ALLIED IRISH Banks and Bank of Ireland have agreed terms with Minister for Finance Brian Lenihan to proceed with a €7 billion State recapitalisation of the two institutions.
The deal, different in many respects to the recapitalisation plan agreed by the Government late last year, is designed to incentivise existing shareholders to invest new capital in the banks.
The banks have not been able to raise the capital required by the original plan following the collapse of their shares in the wake of the decision to nationalise Anglo Irish Bank three weeks ago.
AIB, whose board has met on several occasions in the past fortnight, signed up to the package yesterday morning. Bank of Ireland was the first to sign up.
Mr Lenihan’s spokesman declined last evening to comment on the parameters of the deal. “The final recapitalisation proposal will have to be considered by the Government,” he said.
It is not yet known whether the Government will push for management and board changes as a condition of the public recapitalisation of both banks. However, according to political sources, the Government is keen to see management changes. Taoiseach Brian Cowen did not, however, push for management changes in December when the first recapitalisation plan was agreed.
In parallel to the recapitalisation initiative, the Government is awaiting an expert report on executive remuneration in all of the banks and building societies covered by the State guarantee.
Mr Cowen has already indicated that he expects top-ranking executives and directors in banks recapitalised by the State to take pay cuts of at least 25 per cent.
Although formal publication of the plan was expected on several occasions in the past week, final technical details were not agreed until yesterday. Shares in both banks have lost more than 90 per cent of their value amid investor concern about the collapse in the property market, recession in Ireland and abroad, and the credit crunch.
Under the new plan, which has yet to be signed off by the Cabinet, the Government will receive legal warrants entitling it to buy a 25 per cent equity or ordinary share interest in AIB and Bank of Ireland in five years’ time at their current low prices.
The banks will provide these warrants in return for an upfront State investment of €3.5 billion in preference share capital in each institution, shares which will carry an annual interest coupon of 8 per cent but no equity stake.
The Government hopes this will encourage existing investors in AIB and Bank of Ireland to participate in rights issues, as the ordinary share subscription rights carried by its warrants will fall to a minimum of about 15 per cent if the banks can raise new private capital and start to repay some of the Government’s preference shares.
This would reduce the impact on current shareholders of the Government investment in ordinary shares when its warrants are put into effect.
On the assumption that the share prices of the banks rise in the period prior to that date, the warrants are designed to provide a return to the Government.
The interest or coupon on the preference shares means each bank will make an annual payment of €280 million to the Government.
The deal includes a provision that would enable the Government to trigger the share subscription rights set out in its warrants in the event of a bid for either bank.
This would give it an equity stake of up to 25 per cent, potentially blocking any hostile bid and giving it negotiating power.