AIB looks for permission to reduce share capital by €5bn

Mary Carolan

State-owned Allied Irish Banks is seeking court permission to reduce its share capital by some €5 billion so as to create distributable reserves. The petition, to be heard at the Commercial Court in October, is another step in the continuing reorganisation of the Irish banking sector which could see the bailed-out bank ultimately returned to private ownership, Mr Justice Peter Kelly heard.

Denis McDonald SC, for AIB, said a €94 million deficit in the bank’s defined benefit pension schemes for current and former employees is being addressed.

AIB chief financial officer Mark Bourke said in an affidavit "significant steps" have been taken to mitigate the deficit and AIB did not believe the share capital reduction would prejudice those. The judge was also told the proposed share capital reduction has been approved by the Minister for Finance, Central Bank and the National Pension Reserve Fund Commission, (NPRFC)holder of the State's AIB shareholding.

In its petition, AIB said, following resolutions passed at a June 2014 EGM and approved by the regulators, and the cancellation of new deferred shares, the balance in AIB’s capital redemption reserve was some €3.92 billion and the balance in its share premium account was some €2.82 billion.

AIB wanted to cancel its entire capital redemption reserve and reduce its share premium account by €1.07 billion to create distributable reserves to give greater flexibility in relation to measures the bank may take to simplify and strengthen its capital structure, resolve the long term future of the 2009 preference shares and enable resumption of dividend payments to shareholders over time, when conditions permit and subject to regulatory approval.

AIB believed the proposed reduction will not affect the rights or security availabe to creditors. Any distribution to shareholders would be subject to compliance with legal and regulatory requirements, managing investor and market expectations concerning appropriate levels of capital and associated capital buffers. The bank is subect to ongoing obligations to comply with increasingly stringent regulatory capital requiremnts overseen by the Central Bank and, from November 2015, the European Central Bank, the petition said. In the circumstances, the proposed capital reduction was "just and equitable".

In affidavits, Mr Bourke noted that the bank previously appled in 2012 for confirmation of another capital reduction, mainly to write off accumulated permanent losses. This latest reduction was not targeted at eliminating permanent losses but sought in the context of reorganisation of the domestic banking sector and preparing AIB Group for a return, over time and should the State decide, to private ownership.

While AIB’s total assets and liabilities have both decreased, the relative excess of assets over liabilities has been maintained and somewhat increased, he said. The bank’s 2013 report recorded liabilities (other than in relation to share capital and reserves) at €90,639m, most of which related to borriowings from central banks and banks, and customer accounts. Assets stood at €103,262 in December 2013.

AIB considered the proposed reduction did not necessitate further protection for its creditors who benefit from the Deposit Guarantee Scheme and ELG Scheme. When dealing with applications to confirm share capital reductions, he was advised that principal considerations for the court included that shareholders are treated equally by the capital reduction and the position of creditors has been dealt with. He believed no issue arose in relation to the various considerations.

Some €21.3 billion in AIB loans were transferred to Nama in 2010 and 2011, he noted. The NPRF had subscribed €3.5 billion for preference shares in 2009 and holds 99.8 per cent of the bank’s issued ordinary shares. The 2009 preference shares carried an annual 8 per cent dividend but, to date, some 11.4 billion bonus ordinary shares were issued to the NPRF in lieu of cash dividends on the 2009 preference shares. In February 2011, AIB acquired deposits of €6.9 billion and Nama senior bonds with a nominal value of €12.2 billion from the former Anglo rish Bank, now IBRC.

The Minister for Finance had subscribed for €1.6 billion contingent capital notes issued by AIB in July 2011 and also made €2,283m and €3,771 non-capital contributions for nil consideration.