The Minister for Finance, Michael Noonan T.D., today welcomed the successful conclusion of negotiations by the Government with a group of investors. Subject to appropriate regulatory clearances being obtained, they have committed to buy up to €1.123 billion of the State’s shares in Bank of Ireland, reducing accordingly the State’s obligation to capitalise for this amount as part of the March stress tests.
The investors will initially purchase on an unconditional basis €241 million of the State’s shareholding and are further committing to purchase the remainder of up to €882 million after appropriate regulatory approvals have been obtained.
The Minister stated:
"On March 31st, I told the Irish people that our proposed "radical restructuring of the banking system is designed to put the banking system on a firm footing for the future and break the bonds with our toxic banking past." I said that this was essential for our economy. It was essential for our country. I reiterated "From here, therefore, we move forward with purpose."
Today’s announcement represents the accomplishment of another major step in our plan.
The commitment by a number of significant private sector investors to invest side by side with the State’s retained holding without any form of additional risk sharing by the State reaffirms the credibility of our stress tests and the health of our banks after the PCAR exercise. It further underlines how we are successfully breaking the link between bank risk and the Sovereign.
After taking into consideration shares already held by private investors, this transaction will result in a minimum private sector ownership of 68% in Bank of Ireland.
This investment is tangible proof of growing international confidence in the future prospects of both Bank of Ireland and the Irish economy."
The Minister outlined that, upon receipt of regulatory approval, a number of other advantages accrue to the State:
Having insisted on retaining a minimum shareholding in the order of 15%, the State has guaranteed a sharing of upside potential for the taxpayers who have supported the bank to this juncture. It is also worth remembering that the State will generate a return from the €1.8 billion of preference shares and the €1 billion of contingent capital held by the State in the Bank of Ireland of 10.25% and 10% respectively.
If after the rights issue is completed, 25% of the total shareholding is not available to the private investors, then a top up will be made available from an offering of up to 5% of total bank capital, which will be arranged by the bank.
The level of take up of the rights issue will significantly change the percentage of shares held by each by each investor.
As a result of this transaction, the State will now make a significantly lower capital contribution to Bank of Ireland than the €5.2 billion that was required following the stress tests that were announced in March. This has been successfully reduced through ongoing and future burden sharing with subordinated bondholders estimated at €2.4 billion. Today’s announcement of new private sector investment will reduce the capital requirement by a further €1.1 billion on completion of the transactions and will reduce the burden on the Irish taxpayer by that amount.
At an overall banking system level, by reducing the State’s funding of the PCAR €24 billion capital requirement to below €18 billion, the State will be able, for all practical purposes, to finance the PCAR requirement without recourse to external borrowing from the EU/IMF Funding Programme. This provides an additional saving on interest costs, which will supplement the significant interest rate savings agreed at Thursday’s Heads of Government meeting. It is also worth noting that the €3 billion included as contingent capital will attract an interest rate payment for the State of 10%. As this rate of interest is significant higher than the costs of funds, no additional interest rate burden will arise from this amount of the recapitalisation required.
The Minister concluded by thanking all of those who have worked to advance this very important investment and stated:
"Today’s announcement is truly another very positive development for the Irish economy. It follows on from the successful conclusion of the Heads of Government summit which saw an agreement to significantly reduce the interest rate on the funds Ireland receives from the EU.
The reduction of the interest rate and the restructuring of the banking system were two core objectives of the Government since coming into office. The achievement of these successes have been due to the hard work of all those involved and I wish to thank them for their work. I also wish to assure the Irish people that the Government will continue to work just as hard to improve the Irish economy and create jobs."