Bank of Ireland and Capitalisation – another bad deal for the public

When the first stage of B0I fundraising happens the state will own 36% inclusive of 16% held by National Pension Reserve Fund and new institutional investors will own 16%,. The state pays €1 billion at €1.80 per share and the institutions pay €500 million at €1.53 per share. BoI sold €300 million of discounted shares to pension funds and investment managers. (I cannot see why such managers would buy this stock because of the likelihood a hugely discounted sale later.

The second stage will see BoI raise €1.9 billion at a huge discount maybe 10 cents per share. It is likely to be at least 60% below current share prices. The right to buy these shares will be proportioned out in relation to current shareholding percentages. Citigroup and Deutsche Bank have underwritten the issue in relation to existing shareholders. The share numbers could increase from 2 billion now up to 21 billion. This may result in a massive dilution of existing shareholders. Old shareholders will take a bath ++++. BoI intends a €300 million debt for equity swap and a €1.8 billion rights issue.

The deal for the state is not good. The stage will cancel some preference shares and turn them into ordinary shares at €1.80 which is 18% higher than the institutional price. In stage two the face value of these ordinary shares will collapse and will involve the state buying more shares for €700 million at a much lower price. Lenihan has agreed to cancel €1.7 billion in preference shares and will forego €100 million of the €280 million due annually in interest payments on the preference shares.

In return for a windfall of €491 million the government has agreed to cancel its rights to ordinary shares at steep discounts in to the future.

David Clerkin in the Sunday Business Post poses the question – if BoI needed €3,4 billion – the same amount as the government’s holding of preference shares – why not convert the preference shares into ordinary shares and take the 70% stake in BoI for the public.

It seems that Fianna Fail avoids state ownership of banks at great cost. What is wrong with the state owning the banks and selling them on the
market as they overcome bad debts and become profitable again?