While it has made some progress on the matter, Bank of Ireland still has another €1.5bn to find — by the end of February — in order to meet its recapitalisation targets, as set out by the Government.
The bank declined to address the matter in detail yesterday, pointing out it does not comment on speculation; but Davy Stockbrokers effectively set tongues wagging by suggesting BoI might be about to buy back a degree of its undated subordinated debt — which amounts to around €750m — in another round of capital generation.
“There is around €750m of undated subordinated debt outstanding, and we believe further non-coercive liability management will occur shortly in this space to help generate capital towards the outstanding €1.5bn core capital requirement by the end of February. In our view, the undated subordinated debt was not part of the recent liability management exercise, which generated capital of €700m, as the ‘dividend stopper’ restriction only allowed for an exchange into equity, which is unlikely to generate as high a take-up as either a straightforward cash offer or even a senior debt exchange,” commented Davy’s Stephen Lyons.
While the European Commission was reviewing Bank of Ireland’s restructuring plan last year, the bank was restricted from buying back or exchanging debt and from making discretionary coupon payments.
The fact the bank didn’t announce, by this week, that those restrictions still exist on an undated bond scheduled for a coupon payment at the beginning of February has led analysts to speculate that it is set to launch a buyback offer on some of its undated junior bonds.
Such a move could raise around €200m for the bank, which would leave it needing to raise €1.3bn of outstanding capital. It is seen as being likely the remainder would come from a further cash injection from the National Pensions Reserve Fund (NPRF), which would see the Government up its stake in BoI beyond the current 36% mark.
Mr Lyons noted that “some sort of convertible instrument could be used, whereby the state commits to providing the outstanding capital, which will convert to equity at a future date in the event that the bank is unable to source this privately”.
“While we’re uncertain as to what form such a bond would take and how it would be included as core tier 1, we think the timeline for the equity raise looks to be in reverse, which makes sourcing private capital difficult — banks need to first raise capital and subsequently face further stress tests on asset quality and liquidity as well as de-leveraging.
“A convertible instrument could make sense and would be supported by further liability management, which at €200m would take the group’s core tier 1 ratio to around 10.5% and is coincidentally the new regulatory minimum.
“The bank needs to hit a target 12.5% core tier 1 ratio with its capital raise, but reaching the regulatory minimum, through self-help measures, may provide support for any convertible option,” he added.