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Ireland Reduces BoI Holding

by Jason Gorringe, Tax-News.com, London

27 July 2011


As part of its "radical" restructuring of the banking system the Irish government has secured the purchase by private investors of over EUR1bn state shares in the Bank of Ireland (BoI).

Finance Minister Michael Noonan made the announcement on July 25, stating that negotiations on the purchase deal had been successfully concluded with a group of unnamed investors. These investors have committed to buy up to EUR1.12bn (USD1.62bn) of the government's shares in BoI, and will initially purchase on an unconditional basis EUR241m of the state’s shareholding. The investors are further committed to purchase the remainder of up to EUR882m after appropriate regulatory approvals have been obtained.

The transaction will mean that the Irish state will now make a significantly lower capital contribution to BoI than the EUR5.2bn that was required following the March stress tests. According to the Department of Finance, this has been successfully reduced through ongoing and future burden sharing with subordinated bondholders estimated at EUR2.4bn. This latest deal will cut the capital requirement by a further EUR1.1bn, and reduce the burden on Irish taxpayers accordingly.

The Department has also clarified that, at an overall banking system level, by reducing the state’s funding of the Prudential Capital Assessment Review (PCAR) EUR24bn capital requirement to below EUR18bn, it will be able to finance the PCAR requirement without recourse to external borrowing from the EU/IMF Funding Programme. The Department has argued that this will provide an additional saving on bailout interest costs, which will supplement the 2% rate cut announced in Europe last week.

Furthermore, the Department has stated that, having insisted on retaining a minimum shareholding in the order of 15%, the state has guaranteed a sharing of upside potential for the taxpayers who have supported BoI. In addition, the state will generate a return from the EUR1.8bn of preference shares and the EUR1bn of contingent capital held by the state in BoI of 10.25% and 10% respectively. If, after the rights issue is completed, 25% of the total shareholding is not available to the private investors, a top up will be made available from an offering of up to 5% of total bank capital, which will be arranged by the bank. According to the Department, the level of take up of the rights issue will significantly change the percentage of shares held by each investor.

Noonan said of the agreement: “On March 31, I told the Irish people that our proposed radical restructuring of the banking system is designed to put the banking system on a firm footing for the future and break the bonds with our toxic banking past. I said that this was essential for our economy. It was essential for our country. I reiterated 'from here, therefore, we move forward with purpose.' [The] announcement represents the accomplishment of another major step in our plan."

He added: "The commitment by a number of significant private sector investors to invest side by side with the State’s retained holding without any form of additional risk-sharing by the State reaffirms the credibility of our stress tests and the health of our banks after the PCAR exercise. It further underlines how we are successfully breaking the link between bank risk and the Sovereign. After taking into consideration shares already held by private investors, this transaction will result in a minimum private sector ownership of 68% in Bank of Ireland. This investment is tangible proof of growing international confidence in the future prospects of both Bank of Ireland and the Irish economy.”

Noonan concluded by arguing that the "announcement is truly another very positive development for the Irish economy. It follows on from the successful conclusion of the Heads of Government summit which saw an agreement to significantly reduce the interest rate on the funds Ireland receives from the EU. The reduction of the interest rate and the restructuring of the banking system were two core objectives of the government since coming into office. I also wish to assure the Irish people that the government will continue to work just as hard to improve the Irish economy and create jobs.”

TAGS: tax | investment | economics | business | Ireland | interest | fiscal policy | banking | International Monetary Fund (IMF) | regulation | European Union (EU) | Europe

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