AIB Bank Centre, Dublin

A leak of the interest of a major Canadian bank to take a stake in Allied Irish Banks (AIB), following the transfer of AIB’s property development to the State's planned "bad bank" NAMA (National Asset Management Agency), appears to have a strategic motivation at a time when debate is focused on the Government's plan to transfer the property loans at a value above the current market level of the underlying property.

The Supreme Court's rejection of protection for developer Liam Carroll's Zoe group, which appears to be deeply insolvent, has raised concerns about the risk to  taxpayers over the next two decades, from the transfer of loans with a nominal value of  €90 billion - - equivalent to 60% of Irish gross national product (GNP).

The Irish Times says the conditional approach to the Government and AIB from the Canadian bank was received about a fortnight ago.

However, the fact that the leaker did not disclose the name of the suitor - -  in effect giving the Irish Times half a story - - suggests there was a strategic interest in leaking and it likely came from an official source.

The Irish Times says it is understood that the Canadian bank ranks among that country’s top five lenders.

The proposal is said to be serious, although it is unlikely to develop in the immediate term given that it is predicated on the outcome of AIB’s engagement with Nama.

“It’s a much longer-term thing. I don’t think they’re going to be moving quickly until they see the full extent of NAMA. They want to take an equity interest. We deem this to be of a lot higher standard than other approaches,” a source said, according to the newspaper.

The Irish Times says, on the face of it, however, a fully-developed investment proposal from a large well-capitalised Canadian institution would be welcomed by the Government as it would have the potential to reduce any requirement for further State capital after AIB’s loans move to NAMA.

The Minister for Finance Brian Lenihan will disclose the mechanism of valuing loans on September 16th.

Commenting on Tuesday’s Supreme Court judgment in the Zoe Group case, Fine Gael finance spokesman Richard Bruton TD said the judgment has laid bare the fatal flaw underpinning NAMA  -- the absence of any evidence whatsoever to suggest that property prices are only temporarily depressed and will recover their recent losses.

“In giving their judgment, the Supreme Court Judges said that it was ‘perfectly obvious that some evidence of likely improvement in the property market is absolutely essential’ before a court could give the Zoe Group temporary protection from its creditors.

“It is equally obvious to me that in the absence of any credible evidence from Government that property prices are only temporarily depressed, the Government cannot justify the use of this elastic concept of ‘long term economic value’ in paying above market prices for the assets to be bought by the taxpayer.

“The huge threat from this ill-conceived NAMA project is that taxpayers will be forced to over-pay the banks for toxic developer loans. In the legislation just published, the Minister for Finance gives himself the powers to set the adjustment factors that NAMA must consider in deciding the premium to be paid over current market prices to the banks for their toxic loans, and there is no procedure for independent challenge where NAMA overpays for loans. Rosy and baseless optimism about a recovery in property prices can hobble the public finances for a generation.

“The action by ACC Bank also raises huge questions about how the Government and NAMA will deal with smaller banks that are part of lending consortia to troubled developers. Following this judgment, smaller banks may now feel that they gain even greater advantage from a Court bankruptcy process than from NAMA.

“The nightmare scenario now for the hard-pressed Irish taxpayer would be if small banks like ACC were bought off by the bigger banks and the whole lot passed onto NAMA and the taxpayer in a few months’ time.”

Goodbody analyst Anna Lalor commented today: "An AIB spokesperson said to Bloomberg that it “doesn’t comment on speculation”. If there is an approach, it is unclear whether it would be looking to take a minority or majority stake, but the article indicates that it would only take place after AIB moves its development loans to NAMA (so could be as late as June next year). As a result, if AIB were to try and raise equity before the end of this year in order to pay back some of the Government’s preference shares, thereby reducing the Government’s warrants, this bank may or may not be willing to participate at that stage.

AIB and BOI will probably have to provide the market with their expectations of the write-down on NAMA designated loans before they can raise equity, but it is not clear whether any such guidance would be sufficient for the bank in question. We estimate that AIB needs to raise €960m of equity in order to sustain a 4% equity tier 1 capital ratio by end-2011, which leads to an estimated €3.43 tangible NAV per share.

However, with equity capital requirements over the medium to longer term likely to be higher, any additional sources of capital are helpful, while it would also reduce any need for the Government to provide equity to the bank should it arise. At this stage we cannot tell what, if any, dilutive impact any stake could have for existing shareholders. However, the market is likely to react positively to the news of a potential support from a new investor."