Directed Bank Investments
Initial Directed Investments
On 30 March 2009 the Minister for Finance directed the NPRF Commission to invest €3.5 billion in preference shares issued by Bank of Ireland and on 12 May 2009 directed the Commission to invest €3.5 billion in preference shares issued by Allied Irish Banks, p.l.c. (AIB). The Minister gave these directions having consulted the Governor of the Central Bank and the Regulatory Authority and having decided that the investments were required in the public interest to prevent potential serious damage to the financial system in the State and to ensure the continued stability of that system. The National Pensions Reserve and Miscellaneous Provisions Act 2009 provides the Minister for Finance with the power to direct the Commission to invest in listed credit institutions.
These investments were in perpetual preference shares with an annual non-cumulative fixed dividend of 8% payable in cash or, in the case of non-payment by either bank of the cash dividend, ordinary shares in lieu of such dividend. The preference shares could be repurchased at par up to the fifth anniversary of the issue and at 125% of face value thereafter. Warrants issued with, but detachable from, the preference shares gave an option to purchase up to 25% of the enlarged ordinary share capital of each bank (following exercise of the warrants). The warrants were exercisable at any time from the fifth to tenth anniversary of issue of the preference shares or immediately prior to any takeover or merger of the bank concerned, whichever is earlier. These warrants have subsequently been cancelled in each of the banks and the State has received warrant cancellation fees in respect of such cancellations.
The transactions were funded by €4 billion from the Fundís existing resources and by €3 billion from a frontloading of the Exchequer contributions to the Fund for 2009 and 2010. Directed investments form part of the National Pensions Reserve Fund and any income or capital gains on these assets will accrue to the Fund.
In kind dividends
In February and May 2010 the Fund received ordinary shares in Bank of Ireland and AIB respectively in lieu of cash as payment of the first dividend on its preference share investments. The payment was made in the form of ordinary shares as the European Commission has requested that discretionary coupon payments on Tier 1 and Upper Tier 2 capital instruments in Bank of Ireland and AIB not be paid while it considers each bankís restructuring plan. The number of shares issued in each case represented the amount of the annual preference share dividend divided by the average share price in the 30 trading days prior to the date of issue.
Bank of Ireland Transaction
On 25 April 2010, again having consulted the Governor of the Central Bank and the Regulatory Authority and having decided that it is required in the public interest to prevent potential serious damage to the financial system in the State and to ensure the continued stability of that system, the Minister for Finance issued directions to the Commission to convert part of its €3.5 billion holding of preference stock in Bank of Ireland into ordinary stock as part of the capital raising exercise announced by the bank on 26 April.
The details of the transaction included subscription for Bank of Ireland ordinary stock, full participation in the bankís rights issue, cancellation of the warrants issued in conjunction with the preference stock in return for cash income of €491million and an increase in the dividend rate on the remaining preference stock from 8% to 10.25%. The transaction involved no new investment by the Fund in Bank of Ireland and was funded entirely via conversion of preference stock.
Following the Transaction the Fundís directed investment in Bank of Ireland consisted of:
- 1,900 million units of ordinary stock valued at their current market price (36% of the bankís ordinary stock in issue); and
- 1,837 million units of preference stock held at their issue price of €1.00 paying an annual dividend of 10.25%.
Allied Irish Banks Transaction
Following an application by the Minister for Finance on 23 December 2010, the High Court issued a Direction Order to AIB directing AIB to issue ordinary shares and convertible non-voting ("CNV") shares to the NPRFC in relation to the provision to AIB of €3.7bn of capital by the NPRFC. The CNV shares ranked equally in all respects with the Ordinary Shares other than in respect of voting. The Minister, having consulted with the Governor of the Central Bank, deemed this Direction Order necessary to ensure that AIB met its year-end regulatory capital requirements as determined by the Central Bank.
In accordance with the Direction Order, AIB issued to the NPRFC 675,107,845 Ordinary Shares of €0.32 each and 10,489,899,564 CNV shares of €0.32 in exchange for the net payment of €3.7 billion in cash. Additionally, the NPRFC received a fee of €52.5 million for the cancellation of warrants issued pursuant to the 2009 recapitalisation referred above.
The CNV Shares which were originally issued to facilitate the then ongoing disposal of AIBís Polish interests, were converted to Ordinary Shares on 8 April 2011. The CNV shares were converted into Ordinary Shares on a one-for-one basis. This conversion occurred in accordance with AIBís articles of association following AIBís disposal of its stake in Bank Zachodni WBK and BZ/WBK AIB Asset Management.
As a result of these actions the NPRF held 92.8% of the ordinary share capital of AIB.
Following the Transaction the Fundís directed investment in AIB consisted:
- 3,500 million units of preference shares held at their issue price of €1.00 paying an annual dividend of 8%.
- 11.4 million ordinary shares valued at their current market price (92.8% of the bankís ordinary stock in issue)
Valuation of preference shares
The Commission has valued the preference share investments at fair market value as at 31 December 2010. As these investments are unlisted and not traded, the Commission engaged an independent Valuation Advisor, Davy Corporate Finance, to provide a fair market valuation.
This fair market valuation proposed a write down of the preference shares in Bank of Ireland of 20.6% and in AIB of 41.5%. The Commission, having considered this advice, has written down the preference shares to reflect the discount proposed by the Valuation Advisor.
Therefore the preference shares were valued at 31 December 2010 as a percentage of cost as follows:
Bank of Ireland 79.4%
Developments in 2011 - updated to 30 June 2011
The EU Commission’s prohibition on the payment of discretionary dividend and coupon payments on Bank of Ireland’s capital instruments expired on 31 January 2011. On 21 February 2011, the Bank of Ireland paid a dividend in cash of €214.4 million with respect to the 2009 Preference Stock held by the Fund.
In May 2011, AIB, as a result of a Dividend Stopper in one of its capital instruments, AIB was precluded from paying the annual cash dividend due on the 2009 Preference Share and was therefore obliged to issue ordinary shares to the NPRF equal in value to the amount of the dividend. AIB has to date issued shares in part satisfaction of the dividend due. The remainder of the dividend due is expected to be satisfied by further issue of shares to NPRF when AIB increases its authorized share capital at its next general meeting.
The capital requirement identified for Bank of Ireland by the Central Bank and Financial Regulator in the Prudential Capital Assessment Review (“PCAR”) exercise, the results of which were announced on 31 March 2011, was €5.2 billion. This requirement is made up of core equity of €4.2 billion and contingent capital instrument of €1.0 billion. The core equity requirement will be met through burden sharing with holders of subordinated debt, an optional placing to the Fund (being up to 15% of the issued share capital of Bank of Ireland on 20 June 2011 at €0.10 per share), a rights issue and any private capital, with any residual balance to be provided by the Fund. A direction was received from the Minister for Finance on 17 June 2011 in this regard. Depending on the amount of capital raised in the rights issue from private investors, and following the sale of part of the Fundís holding to a group of investors as announced on 25 July 2011, the Fundís ordinary share ownership of BoI will be between 15% and 32%.
The capital requirement identified for AIB (including EBS) in the PCAR was €14.8 billion, of which €1.6 billion may be in the form of contingent capital. As part of AIB’s recapitalization measures to be completed prior to 31 July 2011, it is expected that a further significant investment into AIB will be made by the Fund. Directions have been received from the Minister for Finance in this regard. After the placing the Fundís ordinary share ownership of AIB will increase from approximately 93.1% to approximately 99.8%.