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Markets News Monday: Public stake in Bank of Ireland rises to 16%; Oil price above $80 in New York; Euro expected to fall further against dollar
By Finfacts Team
Feb 22, 2010 - 8:47:48 AM
The State is being issued with 184m shares in Bank of Ireland this morning, diluting the existing shareholders in the bank as the public stake rises to 16%.
The Minister for Finance, Brian Lenihan TD, on Friday welcomed the issue to the National Pensions Reserve Fund of €250 million worth of its ordinary shares in lieu of a cash payment of this year’s coupon/dividend due on the preference shares which it received under the recapitalisation agreement. This ensures that taxpayers are remunerated in a timely fashion for their investment in the bank.
The European Commission have requested that discretionary coupon payments on tier 1 and upper tier 2 capital instruments in Bank of Ireland, which includes the Government preference shares, not be paid while they consider Bank of Ireland’s restructuring plan. However, the Commission have no objection to payment of the coupon in shares and the Government is therefore receiving ordinary shares instead of cash, based on current prices.
The Minister said that Bank of Ireland is assessing its ongoing capital needs and is actively exploring options, including accessing the private capital markets to enhance the capital position of the bank in consultation with relevant authorities. In his discussions with the bank the Minister said he will ensure that the taxpayer is appropriately remunerated for any investment in the bank and issues in relation to coupon payments and preference shares will be determined in the context of the Bank of Ireland restructuring plan.
Last year the State invested €3.5 billion in the bank as part of its rescue of the banking system. In return, the bank was to pay an annual dividend of 8%, worth €0.25 billion.
Share payment an "unintended consequence": Davy analyst Emer Lang commented --"BKIR announced on February 19th that as a consequence of its dividend stopper (revealed on January 19th) and in accordance with its by-laws, it is issuing 184m shares to the government to meet the initial €250m dividend payment on its €3.5bn government shares.
Preventing Irish banks from paying cash dividends on their government preference shares was described as an 'unintended consequence' by the EU (in relation to ALBK in December 2009). In its original statement on January 19th, BKIR stressed that it was 'in ongoing discussions with the Department of Finance and the EC on this and other related matters as part of our overall engagement on the bank’s restructuring plan and accordingly, this outcome is not certain'. However, clearly no solution has been found despite the willingness of the NTMA — expressed at a recent parliamentary committee hearing — to give the bank more time to pay the dividend, and all parties having a preference for a cash payment. We understand that any amendment to the by-laws in favour of the government preference shares, which would require an EGC with 21 days notice, would have discriminated against other debt-holders.
The shares are issued at a price of 136c, equivalent to the average for the last 30 trading days, and give the government a 15.7% stake in the bank on top of its warrant entitlement (25%). The bank reiterates that it is actively exploring a range of options, with a view to optimising its capital position. It stresses that these options 'include access to the private capital markets'. The latest statement stresses the intention 'to conclude on these options after the bank has further clarity on the outcome of its discussions with the EU regarding its restructuring plan and the impact of NAMA'. The recent change in year-end means that the bank will be out of close period in Q2, facilitating any announcements/capital market transactions that it may wish to make during this key period. Its discussions with the state and the EU include 'positioning the state shareholding in the bank at a level which facilitates possible access to private capital sources'.
In ALBK's case, its first government preference dividend is not payable until May 13th, by which time it hopes to have more clarity on the key issues; as outlined in its statement on December 1st, resuming dividend payments hinges on agreeing its restructuring plan with the EC on that basis."
Goodbody analyst, Eamonn Hughes, commented: Irish Financials - Irish State to take a 16% stake in BOI - - "On January 19, BOI indicated that in line with EU policy and pending the assessment of Bank of Ireland’s restructuring plan (which is required in compliance with State aid rules), the Bank should not make coupon payments on its Tier 1 and Upper Tier 2 capital instruments unless under a binding legal obligation to do so. This process initiated a “dividend stopper” which also applied to the coupon on the government’s €3.5bn preference shares. The coupon on these preference shares was due today and non-payment in cash would alternatively see payment in shares. The market expectation was that the bank, the government and the EU would find some way to address this dilemma, since the stated government aim was not to receive the payment in shares. However, on Friday evening, BOI unexpectedly announced that the State will receive payment in the form of 184m shares, equivalent to the €250m coupon due, equating to 15.7% of its enlarged share capital.
The decision will result in higher state ownership of the bank up front, bearing in mind the State also has warrants attaching to its preference shares that entitle it to a further 25% stake in the bank (exercisable from 2014 to 2019). Clearly, the market will fret about the dilution for equity holders and higher state involvement in the Irish banks and the focus will now shift to AIB. Given it accepted its preference shares later than BOI, it has a little bit of breathing space and must be hoping that the EU ruling on the business plans is published ahead of its mid-May coupon payment date. Nevertheless, as a reference, taking the current share price, we estimate its preference shares coupon in equity rather than cash would equate to just under a 20% stake.
But it’s not all bad news. While the level of State ownership will likely be forefront in investors’ minds this morning, it must be noted that the non-cash payment on the coupon increases the equity in the bank. After the recent hybrid exchange, our core equity requirement at BOI eased to €3.0bn, so the move on Friday sees this ease back further, to €2.75bn. Should a similar fate befall, AIB, it would move our €4.0bn equity requirement back to €3.7bn. Another way to conceptualise this is that recent market speculation was mounting that the level of equity issuance required as a % of market cap was so large at both banks that the government would have to consider converting some of its preference shares to ensure core equity targets are achieved (our base cases are 8% by 2014 and 6% up front, this year). As such, payment in equity will reduce the requirement to convert the preference shares by a similar amount. So in essence, it was possible it was going to have to happen anyway, though on balance, the earlier conversion will be perceived as a net negative despite the fact that we estimate little change to our base case fair values."
