hope to minimise state involvement in recapitalisation, or at least write in a commitment that the state would sell on any shareholding in a few years.
Details on the first of the Nama loans - which relate to big developers - are being transferred now to Nama. The loans will start to be transferred soon, probably by February.
Some market analysts believe the average write-down for AIB will be in excess of the 30 per cent average indicated by the government, increasing its need for new capital.
Analysts say the banks face further write-downs on mortgage and business loans, not covered by Nama. Economist Morgan Kelly warned in a research paper last week that these were likely to ‘‘overwhelm’’ the banks. Market sources say much will depend on the pace at which mortgage losses, in particular, crystallise over the next few years.
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