THE GOVERNMENT has secured a High Court order allowing it to inject a further €3.7 billion into Allied Irish Banks (AIB) without the approval of its shareholders.
The bank – once the country’s largest – will be effectively nationalised, bringing four of the country’s six banks and the majority of the banking system under Government control.
Emergency bank restructuring legislation signed into law by the President on Tuesday was used for the first time by Minister for Finance Brian Lenihan. He will initially take a stake of 49.9 per cent in the bank, rising to 92.8 per cent in January.
Lawyers for the Minister secured the exclusion of two Irish Timesjournalists from the hearing of the court application to inject further cash into AIB. The court was told that the application was a matter of "extreme commercial sensitivity" and related to issues that had not already been aired in the media.
This newspaper and other media outlets had reported yesterday on the Government’s plan to inject another €3.7 billion into AIB, which required further cash to help meet the Central Bank’s higher capital targets.
The nature of the issues underlying the application remain unknown as the Minister sought a private hearing under Section 60 of the Credit Institutions (Stabilisation) Act 2010. This gives him powers to apply to the court through in-camera hearings to make directions to the banks.
When The Irish Timesasked for a short adjournment to yesterday's proceedings in order to consider a challenge to the application to exclude the media, Ms Justice Maureen Clark refused, saying that to do so would negate the powers of the Minister under the Act. She added that she was told these were "matters of commercial urgency".
A heavily edited version of the affidavit grounding the Minister’s application was released later by the courts. Sections explaining why the Minister felt the use of his new powers was necessary were blacked out. However, the affidavit did indicate that there was considerable pressure to make the new investment by the end of the year and that this would not have been possible if the normal procedures of seeking shareholder approval had been followed.
AIB is understood to have been close to breaking rules set by the Financial Regulator outlining how much cash and other assets it must hold in reserve to meet potential losses. As a result it risked breaching the terms of its banking licence.
The Minister said in an interview with RTÉ that AIB would not have survived without the Government’s action yesterday. “We wouldn’t have had Allied Irish Banks on January 1st if this investment wasn’t made,” he said.
AIB’s board said in a statement that it believed that the money was “critical for the continued activities of the company”. AIB said it was considering a voluntary deal seeking to share losses with subordinated bondholders.
Pressure on AIB’s finances intensified earlier this week when it incurred losses of €5.5 billion on the sale of a further €9.3 billion in property development loans to the National Asset Management Agency at a 59 per cent discount to the face value of the loans.
The bank’s shares will now be delisted from the main stock markets in Dublin and London next month and transferred to the junior Dublin stock exchange where it will join small companies such as Donegal Creameries and oil explorer Petroneft Resources.
This means the holdings of AIB shareholders will not be fully wiped out and they could recoup some losses over the coming years.
Shareholders face a further dilution of their holdings as an additional €6.1 billion must be injected by the end of February to raise its capital to higher international levels under the EU-IMF rescue plan.
It is expected that the Government will have to provide this money as the bank has not been able to raise sufficient funds from investors or through asset sales.
A €21 billion market value at its peak in February 2007 made AIB Ireland’s largest company. It was worth just €347 million yesterday.
The bank recorded its biggest share price drop in 22 months, reflecting shareholder fears about the future of their investments.
AIB lost almost 20 per cent of its value, falling to 32 cent a share.