Restructuring plan should soften PTSB’s €854.8m blow

On Thursday night, chief executive Jeremy Masding was given the news he had been expecting: Permanent TSB had failed the adverse scenario of the European Central Bank's stress tests and would be required by the regulator to plug an €854.8 million hole in its capital buffer. The Welsh man had a fair idea of the result following a near three-hour meeting in Frankfurt with the ECB and the Central Bank of Ireland just over two weeks ago to discuss PTSB's likely results.

Just a few years ago, at the height of the financial crisis here, such an outcome would have led to much wailing and gnashing of teeth. Only 12 months ago, it seemed inconceivable that anyone other than the State would have been prepared to plug this hole.

However, such has been the turnaround in the fortunes of PTSB, and the Irish economy and property market since the December 2013 year end used by the ECB for its stress tests, that Masding believes the gap that needs to be bridged is actually just €125 million. It should be possible to raise this, and then some more, from a mix of global institutional investors and private equity groups over the course of the next three to six months. So taxpayers can breathe easily, to some extent at least.

The likelihood is that the new investors will get a stake of between 30 per cent and 40 per cent, thereby diluting the State’s shareholding and making it more challenging to get back the full €2.7 billion in bailout money. Why only €125 million when Frankfurt has identified a shortfall of €854.8 million?

There are a number of reasons for this. PTSB has €400 million in contingent convertible capital notes, or CoCos as they are better known, that form part of its €2.7 billion State bailout. These can be used to offset the shortfall. Masding is loathe to convert them as it would dilute the bank’s return on equity but he can recognise them in the capital plan as an accounting treatment.

In addition, PTSB has sold some assets, most recently its Springboard sub-prime mortgage book in Ireland, that flatter the numbers. There are also provision releases that it can take – it has €4.2 billion of them on its books – and other technical items that emerged in the stress test exercise that it can use to its benefit. Add these up and subtract them from €854.8 million and it leaves you with a number close to €125 million.

You might well ask why these weren't included in the stress tests in the first place. There were certainly some odd things about the tests. PTSB has yet to receive approval from the European Commission for its restructuring plan, unlike AIB and Bank of Ireland.

So it was measured on the basis of a static rather than a dynamic balance sheet. This meant the assumptions worked into its numbers had to reflect the 2013 state of play and could not take account of factors that have applied this year.

PTSB now has two weeks to submit its capital plan to the new Single Supervisory Mechanism, which takes over regulatory oversight for the euro zone on November 4th. The bank has nine months to raise the necessary funds. That work will begin tomorrow morning when its advisers, Deutsche Bank and Davy, begin work on a long list of more than 30 potential investors. It is hoped that a number of serious bids will have been lodged before Christmas, after which detailed negotiations and intensive due diligence would be expected to begin.

Masding hopes to have a deal in place by the end of March 2015. It will then be up to the Minister for Finance Michael Noonan to decide if the terms are acceptable to the State.

A lot can happen in the meantime, but PTSB’s journey back to private ownership appears to be under way.