Tuesday, December 30, 2008

Bank bailout - Ireland v. UK

There has been much misinformed media commentary on the failure of the Irish Govt to take ordinary shares in the Irish banks, unlike their UK counterpart.

The reality is that the UK government invested, in the first instance, in preference shares and only acquired ordinary shares as a result of acting as underwriter to major rights issues for RBS, Lloyds-TSB & HBOS.

For example, RBS sought to raise £20bn in new capital - £5bn in preference shares taken directly by the UK government and a £15bn rights issue to existing shareholders, the latter underwritten by the Government. When the majority of existing shareholders failed to exercise their rights, the government ended up buying most of those new shares and became the majority 60% shareholder in RBS. Does anyone actually believe that this was the outcome the UK government desired?

Lloyds-TSB & HBOS sought a total investment of £17bn between ordinary & preference shares and, as with RBS, the UK government ended up with most of the new ordinary shares and currently holds 40% of the stock.

Both AIB and BOI have indicated that they are likely to seek to raise additional capital through a rights issue, with the Irish government acting as underwriter. Should existing shareholders fail to take up their rights, it’s highly likely that the government will become the largest, if not the majority, shareholder in both banks.

In addition, should AIB, Anglo or BOI be unable to pay the annual coupon of the preference shares bought by the Government, the missed dividend must be paid in new ordinary shares at the currently prevailing market price.

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