IRISH LIFE & Permanent has offered to give the Government a potential 10 per cent stake in the company in return for accepting an offer to merge its banking division Permanent TSB with State-owned EBS Building Society.
The company, one of two final bidders in the EBS sale process, is offering the Government warrants on a 10 per cent stake in Irish Life & Permanent Group Holdings. This would give the State a share in the upside value of the parent group if it were to off-load Permanent TSB banking division into a merged bank with EBS.
The value of Irish Life is expected to rise once the company offloads the loss-making and heavily borrowed Permanent TSB and merges it with the building society.
The company must first raise €925 million in capital for Permanent TSB to operate on a standalone basis. The other final bidder in the EBS sale process, a private-equity consortium of international investors led by Cardinal Capital Group, has proposed taking full control of the building society in return for injecting the additional €500 million of capital required by the lender.
Under Irish Life & Permanent’s proposal, the Government would have to inject the additional capital at EBS and the State would end up with a stake of more than 40 per cent in the merged bank.
The Cardinal consortium is led by Dublin businessmen Nick Corcoran and Nigel McDermott with the backing of billionaire US investor Wilbur Ross and private-equity group Carlyle.
Last month, the Department of Finance narrowed the race for EBS to Cardinal and Irish Life & Permanent. The building society was taken into State control by the Government following the commitment of €350 million in capital to the lender earlier this year.
Discussions have commenced with the two bidders with a view to preparing final, third-stage bids over the coming weeks. None of the parties would comment as the sale process is ongoing.
EBS requires the additional €500 million to meet the Financial Regulator’s target of €875 million. This is to cover losses incurred on the transfer of €1 billion of loans to developers to the National Asset Management Agency (Nama) at discounts of up to 60 per cent.
It is understood that the Cardinal consortium is offering the Government warrants to take a 10 per cent stake in EBS and would convert the €350 million in State capital into a type of loan that would be repaid if the lender did not incur further losses. The State would be paid a return on this loan when EBS returned to profitability.
The Government’s €350 million capital commitment – which has been injected by way of €100 million in cash and €250 million in promissory notes or IOUs – would be converted into a debt instrument under Cardinal’s proposal as a payment-in-kind on which the State would be paid a return as the building society recovers.
Cardinal is offering to cover up to €450 million of any additional losses at EBS and to share any further losses beyond that with the Government taking 70 per cent and the consortium the remaining 30 per cent. These losses would be structured around the €350 million payment-in-kind instrument that would be created.
The acquisition of EBS is regarded as the first step in a wider consolidation in the financial sector that could lead to the creation of a so-called “third force” in Irish banking to compete with the two biggest banks, Allied Irish Banks and Bank of Ireland.
Cardinal and Irish Life Permanent have signalled their interest in acquiring further banking assets, including the post-Nama rump of Irish Nationwide comprising €2 billion in residential loans and €4 billion in deposits, following the EBS sale process.
