B of I warns State stake may rise to 87% if investors hold off

BANK OF Ireland has painted a worst-case scenario where the State’s stake would rise to 87 per cent if no bondholders accept its debt for cash or shares proposals and investors shun a subsequent rights issue.

The bank said it planned to issue shares at between 11.3 cent and 11.8 cent a share to subordinated bondholders taking up a debt-for-equity swap before July 7th. This compares with yesterday’s closing price of 14 cent.

Publishing further details of the cash and shares offer to bondholders, the bank said that the final equity conversion price would be set on June 23rd.

Shares will be issued to bondholders on the basis that they will not be able to participate in a subsequent right issue of new shares.

It emerged last night that a group of investors holding more than $1 billion of the bank’s subordinated bonds have hired law firm White and Case in London to challenge the bank’s plans to raise €4.2 billion in cash.

The bank’s debt offer is “fatally flawed because it fails to respect the fundamental principle that creditors must be paid ahead of shareholders”, the firm said.

Rather than engaging investors in a “market-based” solution, the bank, supported by the Minister for Finance, has “defaulted to a different path – yet another taxpayer funded bailout that is regrettably premised on the improper impairment of creditor rights”, it said.

The bank, which is 36 per cent State owned, is attempting to avoid Government control, making it the last of the banks to avoid majority public ownership.

Its offer is open to subordinated bondholders holding €2.6 billion of debt. Analysts estimate that the bank could generate about €2 billion from the exercise.

The State will buy any shares not taken up by investors at a price of 10 cent a share in the rights issue up to €2.2 billion following the debt deal with bondholders.

The bank is seeking to inflict losses of up to 90 cent in the euro as part of the Government’s plans to pass a significant share of bank losses onto the bondholders.

Bondholders who don’t accept the offer will be virtually wiped out – receiving 1 cent for every €1,000 of debt held. The bank warned that the Government would take “severe measures” to ensure burden-sharing is achieved.

Bank of Ireland was ordered to raise €4.2 billion in cash and a further €1 billion in contingent capital by the Central Bank following the bank stress tests last March.

The bank warned that it may have to cancel its listings on the Irish and London stock exchanges if too few investors take up the debt buyback and rights issue.

In such circumstances, the bank said it would consider listing on the junior Irish market, the Enterprise Securities Market.

The bank is to offer bondholders between 10 and 20 per cent of the face value of their debt in a cash deal and between 20 and 40 per cent in the debt-for-equity offer.

A range of scenarios around the deal and rights issue were set out by the bank to explain the effect on the bank’s ownership.

In the event of 100 per cent take-up in the share deal and 100 per cent take-up in the rights issue, the State’s shareholding would drop to 26.6 per cent, while existing shareholders would be left with 47 per cent of the bank.

The bank said it wants to reverse its decision to sell ICS Building Society and to retain the business, and to delay the sale of New Ireland Assurance by a year.