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.