Bank of Ireland (BoI) has announced a capital package to refinance the €1.8bn Government Preference Shares via a share placing of €580m (€537m net of expenses) utilising a cash-box structure and the sale of €1.3bn of the instruments to private investors. In terms of the placing element, BoI notes that it intends to issue new stock to both existing and new institutional investors (discount should be less than 10%). The placing will be underwritten, with an accelerated bookbuild to take place today. <p>
The sale of €1.3bn Perpetual Non-Cumulative Preference Shares will be structured through a special purpose company (Baggot) with the new investors waiving the right to the principal-step up. The coupon on the new instrument is to remain broadly the same at 10.24% (1bps lower relating to expenses). Importantly while the bank is not in a position to offer a hard call date on the new instruments, it does not intend to redeem them prior to 1 January 2016 and has also advised the Central Bank that it plans to derecognise the Preference Shares as regulatory CET1 capital after July 2016 (unless an adequate capital buffer cannot be maintained above regulatory requirements). However from speaking to management this morning we understand that the bank has again reiterated its belief that it will maintain a sufficient capital buffer above the 10% CET1 level on a Basel III phase-in basis over the medium term, allowing to re-purchase these instruments in 2016. <p>
Factoring the new share issuance and assuming our current 2013 impairment charge rises by an additional €0.7bn to €2.1bn (which we note may be overly conservative) and RWAs increase by €3.4bn to €54.5bn (both reflecting recent BSA preliminary results), we estimate that the group’s would report a CT1 ratio c. 11.3% on a Basel III phase-in basis at year-end (c. 5.5% fully-loaded). A successful refinancing of the Government Preference Shares represents a significant step for BoI back to normalised operating conditions and away from State assistance, giving the bank and its shareholders more control over the group’s strategy and decision making in the coming years. While the 2009 Government Preference Shares continue to be owned by the Irish State, the Minister for Finance is entitled to appoint 25% of BoI’s directors, despite only owning 15% of the equity (currently has two nominated Public Interest Directors on the Board). A redemption of the instruments will also remove ordinary dividend restrictions (imposed as part of burden sharing by EC following receipt of State Aid), and also give the bank more control over its future remuneration policy.
<p><h5>Ciaran Callaghan</h5>
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