Lenihan preparing to go to High Court over AIB bailout

Thu, Dec 23, 2010, 00:00

THE GOVERNMENT was last night taking the first steps to effectively nationalise Allied Irish Banks and take a fourth institution into State control as it made legal preparations for a further bailout of the troubled bank.

Legal papers were being prepared yesterday evening in advance of Minister for Finance Brian Lenihan making a High Court application today to pump a further €3.7 billion of State cash into the bank from the National Pension Reserve Fund.

The Minister will use the Government’s new sweeping bank rescue legislation for the first time since it was enacted earlier this week for this second State bailout of AIB.

The bank requires further Government cash to protect against higher losses on property loans and to meet the end-of-year deadline set by the Financial Regulator to bolster its capital.

A court application, which can be held in private, is expected to be made under the new Credit Institutions (Stabilisation) Act, seeking a court order. This will pave the way for the latest bailout, with another capital injection to be made before the end of February.

The Government may seek to “de-list” AIB from the Irish Stock Exchange as a condition of the bailout in the court application.

Spokespersons for the Department of Finance and AIB had no comment to make last night.

The Government is applying to the court to avoid seeking shareholder approval, which it is allowed to do under the new legislation.

The move will bring AIB into State control, effectively nationalising the bank with the Government taking almost full ownership. This will put the bank alongside Anglo Irish Bank, Irish Nationwide Building Society and EBS building society in State hands.

Mr Lenihan may choose not to wipe out existing AIB shareholders fully, as he could seek to move the existing shares to some form of secondary or so-called “grey market” where they can still be traded.

The Government had planned to retain a small shareholding on the market, known as a “free float”, but stock exchange rules, which force a single shareholder in control of 75 per cent of a company to take outright ownership, ruled this out.

The European Commission approved a further injection of €3.7 billion for AIB on Tuesday, setting up the latest bailout.

AIB, which is 19 per cent State-owned, requires further cash to meet the end-of-year target of capital ratio of 8 per cent where the bank must set aside €8 for every €100 out on loan to cover losses.

The commission has also approved a further €6.1 billion injection into AIB so the bank can meet a higher 12 per cent capital ratio by the end of February.

This is part of the plan to “over-capitalise” the banks to international levels under the plan agreed with the EU and the International Monetary Fund. The commission temporarily approved the emergency aid to AIB on the condition that a revised restructuring plan was submitted.

Final approval will depend on showing how AIB can return to long-term viability, “adequate burden-sharing by shareholders and subordinated debt holders” and “proper measures” to limit the distortion of competition.

Under the new bank legislation the Minister has wide-ranging powers to fire directors and force losses on subordinated bondholders to reduce the cost of AIB. The latest recapitalisation will be the bank’s second State bailout as it received an injection of €3.5 billion last year.

Spiralling losses have raised AIB’s capital hurdle, first to €7.4 billion in March, to €10.4 billion in September and to €15.7 billion last month. This left the bank with no alternative but to seek further cash from the State, making effective nationalisation inevitable.

AIB has raised about €4 billion from the sale of its bank in Poland and a stake in US regional bank MT, but it had little chance of raising the remaining €9.8 billion required from shareholders with a market value of just €432 million.