Monday, April 26, 2010

Economics 26/04/2010: Bank of Ireland Conversion Deal

Bank of Ireland deal: per latest report from the RTE, the State's shareholding in BofI will increase to 36% from 16% through a conversion of €1.7bn of funds given to the bank last year into ordinary shares. The bank will now attempt to raise the other €1.7bn in equity from private markets with a rumored discount on first-offer of 40%.

Minister for Finance Brian Lenihan said that 'This transaction is good news for our economy, good news for the taxpayer and good news for Bank of Ireland's shareholders and investors.'

This is another extraordinary statement made by the Minister. The Minister has just informed the nation that we are overpaying some 11%+ (see below) for the shares gained under this conversion, since 'the transaction has been agreed on market terms'.

Aside: the Minister does not appear to clearly understand the terms of conversion he agree to, as 'market terms' would mean that the state is converting at a current price (Friday close of €1.80) less cumulated dividends (2 years @8%), less the discount extended to the market (38-42%). 'Market terms' therefore would imply conversion at €0.88 per share, not €1 per share achieved.

Finally, the Minister failed to negotiate a discount that should be due any large-scale investor. All in, the estimated overpayment of 11% is really a likely underestimate. In exchange for our money, we, the taxpayers, got a pile of over-priced shares which are about to be diluted!

Looking closer at the details: BofI plans to raise €500mln from private placements with institutionals, priced at €1.53 or 15% discount on Friday close price. The main issue will be €1.2bn (net) with 38-42% discount. Preference shares held by the taxpayers will be converted at €1 per share (they were bought at €1.2 per share and paid no dividend), which actually means we de facto are paying €1.16 per share, while existing shareholders can get shares at as low as €1.04-1.06. Government-held warrants are priced at ca €491mln.

9 comments:

  1. Excellent analysis Constantin.
    Reading your economic analysis is like reading the Bible because it is the honest truth.
    You lost a newspaper column for warning the Irish public in 2007.
    A shiver went down my spine when Brian Lenihan told the nation that by losing the discount and dividend,
    this was GREAT NEWS for the taxpayer.

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  2. ..another observation is that the dividend due in February 2010 was paid in shares @ 1.34 (I think this is correct price) (now 1.83). How are two years dividends due?

    How is cost of 1.20 calculated?

    You made a second comment that the dividend is unpaid. Tis appears to be wrong.

    I understand your frustration with Brian Lenihan but it would be worth calculating the true costs and current valuation of the GOvernments holding in BOI, taking into account the money also received for the warrants and the guarantee scheme.

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  3. Hi Constantin,

    Is Bank of Ireland out of the woods? I thought Colm McCarthy said that BOI would suffer huge mortgage l, consumer and business loans. Morgan Kelly also referred to this in his working paper "The Irish Credit Bubble 2000-2008" when he said that the "second wave" would drown the zombies.

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  4. Good interview on 9 o clock news Constantin, you were saying that BOI could be in hot water with non NAMA bound loans

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  5. Good interview on 9 o clock news Constantin, you were saying that BOI could be in hot water with non NAMA bound loans

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  6. Your analysis is top drawer Constantin.
    Business & Finance magazine is a must buy for anyone interested in economics,finance and shares.
    Interesting to note Constantin, that BOI was down 5% on Irish stock exchange this morning but rose 6% when BOI ADR shares on New York Stock exchange opened at 2.30 p.m., see here
    http://www.breakingnews.ie/business/boi-shares-rebound-as-iseq-jumps-1-455433.html

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  7. Your analysis is top drawer Constantin.
    Business & Finance magazine is a must buy for anyone interested in economics,finance and shares.
    Interesting to note Constantin, that BOI was down 5% on Irish stock exchange this morning but rose 6% when BOI ADR shares on New York Stock exchange opened at 2.30 p.m., see here
    http://www.breakingnews.ie/business/boi-shares-rebound-as-iseq-jumps-1-455433.html

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  8. It seems everything that this government does is good news........ according to this government.

    The government is overpaying because it has accepted responsibility for lying about the economy for years. This form of thinking is delusional.

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  9. Can someone please explain to me about the rights issue. Why are existing shareholders getting shares at a 40% discount? Also does that mean the shares will trade at that level in the near future. I'm confused. Appreciate any feedback.

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