Extension of Irish Bank Guarantee Scheme

The Government has today extended with the approval of the EU Commission the existing bank guarantee scheme to 31 December 2010. The existing eligible liabilities guarantee scheme (ELG Scheme) introduced in 2009 was due to expire today for new deposits and debt issuances. Now the amended ELG Scheme will continue to guarantee specific issuances of eligible debt securities and deposits (of up to five years maturity in each case) issued or placed up to 31 December 2010.

The guaranteed institutions remain the same, namely Allied Irish Banks, p.l.c., (AIB), Anglo Irish Bank Corporation Limited (Anglo), Bank of Ireland (BoI), EBS Building Society (EBS), Irish Life and Permanent plc (IL&P), Irish Nationwide Building Society (INBS) and certain of their group companies. Further details are available on the Department of Finance's website.  

Final Bill for Anglo Irish Bank

On the 8th September the Government announced its plan for the restructuring and resolution of Anglo, by splitting it into two regulated credit institutions - an "asset recovery bank" and a "funding bank". In his statement today, the Minister for Finance (the Minister) said that the capital requirement for the new structure was now established as definitively as possible.

The Central Bank's revised capital assessment published today includes both a base case and a stressed scenario. In the base case a further €6.4bn of capital will be required by Anglo, in addition to the €22.9bn already provided. In the stressed scenario this number increases by €5bn, bringing the total, potentially, to €34.3bn.

The principal driver of the projected increased capital requirement in Anglo is an estimated 67% discount on its remaining €19bn portfolio of loans due to be transferred to the State's National Asset Management Agency (NAMA) (the average discount on the first two tranches was 58%). The stressed scenario contemplates an increase in the NAMA discount up to 70%. This stressed scenario is also based on various projections on Anglo's non-NAMA loan book (including 65% to 70% peak-to-trough falls in Irish commercial property prices and limited recovery out to 2020).

It is now a priority for the Government to press ahead with the restructuring of Anglo and it is anticipated the split will occur, subject to European Commission approval, in early 2011. The transfer of Anglo's remaining NAMA bound loan portfolio will be accelerated (as discussed below) and is now proposed to be completed by the end of October. Each of these steps will require further implementing legislation.

AIB

In March, the additional capital requirement for AIB was calculated by the Irish Central Bank to be €7.4bn. The Central Bank has now advised AIB that it will be required to raise a further €3.0bn in additional capital. This increase arises principally from a review by NAMA of the remaining AIB loans yet to transfer to it. NAMA now estimates an average haircut of 60% for those remaining loans (up from a previous average of 45% on the two tranches already transferred). In respect of this €10.4bn capital requirement it is anticipated that:

  • AIB's disposal of its Polish operations will generate €2.5bn of capital;
  • a €5.4bn capital raising (placing and open offer) will be launched during November:
    • the capital issuance will be fully underwritten by the National Pensions Reserve Commission (NPRFC) at a fixed price of €0.50 per share; and
    • if necessary, the NPRFC's underwriting commitment will be met through a new cash contribution of up to €3.7bn for ordinary shares and by the conversion of up to €1.7bn of existing preference shares held by the NPRFC (which would leave €1.8bn in AIB preference shares held by the NPRFC);
  • in addition, AIB is planning further asset disposals and capital generating measures which could generate the remaining €2.5bn of capital required; and
  • subject to the outcome of those further asset disposals and capital raising measures, it may be necessary for the NPRFC to convert some or all of its remaining €1.8bn (referred to above) in preference shares.

As a consequence of these steps, it is anticipated that the Irish State will hold a significant majority shareholding in AIB. AIB has indicated that it intends to structure the capital issuance in a manner that optimises the ability of AIB to retain its existing stock exchange listings.

These measures will require European Commission approval. Today Competition Commissioner Joaquin Almunia said that he will follow the process very closely and that he "has no doubt that the collaboration between Ireland and the Commission will be satisfactory".

The Minister also announced that he expected to see progressive management and Board change in AIB. The AIB Board announced today that the banks' Executive Chairman, Mr. Dan O'Connor, and its Group Managing Director, Mr. Colm Doherty, would leave the bank over the coming months.

Other Institutions

  • BoI has met the Financial Regulator's 2010 capital requirements and, whilst its final tranche of NAMA loans may have a marginally higher discount than previous tranches (up to 42%), the Central Bank has confirmed that BoI has sufficient capital.
  • IL&P does not have loans going into NAMA and its capital requirements are unaffected by today's announcements.
  • EBS is not expected to be materially affected by higher NAMA haircuts, given the relatively small size of its NAMA portfolio.
  • INBS requires an additional €2.7bn in new capital (bringing the total capital support to €5bn). The NTMA is exploring options for the society and the Minister reaffirmed his view that INBS did not have a future as an independent stand-alone entity.

NAMA Process

Some fundamental changes to the mechanics of the NAMA loan transfer process were announced. However, there are still a significant number of loans to be transferred. To reduce and limit the duration of the loan transfer exercise the Minister has announced that:

  • all of Anglo's remaining NAMA bound loans are to transfer in one tranche by the end of October, with detailed due diligence and valuations to occur post transfer;
  • all of AIB and BoI's remaining loans are to transfer in a single tranche, each on dates to be determined; and
  • the working threshold for loans to be transferred to NAMA for AIB and BoI has been increased from €5m to €20m (for the total exposure to a debtor).

These measures should also allow, in the future, for greater efficiency and concentration of resources within NAMA on managing its portfolio.

These changes will require new regulations which have not yet been published.

Bank Bond Holders

The position of bond holders in certain Irish financial institutions has recently been the subject of much heated media debate. In his statement today, the Minister noted that senior debt obligations rank equally with depositors, that the Government has no plans to change this position and that there is no question of the Government seeking to impose losses on holders of senior debt obligations in Anglo, or any other credit institution in the State, through legislative measures.

The position of subordinated bond holders in each of Anglo and INBS is, however, different. The Minister said that he expects the subordinated bondholders of those institutions to make "a significant contribution" towards the costs of their resolution. Consequently, the Department of Finance and the Attorney General are working on resolution and reorganisation legislation which will enable measures to be specifically targeted at those bondholders. It remains to be seen how this will be implemented.

Conclusions

  • The measures outlined above should go some considerable way to providing greater certainty to domestic and international investors.
  • It appears that the total cost of the Irish State's support to the banking sector will be in the region of €45 billion, possibly extending to €50 billion in a worse case scenario.
  • The cost will be spread over a number of years.
  • A key question is the final level of discount to be imposed by NAMA on the remaining loan portfolios. Today's announcement provides greater clarity, on a bank by bank basis, of that anticipated discount.
  • Significant new legislation will be required in the near future to accommodate the acceleration of the NAMA process as well as the restructuring of Anglo and certain of the other Irish institutions.
  • Clearly, there is some way to go before the problems in the Irish banking sector are fully resolved but it is hoped that today's announcements mark a significant milestone in that process.