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.


cbweb said...


we bought at €1.80 per share
and according to you we could have bought at post-rights 81.9 cent. If the buyin price was 55 cents, then we could have limited our losses to 26.9,according to my Math, not the 24.75 cents per share you mention?

However, though I got a background in Math, rather than impenetrable charting and Math, could the above be summarised more in lay terms that are a little more accessible?

keep up the good work


Anonymous said...


I'm not sure if you are deliberately missing the point on Bank of Ireland or if you have just not had time to read the relevant documents.

The TERP was 98 cents, a 41.7% discount per announcment.

It is clear that the Government has bought in at just over 1 euro (blended cost of shares arising from dividend, placing and in rights issue at 55 cents). As a holder of c 760m shares prior to the rights issue the Government gets c 1.1bn shares at 55 cents.

The loss to the Government on the negative movements in the market - a risk for ALL shareholders and one which cant be alleviated - is neglible at this point and more than outweighed by the fees charged and the money raised on the warrants.

I would appreciate if you could repost with correct figures rather than leaving in accurate figures on your blog.

TrueEconomics said...

Anonymous - my figures come from the brokers' report:
Rights price €0.55
TERP €0.94, discount 41.7%
Numbers of shares and values shown as in my post.
Rights issue terms 3:2
Discount to closing price on May 14th 64.1%

Total Capital Raise
The rights issue brings the total capital raise by BoI to 3.421bn
including the redemption of the Irish Government warrants, which is
fully underwritten. The capital raise will be completed in a number of
different parts as follows :
· Institutional Placing of 500m
· Placing of 1.036bn to the National Pension Reserve Fund
· Rights issue of 1.723bn
· Capital management exercise comprising of 100m capital gain
and 61m equity generation
· Following the implementation of the proposals, the State through
the NPRF will hold a maximum of 36% of the enlarged ordinary
shares in BoI. The State will also hold c. 1.84bn of 2009 preferred

The rights issue price represents a 41.7% discount to
the theoretical ex-rights price (TERP) of 0.94 and 64.1% discount
to the closing price of BoI’s ordinary shares on Friday May 14th
( 1.534).

The premium is the difference between the TERP and the right price. Based on BoI closing price on Friday, the value of a BOI
right is 0.3932. This will change as the share price changes over the course of the rights period.

These are direct quotes from the report on placement and are the basis for my estimates.

TrueEconomics said...


PS: these numbers that formed the backdrop assumptions in my estimates are exactly confirmed by another stock broker report on BofI deal to their clients.

cbweb said...


re "The loss to the Government on the negative movements in the market - a risk for ALL shareholders and one which cant be alleviated - is neglible at this point and more than outweighed by the fees charged and the money raised on the warrants. "

I'm no expert but a couple of points there:

1. 'Government' above should read taxpayer.

2. RE 'risk for ALL shareholders and one which cant be alleviated'
Wrong, wrong, alleviate risk by not taking risk as in not buying shares in banks with a track record of failure. Otherwise, they take you down with them.

3. Re 'money raised on the warrants' I assume any monies raised on the warrants is a factor of the bank being returned to a fully capitalised, profitable concern.

This in turn depends on the economy returning to growth.

This depends on Government not borrowing to pour dead money into zombie banks supporting incompetent management.

Allowing banks to fail and spending taxpayers money on the setting up of a new bank or e.g the promotion of a branch network of Canadian/Australian banks in a new cleansed financial system, banks with expertise in running a bank rather than our bank's flawed business model of recent years all of this contributes to regeneration and growth. Otherwise it's Government becomes more zombie than the zombie's themselves.

By the logic above, Government is going down and taking our economy with it. Situation is made worse rather than better.