Lenihan Outlines Irish Bank Recapitalization Plan

by Robert Lee, Tax-News.com, London

13 February 2009

Irish Minister for Finance Brian Lenihan on February 11 announced that the government, Allied Irish Bank (AIB) and Bank of Ireland (BOI) had agreed comprehensive terms for banks' recapitalization.

In view of the continuing turmoil in global financial markets, the government felt it necessary on December 21 to initiate further intensive discussions with Allied Irish Bank and Bank of Ireland with a view to securing the position of these two banks. As a result of these discussions, the government has decided on a comprehensive recapitalization package, which will reinforce the stability of the financial system, increase confidence in the banking system, and allow the banks involved to begin lending again.

The main features of the government's investment are as follows:

• The government will provide EUR3.5bn in core tier 1 capital for each bank.
• In return for the overall investment the state will get preference shares with a fixed dividend of 8% payable in cash or ordinary shares in lieu. These preference shares can be repurchased at par up to the fifth anniversary of the issue and at 125% of face value thereafter.
• The state can appoint, in total, 25% of the directors to both banks.
• The state also gets 25% of total ordinary voting rights in respect of change of control and board appointments.
• Warrants attached to the preference shares give an option to purchase up to 25% of the ordinary share capital of each bank existing on the date of issue of the new preference shares. The strike price of the first 15% of the warrants exercised by the state shall be EUR0.975 for AIB and EUR0.52 for BOI. The strike price of the balance of the warrants shall be EUR0.375 for AIB and EUR0.20 for BOI.
• If the bank redeems up to EUR1.5bn of the State investment in new preference shares from privately sourced core tier 1 capital prior to December 31 2009, then the warrants will be reduced pro rata to that redemption to an amount representing not less than 15% of the ordinary shares of the bank.
• The recapitalization programme will be funded from the National Pensions Reserve Fund. EUR4bn will come from the fund’s current resources while EUR3bn will be provided by means of a frontloading of the Exchequer contributions for 2009 and 2010. The necessary amending legislation to the National Pensions Reserve Fund Act will be introduced shortly.

A statement from the Irish government explained that it does not intend to take control of the banks and following this recapitalization, the state will not hold ordinary shares in either bank (other than existing NPRF holdings), but it will have an option to buy shares in five years time at a predetermined strike price, thus providing the Irish government with the potential for a significant return.

“The recapitalization package has been recommended to the Minister by the Governor of the Central Bank, the Financial Regulator, his financial advisors and the National Treasury Management Agency. The Financial Regulator has confirmed that the preference shares qualify as core tier 1 capital. The recapitalization package is subject to regulatory approval and the approval of the ordinary shareholders at general meetings; which will be convened without delay. The proposals announced today have also been designed having regard to the European Commission recapitalization communication and are subject to EU state aid approval,” noted the government’s statement.

“The government is also in discussions with the other covered institutions (Irish Life and Permanent, EBS and INBS) concerning their respective capital positions and about the review of the guarantee scheme. Anglo Irish Bank, now under full public ownership, will continue to trade as a going concern."

Recommended