PTSB may need €600m

KKR and Colony Capital are the most likely investors in Permanent TSB when it raises capital following the results of the stress tests, according to a source.

Permanent TSB might have to raise up to €600m following the results of the ECB’s stress tests even though the likely capital shortfall will be between €200m and €300, the source said.

The ECB will tomorrow release its Comprehensive Assessment of the banking system.

The year-long exercise to determine the health of banks across the region includes asset quality review and stress tests.

Of the Irish banks covered by the assessment — Bank of Ireland, AIB, PTSB, Ulster Bank and Merrill Lynch — only PTSB has failed. The 99.2% state-owned bank failed the adverse scenario part of the assessment, which looks at whether PTSB has enough capital to withstand a severe economic downturn over the next three years.The capital shortfall could be up to €1bn.

However, it has €400m of contingent convertible (CoCo) liability notes, which can be converted into equity.

Moreover, it has sold a number of loanbooks over the past year, which means the capital hole will be €200m-€300m.

But market sources say the bank will have to raise about €600m to ensure it has enough capital to satisfy new investors. “No investor will take the risk without a big buffer. It is likely to be a mix of equity and some deeply subordinated debt,” said one corporate financier.

There has been market speculation that US investor, Wilbur Ross, could take an equity stake in the bank as he is close to Deutsche Bank, which is advising PTSB.

However, it is much more likely to be a private equity firm like KKR or Colony Capital, said a person familiar with the situation.

If PTSB fails to tap private investors, then it would be up to the Government to plug the capital shortfall. But another market source said that “it is extremely unlikely that the Government will have to write a cheque”.

However, PTSB will need its restructuring plan agreed with the EU Commission before it can raise new equity. “Investors will want to know what they are investing in,” said another corporate financier.The Department of Finance submitted a restructuring plan for PTSB to the European Commission last year.