BoI deal fashions tale of two very different banks

ANALYSIS:ON SUNDAY the deal was off. The Government had been negotiating with a group of potential private investors in Bank of Ireland for most of the previous 72 hours since the sides reached an exclusivity agreement last Thursday.

The parties had been holed up for most of that time in the offices of Dublin solicitors William Fry on Wilton Place – just across the Grand Canal from Bank of Ireland’s head office in Dublin 4.

The law firm represented the group of investors led by Canadian investment company Fairfax and including the New York private equity fund led by Wilbur Ross, who was part of the consortium that had tried to buy EBS building society earlier this year.

Cardinal Capital Group, which led the consortium that circled EBS, is among the investors but is participating through Ross’s company, WL Ross and Co, and was not directly involved in negotiations.

By Sunday afternoon the banking teams from the Department of Finance and National Treasury Management Agency had called a halt to negotiations, refusing to budge any further.

One investor had wanted more from the deal, seeking to increase the group’s potential shareholding and reduce the State’s interest.

The Government side decided to walk, leaving the investors to stew on a proposal. It was a calculated gamble to conclude a deal. Their view was that the deal was there if the investors wanted it; the Government would go no further.

Two previous groups of investors interested in the bank had come and gone over the previous weeks – the Government side had consistently refused to agree risk-sharing where future losses would be covered by the State, not investors.

Later, on Sunday evening, the investors agreed to come back in.

Talks kicked off again Sunday night and a deal was agreed in principle by 2am yesterday and inked soon afterwards.

Under the deal announced by the department at 6.40am, the group will invest €1.123 billion into Bank of Ireland, reducing the amount the State has to invest in the bank as part of this week’s €1.9 billion capital-raising efforts.

More crucially, the deal means the bank will be the only Irish bank to avoid State control – at least 68 per cent of the bank’s stock will remain in private hands.

The take-up of new shares among existing shareholders in the rights issue will determine how large a stake each party takes.

The share sale ends tomorrow but the final shareholding will become clearer later this week once the rump of the rights (to buy new shares not taken up) are sold. Depending on how many new shares are acquired by shareholders, the State will be left with at least 15 per cent and at most 32 per cent, while the new investors will have at least 14 per cent and at most 37 per cent. Existing shareholders will be left with between 31 per cent and 71 per cent.

One aspect of the deal was agreed in the early hours of yesterday morning – the bank will sell more shares to ensure that the new investors will have at least 14 per cent of the bank and the State at least 15 per cent if there is a massive take-up among shareholders.

That could result in further dilution of shareholders but this is thought to be unlikely given the poor appetite of the shareholders.

Most importantly, the deal means the State will not have to borrow from the EU or IMF to pay the latest recapitalisation bill, which has been reduced from €24 billion to €19 billion by forcing losses on junior bondholders. Yesterday’s deal shaves a further €1.123 billion off that bill and means that the State doesn’t need to go beyond the €17.5 billion in the National Pension Reserve Fund and the State’s cash balances to recapitalise the Irish banks.

There may also be some value in the warm glow the deal sends out into the market that Ireland can still attract outside investors.

The deal, of course, doesn’t solve the bank’s major funding woes as it remains heavily reliant on the Government guarantees.

Also, flogging more than a third of our main “pillar” bank for €1.1 billion – which is pocket change in the scheme of the banks’ capital requirements – may not look attractive to the taxpayer in a few years.

But beggars can’t be choosers.

Over at the other “pillar” bank, AIB, executive chairman David Hodgkinson said it would be 2012 – once its losses are fully accounted for – before there was any hope of private investment coming into a bank on the verge of 99.8 per cent State ownership.

In a weekend, this has become a tale of two very different banks.