Late yesterday, the Irish Government announced that it has “decided on a comprehensive recapitalization package [for Allied Irish Bank and Bank of Ireland] which will reinforce the stability of our financial system, increase confidence in the banking system here, and facilitate the banks involved in lending to the economy.” The government announced in December that it was investing €2 billion in each bank under Ireland’s €10 billion bank recapitalization program. Yesterday’s announcement of an additional €1.5 billion for each bank brings the government’s total investment to €7 billion. The main features of the recapitalization package are as follows:
- The government will provide €3.5 billion in Core Tier 1 capital for each bank
- The government will get preference shares with a fixed dividend of 8% payable in cash or ordinary shares, which can be repurchased at par up at any time prior to the fifth anniversary of the issue and at 125% of par thereafter
- The government can appoint, in total, 25% of the directors of each banks
- The government will also receive 25% of total ordinary voting rights in respect of change of control and board appointments
- The government will receive warrants to purchase up to 25% of the ordinary share capital of each bank existing on the date of issue of the new preference shares
- If the bank redeems up to €1.5 billion of the government’s preference share investment with the proceeds of privately sourced Core Tier 1 capital prior to December 31, 2009, then the warrants will be reduced pro rata to that redemption to an amount representing not less than 15% of the ordinary shares of the bank
- The recapitalization program will be funded from the National Pensions Reserve Fund
In addition, the Irish government “believes that pay restraint is important in the overall context of the economy and the supports being provided by the taxpayer, and will act accordingly.” Therefore, both Allied Irish Bank and Bank of Ireland “accept that the pay of senior executives will be curtailed. Total remuneration for all senior executives will be reduced by at least 33%. No performance bonuses will be paid for these senior executives and no salary increases will be made in relation to 2008 and 2009.” Fees for non-executive directors will be reduced by at least 25%. This policy is consistent with initiatives announced recently by other European nations.
The recapitalization package is subject to approval by Ireland’s regulatory bodies, ordinary shareholders, and the European Commission under EU state aid rules.
The Irish government is also “in discussions with the other covered institutions (Irish Life and Permanent, EBS and INBS) concerning their respective capital positions and about the review of the guarantee scheme. Anglo Irish Bank, now under full public ownership, will continue to trade as a going concern.”