BoI ordered not to pay interest to state

THE European Commission has instructed Bank of Ireland not to pay the state the interest it is due on its 25% preference stake in the troubled bank.

In December, the Commission imposed the same restriction on AIB which has also benefited from a €3.5bn capital injection from the state to support its Tier 1 and Tier two capital rations.

Those interest payments amount to €280m per annum each case, and if ruled out would represent a huge shortfall of €560m to the state’s depleted coffers.

The bank said the ruling raised doubts about the arrangement and said the future of the preference share scheme, which amounts to 25% of bank equity in each case, was “uncertain”.

In effect it could force the state to convert the preference shares into ordinary shares in both banks that could lead to state control.

That is a distinct possibility facing the Government as it looks to the longer term capital needs of the five banks who are transferring €77bn of bad and doubtful debt to the National Asset Management Agency.

Investment bankers Morgan Stanley, in a recent review of the banks’ capital funding needs, estimated the two major banks will need to raise a further €9bn in capital to satisfy the more stringent capital ratios demanded in the wake of the banking crisis.

John FitzGerald of the Economic and Social Research Institute, said yesterday he expected the banks would be taken into state control in the short term until the crisis in the banks is resolved.

Managing director of NAMA Brendan McDonagh said legislation is in place to facilitate the interest payments using alternative mechanisms.

Bank of Ireland said the restriction on banks subject to restructuring is intended to prevent the reduction of their own funds in the current tight circumstances.

In that context it said that under the terms of the capital funding from the state that payments due on February 1 and February 4, 2010 “will not now be paid”. It said the decision had no implications for the ongoing discussions with the Commission and its entitlements under the state aid rules and EU Treaties.

“The bank recognises that a longer period where there is non-payment of coupons is unfavourable from the perspective of the holders of the impacted securities.”

One proposal the bank said was open to it is to pay the €280m coupon it owes to the Government by way of ordinary shares either on the due date, or at some future date.