UPDATE 1-European investors offer final crutch to BKIR
By Aimee Donnellan and Helene Durand
LONDON, Dec 4 (IFR) - Real money, hedge fund and equity investors are expected to be the big players in Bank of Ireland's remarketing of its state-owned preference shares - an exercise that will provide the bank with capital until 2016, by which time it expects to have fully recovered.
The Irish lender announced on Wednesday morning that it would repay EUR1.8bn of state aid received in 2009 when it was rescued by the government.
As well as a EUR580m share sale, the bank is remarketing EUR1.3bn of preference shares at a price of 104.50 area, having initially marketed them at around 103. At the first update, the deal had attracted over EUR7.5bn of demand with 280 accounts involved.
"The market is going bonkers for subordinated debt and there is no question that this is going to work," said a syndicate banker. "This is a great buy. It's a credit turnaround story, and while spreads have compressed massively, there is still some upside."
Investors shared that view, saying they were impressed with the bank's handling of the crisis and its future.
"Bank of Ireland has come a long way in restoring its capital levels, even though asset quality is still a concern," said Georg Grodzki, head of fixed income at Legal & General.
"I think investors that are buying this instrument are taking a bet that the issuer will return to profit and pay them back in the coming years. There's a reasonable chance that this will indeed be the case."
This is the second time this year that Bank of Ireland has turned to the private market to sell down the state's stake in the bank.
It sold a EUR1bn contingent capital note with a 10% coupon in January, attracting nearly EUR5bn of demand. The paper went to hedge funds, asset managers and retail investors.
While that CoCo has an 8.25% Core Tier 1/transitional Common Equity Tier 1 contingent loss absorption feature, the preference shares do not include such a provision, potentially making them more palatable for investors.
The notes also include dividend stopper protection, another bondholder-friendly feature, as it prevents the bank from potentially inverting the capital structure.
A banker on the deal, which was jointly structured by Credit Suisse, Deutsche Bank and UBS and which is being jointly led by Bank of America Merrill Lynch and Davy, said the trade was an efficient way for the bank to bridge a short-term Common Equity Tier 1 requirement.
The bank has said it plans to derecognise the instrument from its Common Equity Tier 1 ratio by July 2016, unless that would mean an adequate capital buffer cannot be maintained above applicable regulatory requirements.
This is a voluntary action taken by the bank. The European Banking Authority said in October that the notes would be eligible to be recognised as grandfathered CET1 capital until December 31 2017, adding that this grandfathering would apply to state aid instruments and also to instruments remarketed to private investors.
"BoI will get to the point where it has more than enough capital, and this trade maximises the tangible book value per share," said a banker.
AVOIDING THE STEP-UP
The preference shares, issued when the 15% state-owned bank was rescued in 2009, are being remarketed via a special purpose vehicle called Baggot Securities Limited, allowing the lender to avoid a punitive 25% step-up scheduled for the end of the March 2014.
"It's quite common for a bank to use an instrument like this," said a DCM banker.
"By using the SPV, Bank of Ireland can structure the preference shares in such a way that the step-up is removed."
The proceeds from the sale will be used by Baggot to acquire part of the Bank of Ireland 10.25% perpetual non-cumulative redeemable preference stock that is currently held by the Irish National Pensions Reserve Fund Commission; Baggot will then issue perpetual non-cumulative notes secured on the preference stock to investors.
Baggot has undertaken to waive the step-up. "The terms and conditions of the deal can't be changed or it would lose its Common Equity Tier 1 recognition, so by using this orphan SPV, the step-up can be waived while all of the other terms and conditions remain the same."
A successful transaction will be considered a milestone for the bank, the banking sector in general, and the Irish government ahead of its expected exit from an EUR85bn international bailout this month.
The Irish lender still has some gaps to fill, as the Irish central bank said it needed to make extra provisions for loan losses as part of an industry-wide review.
"Bank of Ireland is almost out of the clutches of the Irish government. This is a huge signal of strength not only for Bank of Ireland as a credit but for the government as well," said a banker.
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