What Happened to IRE
June 09, 2010
– Comments (9) |
RELATED TICKERS: IRE
, AIBYY
There seems to be some confusion over what happened to IRE in the last couple of weeks. This is just a brief description of the events to (maybe) help clarify it for those who are interested.
First, some background. When the Irish economy "tanked", the Irish Govt injected some much needed cash into the 3 largest banks. "Anglo" ended up being nationalized. IRE and AIB issued some debt instruments which were originally intended to pay interest only, twice a year, for a period of time.
The Irish Govt also set up an agency commonly refered to as NAMA. The purpose of NAMA, was to purchase certain loans from the two banks at a discount ( originally expected to be in the 20% to 25% range), and hold them until the economy improved.
When it came time for IRE to make the semi-annual interest payments to the IRISH Govt, the EU intervened and said "you can't do that", "they have to issue stock". This resulted in the Irish Govt buying shares and putting them in their "Pension System". This left the Govt with about a 15% to 16% ownership interest in IRE. If the Irish Govt also bought some of these new shares, then their percent of ownership may have changed.
After reviewing the loans they were going to "purchase" through NAMA, the Govt decided they needed about a 35% dscount. This meant that IRE would have to take a larger "write down" then originally anticipated. They were then required to raise additional capital. This was the reason for the recent "rights issue".
Because of all the turmoil in the markets, it was decided, that to get the new shares issued, a "rights rate" of 3 new shares for each 2 owned was needed.. It was originally to be 1 for 1, but because they had to offer a 40% discount to make sure they would be bought, they had to change it.
Unfortunately, the ADR holders could not exercise the "rights", because it had not been registered in the U.S.. Bank of New York Mellon, as the custodial bank, then sold those "unusable rights", sort of like warrants and were able to get only about $0.17 on average for them.
While this was not as good as being able to purchase 150% more shares at a 40% discount, it was better than nothing. The holders of the ADR's as of a certain date, will receive just over $1.00 for each ADR share they owned.
The exact date of ownership is not 100% clear at this point, but I believe it was through the end of the trading day on June 4th.
As a result of these new share being issued, there was somewhere between a 20% and 30% dilution in the value of the shares. The ADRs should have traded "bills due" through the close of business on the 4th. This is why the IRE ADRs were down 20% to 25% on Monday.
Basically the same thing happened (and is in the process of happening ) with AIB. On the negative side, AIB has to raise more capital, because their loans will likely be bought out by NAMA at a greater discount, perhaps as much as a 45% discount. This means they have to raise more capital than IRE did. On the positive side, AIB has more "sellable" assest than IRE had. these include their approximately 22% ownership in M & T bank, and a really fine bank in Poland.
They will still have to raise additional capital. At what kind of a discount the new shares will have to be offered at will depend on the price they get for their M & T shares and for the Polish bank, as well as whats happening with the markets, and the economy in general at that time. They have until the end of the year to do so.
There is also speculation that Banco Santander will be buying some assets from them, and may even make a bid for the whole bank. My thoughts are that after everything the Irish Govt. has gone through, they will likely want to keep the ownership of their two largest banks at home.
Their is also speculation the Barclays is interested in a buyout too.
While this has (and for AIB will ) cause dilution for shareholders, the flip side of that is that both should emerge as "leaner and stronger" banks. They have had to face up sooner to the realities that other big banks will likely have to face also. The pain is great, but the healing process gets started sooner.
The economy of Ireland has also been showing signs of improvement. It will be a while (if ever) before they return to the robust economy they once were, but I personally see a very bright future for both of them over the longer term.
I hope this helps to shed some light on what has been going on with these two banks, and maybe answered some questions.
All of the above in JMO and based on what I understand to be the situation. I could be totally wrong and perhaps you should listen to Cramer and avoid them like the plague.
This was a lot for an old, one eyed man with dyslexia and crooked fingers to type, so please be kind and overlook any (hopefully) inconsequential typos.
Have a good week in this Up and Down market.
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