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Teacherman1 (< 20)

What Happened to IRE



June 09, 2010 – Comments (9) | RELATED TICKERS: IREBY , 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. 

9 Comments – Post Your Own

#1) On June 09, 2010 at 4:49 PM, EnigmaDude (59.81) wrote:

Excellent summary!  Thanks for taking the time to share the info. Not bad for a one-eyed, dyslexic, crooked old man...

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#2) On June 09, 2010 at 9:19 PM, unusualpro (< 20) wrote:

Not sure if I can link this info but here it is

ADR Record Date: May 17, 2010
ADR Payable Date: June 11, 2010
Final Gross Rate per DS: $1.037725
Depositary Fee: $0.020000
Final Net Rate per DS: $1.017725


What I dont understand is this 

Ratio: 1 DS for 4 ORD


Does that mean 1 dollar for every 4 shares??? I surely hope not. 


Great info as always Teacherman. 


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#3) On June 09, 2010 at 9:53 PM, ChrisGraley (28.52) wrote:

Very good explanation!

I'd give an apple to the teacher but all I have is a rec. 

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#4) On June 10, 2010 at 10:38 AM, Teacherman1 (< 20) wrote:

unusualpro - the 1 for 4 refers to the fact that each ADR represents 4 "direct shares". That is the shares as they are tradered there.

The ADR holders will get about $1 for each ADR held, which represents 4 ordinary shares.

If it was $1 for each ordinary share, they would have preformed a real "magic trick", and increased the value of each share 100% plus simply by issuing new shares.

There was dilution for the ADR holders, but this can be reduced some by buying more ADRs at the new price. The new combined shares should start trading on Monday, and hopefully by next week, we will get a better idea of where they are going in the intermediate term. 

I believe CAPS made an error in their adjustment of the starting price for the ADRs. It should have been lowered by $1.017. I think they put in $1.17. It helps it look better for now, but needs to be corrected at some point.

That May 17 date shown on BNYM's page is the cutoff date at which BNYM determines who to send the dividend/return to. I don't believe that is the date that new owners were "cutoff". Unless the actual "cutoff" date was as of the close, June 4th, then the trading price after May 17th would make no sense.

I believe BNYM also stated on their site, that the "cutoff" date for the dividend/return to "follow" the shares, would be determined by the NYSE. 

Hope this helps clear that up.

Chris and Enigma - Thanks for the comments and the recs. 

Sorry for just now replying, but wasn't feeling well yesterday, so went to bed early.

Feeling great now.

Hope everyone has a great day. 

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#5) On June 14, 2010 at 8:28 PM, MsFaboo (< 20) wrote:

What I'd like to know is... what does the "Yield/Div" mean on these stocksin the MF system?  IRE has a "yield" of 35.40%, ING, 18.6% and AIB, 14.6% !  Then I start doing my homework -- and I find that none of these banks pay dividends!  So what the hell is the source of this "yield" figure & what should it mean to me ?

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#6) On June 15, 2010 at 6:01 PM, Teacherman1 (< 20) wrote:

Those "yields" don't mean anything. MF is not very good at keeping all of their information up to date. I always go to Yahoo Finance to get information on dividends and yields.

You are correct, they do not currently pay a dividend, but have in the past, and will in the future.

Right now, most banks fall into the category of what I call "depressed growth" stocks. Mature banks, in a normal economic environment are not growth stocks, but are dividend stocks.

Growth stocks do not usually pay a dividend.

In time, if and when the economy returns to a more normal condition, and the banks return to consistent profitability, they will leave the ranks of "growth" stocks, and once again become "dividend" stocks.

I expect this is what will happen with IRE, AIB, LYG, RBS, BAC, C, RF, HBAN, FITB, PVTB, KEY, etc.

All of the above is JMO and worth exactly what I am charging for it. 

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#7) On June 25, 2010 at 1:09 AM, harrytong76228 (34.19) wrote:

Thank you for your great analysis teacherman1.

Since the market cap for IRE increased from $901 million to $4.6 billion because of the Irish government's stake. What is your calculation on IRE's book value?

Before the government's 36.5% the book value was around $36. So 63.5% of $36 would be $22.84. Is this correct or am I missing something?

Thanks for your time!

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#8) On July 18, 2010 at 3:49 PM, Teacherman1 (< 20) wrote:

Sorry I didn't respond to this sooner, but I don't usually go back and look at my blogs after a couple of days.

I honestly don't think there is any way to accurately calculate the book value of IRE at this point. There are too many unknowns.

I am investing for "future value". They have done what they need to do to "clean up the mess", and are "stable" at this time. It will take time, and a longer term rebound in the Irish economy to see the results. 

When this happens, I expect the Irish govt will sell off their shares a little at a time, like the U.S. is doing with Citi.

They may also be in a position to raise more money and make a deal to buy back some of the stock the govt bought.

Remember, the govt did not really want to own more stock, they wanted to be paid interest, and then paid back in a similar fashion to bonds, but the EU would not allow this.

In a 'nutshell", I would not be buying this bank based on "book value", but rather on the basis of their future prospects.

JMO and worth exactly what I am charging for it. 

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#9) On July 28, 2010 at 12:21 PM, jeremiahcork (< 20) wrote:

Teacherman is it possible to profit from the dips in price?

I am thinking of buying $24k of stock in AIB. Then selling if it rises by .20 or more cents a share. This would give me a tidy profit, especially if I did it afew times. 

I am new to investing. I am following shares in transocean (RIG) pfizer PFE and AIB. I could split my money between the 3 stocks. (OIL,PHARMA,BANKING) that might be a safer strategy. Should I spread my money out over mre stocks...? 

thank you



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