Monday, May 17, 2010

Economics 17/05/2010: BofI rights offer - back of an envelope

Update: Tasc have published a very interesting piece of research (here) mapping the real Golden Circle of Ireland's interconnected political and economic elites. Fair play to Tasc for covering semi-state bodies and companies. Well done to the authors! (hat tip to RDelevan)



Back of an envelope calculations for the BofI rights offer - self explanatory stuff:
But what about taxpayers' buy-in into BofI under this deal? Well, if the value of this offer is negative at the buy-in price of 55 cents per share, think what the value is for the taxpayers, who bought at €1.80 per share! Ok, let's do the maths: we have post-rights price of BofI at 81.9 cents, for which we paid 180 cents - the net return is the loss of 98.1 cents per share bought by the Irish Exchequer... Amazingly, there is no reason for this loss whatsoever - as an existent shareholder in the bank, Irish Exchequer is entitled to participate in the same deal offered to all current shareholders. we, therefore, could have limited our losses to 24.75 cents per share from 81.9 cents per share and still done the same deal!


Note: the above estimates are based on straight forward linear model of equity-price relationship. These are, therefore approximations. Based on expected balance sheet model, the returns can be estimated different - with upside growth scenario over the next few years potentially yielding a positive return, while downside growth scenario can yield an even deeper loss. You be the judge, but my figures should be treated as being closer to risk-adjusted (static model) averages.

Disclaimer - I do not hold any shares or any other financial instruments (equity or debt) in any of the Irish banks.
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