ON THE face of it, the investment by the group of North American fund managers and private equity firms in Bank of Ireland is not a good deal for the State.
The Government has injected €2 billion in two rights issues a year apart (€1.7 billion last year and €300 million this week) and has emerged with 15.1 per cent.
The private investors are pumping in €1.123 billion for a 34.9 per cent. In other words, the investors are buying more than half the Government’s equity stake for almost half the price.
Based on the prices the Government paid, this isn’t bad for a group of investors taking a punt on a heavily capitalised bank that will be Ireland’s largest bank, the main “pillar” of Irish banking.
Looking at it another way, following the rights issue last year the Government owned 36 per cent of a bank with capital reserves of about €5 billion.
This time around it owns 15.1 per cent of a bank with a capital base of €10.3 billion so it has arguably a smaller shareholding in a much stronger bank.
The Government will make other gains from a recovery by the bank. The deal will increase the value of the State’s €1.8 billion preference shares in the bank.
This arose from the €3.5 billion injection in 2009. (The remaining €1.7 billion was converted to equity in last year’s rights issue.)
The Government is paid a 10.25 per cent coupon on this stake.
On top of this, it will receive a 10 per cent coupon on a €1 billion loan in contingent capital being injected so the bank can meet the Central Bank’s €5.2 billion capital target.
The bank also pays about €400 million a year to the Government in fees for using the guarantee.
Totting up the bank’s capital raising efforts since 2009, it has raised €12.8 billion, of which 67 per cent was raised privately and some 33 per cent from the State. In terms of cash equity, 85 per cent of €10 billion raised came from private investors and some 15 per cent from the State, reflecting its current stake.
The sale price to investors has been described as a firesale valuation but for a Government running on empty and fuelled only by bailout loans, the strong signals sent out by the investment are hard to value.