Par Magnusson, senior analyst at Danske Bank tells CNBC's Anna Edwards and Chloe Cho that he is doubtful that a bailout of Greece will help the country:
Euro: Bloomberg reports derivative traders are signaling that the euro’s slump to a nine-month low will continue even if European Union leaders bail out Greece.
Short-term rates for borrowing in euros in the forwards market are the cheapest relative to loans in dollars since September. The 50% collapse in that spread this month signals investors are betting the European Central Bank will keep its benchmark at a record low, sacrificing euro strength to prevent deficit-cutting by debt-laden economies in the region from stymieing growth.
The euro dollar is heading up because of profit-taking, but it will still trend downward, says Mario Singh, co-founder and CEO at FX1 Academy. He tells CNBC's Anna Edwards and Chloe Cho that investors are massively short on the euro dollar.
Busier week of macro figures ahead: Davy chief economist, Rossa White, commented today : "Last week was quiet for macro data, not helped by an American holiday thrown in. The general trend in data for the year has been characterised by ongoing improvement in the US, resilience in the developing world and sluggishness in Europe. Yet perhaps the most interesting report this week will come from the UK, where the expenditure breakdown of the GDP numbers will be released on Friday.
The first print of UK GDP for Q4 was disappointing. But the data are incomplete, coming as they do from sectoral output estimates. The 0.1% increase was lower than market estimates, but two volatile sectors — agriculture and utilities — had a disproportionately negative effect on the numbers. The rest of the economy was growing at a solid, if unspectacular, pace. It will be fascinating to see what consumer spending on services was like, because retail faltered a touch at the end of the year. We also expect to see a pick-up in exports, following the return to manufacturing growth.
Elsewhere, key reports centre on the US consumer. Durable goods orders, which have recovered in a staccato fashion in recent months, are due on Thursday. Also set for release is the Conference Board's measure of consumer confidence. Spending data have diverged somewhat from confidence in recent times: actual behaviour is more positive than the flat mood. The housing market is sending conflicting signals. On one hand, home sales have been recovering (despite a December blip as payback for the expected expiration of the home purchase incentive), yet mortgage applications are telling a more subdued story. Either way, the January numbers will likely see a bounce. "
Economic View; Leading the way: Goodbody economist, Deirdre Ryan, comments - - "With a week gone by since Eurozone ministers’ statement of solidarity pledging its support to Greece, bond markets still appear to be looking at the country in not much of a favourable light. The Greek 10 yr bond yield spread versus Germany rose 23bps over the past week to 318bps, although it remains below its peak spread of over 360bps (3.6%) seen in earlier weeks. While Eurozone finance ministers have ensured that Greece’s target reduction in the budget deficit of 4% will be hit this year, even if supplementary measures need to be enforced on the country, a credibility and transparency deficit still looms large over the country.
Press reports this morning indicating that Greece itself is considering fresh consolidation measures, in addition to those already announced, may aid in this regard. As Ireland knows only too well, transparency and credibility are two vital ingredients in any fiscal consolidation plan and Ireland has reaped the benefits from displaying these qualities at large over the past year, having enacted measures to reduce its fiscal deficit by a cumulative 6% of GDP thus far. Furthermore, last December’s budget (amounting to over 3% of GDP) consisted solely of expenditure cuts, arguably the more difficult avenue of fiscal consolidation.
With the Irish bond yield spread versus Germany unchanged over the past week, at 148 bps, its clear that markets remain focussed on those countries who have acted to reduce their deficit and those who have not. The fact that each of the other countries with perceived vulnerable government finances have seen an increase in their yield spread versus Germany is telling in this regard, with Spain (+3bps), Italy (+4bps) and Portugal (+10bps), all up over the week. While Ireland has still much left to do in consolidating its public finances, the impressive progress made has been recognised and it remains the template for the other Eurozone countries highlighted above to follow."
The People's Bank of China will likely hike the triple R rate by at least another 150 basis points by year end, says Chi Lo, head of overseas investment of China Asset Management at Ping An. He speaks to CNBC's Oriel Morrison:
Asia
The MSCI Asia Pacific Index gained 2.5% Monday.
The Nikkei 225 rose 2.74% and the Shanghai Composite dipped 0.49%. Chinese markets opened Monday after a shutdown for a week for the Lunar New Year holidays.
The BDI closed at 3,005 on Thursday, Dec 31st - - a rise of 289% in 2009.
The index rose 10 points or 0.4% Friday to 2,714 -- its fourth day of gains.
In the Financial Times on Wednesday, Feb 17th, Javier Blaswrote that the weakness in the Baltic Dry Index, long seen as an indicator of global economic activity, does not reflect a downturn in global trade. Instead, the measure of freight costs is showing a strong supply of new vessels that helps explain the 40% drop in three months. “New supply is astonishingly high and it is overwhelming the otherwise robust demand for bulk commodities from China,” he wrot. “On the other hand, bullish investors should be cautious of any near-term turnround. Rather than a sign of stronger economic activity and commodities demand, it is likely to reflect cancelled orders, scrappage and port congestion.”
Crude oil for April 2010 delivery is currently trading on the New York Mercantile Exchange (Nymex) at $80.52 per barrel up 56 cents from Friday's close,, on speculation energy demand will increase as the global economy recovers. In London, Brent for March delivery is trading on the International Commodities Exchange at $78.79.
