Ruling poses dilemma for bank and State

ANALYSIS:THE DECISION of the European Commission to tell Allied Irish Banks (AIB) to stop paying coupons on some of its bonds is hardly surprising. This is the practice followed by Brussels on most bank restructuring plans, writes SIMON CARSWELL

It would appear the commission is applying a one-size-fits-all approach to banks in receipt of government aid when it comes to the EU’s initial reaction to restructuring plans. That’s not to say that the commission won’t change conditions as they affect individual banks.

Yesterday’s ruling poses a trickier dilemma for the bank and the Government. An unintended consequence of the move means the bank would be blocked from paying the 8 per cent coupon to the Government on the State’s €3.5 billion injection into AIB.

This amounts to €280 million and is due to be paid next May.

AIB has agreed to the commission’s request, triggering a “dividend stopper”, starting with a payment due on December 14th. This affects the Government’s recapitalisation deal and could lead to a larger State stake in the bank. If the bank fails to pay the €280 million coupon as agreed, it will have to hand over the equivalent amount in ordinary shares in AIB based on a 30-day average price.

This, on top of the 25 per cent warrants agreed in the recapitalisation deal, could give the State a fair chunk of AIB ordinary shares.

AIB-owned Goodbody Stockbrokers said that, based on Monday’s closing share price, this could give the State 17 per cent of the bank. With the 25 per cent holding in warrants, this would bring the State’s interest to 42 per cent.

The ink is barely dry on AIB’s restructuring plan, which was submitted to the EU on November 13th. The commission hasn’t issued a similar coupon block on Bank of Ireland, which submitted its plan six weeks before AIB.

The commission said that the restriction on AIB was “without prejudice to the respective positions of other Irish banks”.

An identical restriction on Bank of Ireland would give the State a 40 per cent stake, on Monday’s final price, including the warrants.

The restriction on AIB coupons, excluding the amount owing to the Government next May, amounts to an annualised saving of €47 million on debt worth €760 million. However, the coupon restriction blocks the payment to the Government and could affect AIB’s ability to raise capital privately given the dilutive effect of the State taking a larger stake.

The commission followed up AIB’s statement with a statement of its own saying it could adjust coupon restrictions if it looked to private capital-raising which would in turn reduce state aid. Given that the objective of the five-year restructuring plan is to show the EU how AIB intends to reduce its dependence on State aid, it makes sense for the commission to show flexibility so AIB can pay its dues under the €3.5 billion State investment and wean itself off State support.