BoI successfully executed its “capital plan” yesterday placing €580m of new stock at 26c (discount of 3% to previous close/equates to 7.4% of prior outstanding shares) while selling €1.3bn of the Government Prefs priced at 104.75c. There was significant demand for the debt issue with reports of the total order book reaching over €10bn while pricing tightened significantly from initial guidance (103c area). <p>
We believe the successful non-cumulative perpetual €1.3bn Pref issue bodes well for all of BoI’s debt across the bank’s capital structure. We also expect the Prefs to trade well at the break today, with investors viewing the instrument a decent two and half year carry trade (YTM c. 8.2% assuming July 2016 call). While absent a hard call date, we believe that the market is likely to focus on July 2016 as an effective maturity date given the bank’s stated intention to derecognise the instrument from CET1 capital beyond this point. Although structurally subordinate to BoI’s €1.0bn CoCos (YTM 6.7%), we eventually see the Prefs tightening to a slight premium over these notes as investors take comfort from the lack of a conversion trigger coupled with the junior dividend stopper protection. These features effectively make the Pref coupon a “must-pay” given the bank’s apparent strong reluctance to avoid existing shareholder dilution, which is clearly critically important to its North American strategic equity investors. <p>
This transaction also leaves the bank well placed to build out its overall capital profile in coming periods with Lower Tier two (LT2) issuance possible next, eventually followed by AT1. Given the bank’s low fully-loaded Basel III ratio (c. 5.5% at 2013 year-end assuming BSA related revisions to impairment charges and RWAs), we also see merit in BoI raising fresh equity in Q1/Q2 next year to remove any lingering doubts over the group’s solvency level. This final piece of the jigsaw would leave the group in a solid position to overcome any capital “bottleneck” presented by the European stress tests. Interestingly and taking the yield on the Prefs as a proxy for the bank’s current cost of equity (ranks pari passu on liquidation) implies that the stock should be trading on c. 1.2x Tangible Net Asset Value (TNAV) assuming it can generate a return on equity of 10% in coming years (notwithstanding the increased future capital and liquidity challenges facing the bank in the new regulatory environment). This compares to its current equity valuation of c. 1.6x TNAV. We would not be surprised to see the State seek to exploit the buoyant equity backdrop over coming months (14% stake valued at c. €1.2bn), consistent with the UK’s plan to re-privatise Lloyds Banking Group through a series of stock placings. <p>
From the State’s perspective, it will book a profit of €61m from the disposal of the Prefs and see its residual BoI equity stake diluted down to 14% (from 15%). The total proceeds from the Pref sale (€2.05bn including accrued interest) is expected to flow back to the National Pension Reserve Fund’s directed investment portfolio. Following the €4.7bn recapitalisation of BoI (Prefs – €3.5bn, CoCo – €1.0bn, 2011 equity – €0.2bn), the State has now recouped a net positive return of c. €1.1bn. We estimate that the Government has extracted gross proceeds of €5.8bn from the bank through a combination of, Pref sale (€1.9bn), Pref coupons (€0.7bn), CoCo disposal (€1.0bn), CoCo coupons (€0.16bn), repurchase of warrants and recap fees (€0.65bn) and ELG/CIFS guarantee fees (€1.5bn).
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