December 6, 2013 / 3:12 PM / 4 years ago

Bank of Ireland escapes government clutches

5 Min Read

* Irish lender pays back EUR1.8bn of state aid

* US, UK investors flood equity and pref share sale

* Irish government books profit on bailout

By Aimee Donnellan and Graham Fahy

LONDON, Dec 6 (IFR) - Bank of Ireland took a giant leap forward in its plans to return to mainstream banking this week when it successfully repaid EUR1.8bn of state aid, breaking free from the clutches of a government that supported it through the financial crisis.

The Irish lender executed a two-pronged plan to re-market EUR1.3bn of state-owned preference shares and sell EUR580m of equity, building on strong momentum in the capital markets that is making riskier instruments more attractive to yield-hungry investors.

"This is pretty much closure for Bank of Ireland following a very tough story during the crisis," said Sandeep Agarwal, head of EMEA DCM at Credit Suisse.

"These deals achieved a favourable outcome and follow-on secondary performance that speaks to the depth of the market and the confidence investors have in the Irish story."

The bank, which narrowly avoided a full state bailout and infamously burnt its bondholders during the height of the crisis, has been on a fast track to rehabilitation over the past year. It has regained access to every part of debt capital markets, selling covered, senior and Tier 2 bonds, while the government also managed to re-market a CoCo it took on as part of the rescue process.

This week's package allows the bank to redeem EUR537m of government-held preference shares and move the remaining preference shares into the hands of private investors. The bank now expects to redeem the preference shares in 2016 from retained profits.

"This remarketing exercise and equity sale have given us great clarity on the future of the group, and the improvement in our net interest margins provides strong momentum towards sustainable profitability," said Donal Collins, head of group strategy at Bank of Ireland.

US and UK asset managers clearly believe in the bank's recovery, putting in EUR1.7bn of orders for the equity sale and around EUR10bn for the preference shares.

"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."

The preference shares were priced at 104.5, while the equity was priced at EUR0.26.

Proceeds of the equity issue provide the government with a tidy profit - and good news to placate weary taxpayers who had pumped EUR4.8bn into the bank when it was partially bailed out. The government made a profit of EUR62m on its investment in the preference shares, alongside accumulated interest of around EUR151m.

Dividend Freedom

The sale package removes a restriction that prevented the payment of dividends on the bank's ordinary shares while the preference shares were held by the state. This normalises the bank, giving it greater autonomy to decide when and how it handles payouts to shareholders.

"We are a strong bank in an evolving market," said Sean Crowe, head of group treasury of Bank of Ireland. "The government is now in a net positive cash position from its bailout of Bank of Ireland and continues to hold a discretionary stake in the bank."

By unwinding the state's position in the preference shares ahead of a March 31 deadline and structuring the sale using a special purpose vehicle, the bank has avoided a step-up premium that would have made redeeming the shares 25% more expensive. The government retains a 14% stake in the bank.

"This is a situation where everyone is happy, which does not happen every day," said Mauricio Noe, managing director, financial institutions group at Deutsche Bank.

"The government achieved a price way above par and investors got exposure to a credit in which they have confidence. It proves that this name is definitely no longer in high-beta territory any more."

The deal follows a steady stream of more positive economic news in Ireland, including the fastest fall in unemployment in four years.

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