I propose to take Questions Nos. 36, 64 and 69 together.
On 30 March 2009, I directed the National Pensions Reserve Fund Commission to invest €3.5 billion in preference shares issued by Bank of Ireland and on 12 May 2009 I directed the Commission to invest €3.5 billion in preference shares issued by Allied Irish Banks plc (AIB). I gave these directions under the Investment of the National Pensions Reserve Fund and Miscellaneous Provisions Act 2009 ("the 2009 Act"), having consulted the Governor of the Central Bank and the Regulatory Authority and having decided that the investments were required in the public interest to prevent potential serious damage to the financial system in the State and to ensure the continued stability of that system.
These investments were in perpetual preference shares with an annual non-cumulative fixed dividend of 8% payable in cash or, in the case of non-payment by either bank of the cash dividend, ordinary shares in lieu. The preference shares could be repurchased at par up to the fifth anniversary of the issue and at 125% of face value thereafter. Warrants issued with, but detachable from, the preference shares gave an option to purchase up to 25% of the enlarged ordinary share capital of each bank (following exercise of the warrants). The warrants were exercisable at any time from the fifth to tenth anniversary of issue of the preference shares or immediately prior to any takeover or merger of the bank concerned, whichever is earlier. The number of ordinary shares which could be acquired pursuant to the exercise of the warrants was subject to anti-dilution protection in line with market norms for warrants. Accordingly, the warrants will be proportionately adjusted for any increase or decrease in the number of ordinary shares in issue resulting from a subdivision or consolidation of units of ordinary shares. The warrants will also be proportionately adjusted for any capital distributions by the bank and for certain bonus issues or rights issues by the bank.
In February and May 2010, the Fund received ordinary shares in Bank of Ireland and AIB in lieu of cash as payment of the first dividend on its preference share investments. The payment was made in the form of ordinary shares as the European Commission has requested that discretionary coupon payments on Tier 1 and Upper Tier 2 capital instruments in Bank of Ireland and AIB not be paid while it considers each bank's restructuring plan. The number of shares issued in each case represents the amount of the annual preference share dividend divided by the average share price in the 30 trading days prior to the date of issue.
On 30 March 2010 I gave details to the House of the further capital needs of the banks in order to meet the Financial Regulator's requirement of a Tier 1 capital ratio of 8%, of which 7% must be equity.
As regards Bank of Ireland, on 25 April 2010, again having consulted the Governor of the Central Bank and the Regulatory Authority and, having decided that it was required in the public interest to prevent potential serious damage to the financial system in the State and to ensure the continued stability of that system, I issued directions to the National Pensions Reserve Fund Commission under the 2009 Act to convert part of its €3.5 billion holding of Bank of Ireland preference stock into ordinary stock as part of the capital raising exercise announced by the bank on 26 April. The details of the transaction are as follows:
Placing/ Conversion (Step 1)
The National Pensions Reserve Fund (NPRF) subscribed for 576 million units of ordinary stock. In exchange for this stock the NPRF converted 1,036 million units of preference stock at their issue price of €1.00 into ordinary stock.
The NPRF received €491 million in cash in return for the cancellation of the warrants issued in conjunction with the preference stock.
Rights Issue (Step 2)
The NPRF participated in the Bank of Ireland rights issue taking up the full allocation to which it is entitled at a price of €0.55 per unit of ordinary stock. In order to exercise the rights, the NPRF converted a further 627 million units of its preference stock into ordinary stock.
The NPRF received €52 million in fees for its participation in the transaction.
Change in dividend rate on preference stock
The dividend rate on the remaining preference stock increases from 8.00% to 10.25%.
The transaction involved no new investment by the NPRF in Bank of Ireland and was funded entirely via conversion of preference stock. Including the cancellation of the warrants issued in conjunction with the preference stock and fees, the NPRF has received total cash income of €543 million from Bank of Ireland for participation in the transaction.
The NPRF's directed investment in Bank of Ireland now consists of:
1,900 million units of ordinary stock valued at their current market price (36% of the bank's ordinary stock in issue); and
1,837 million units of preference stock held at their issue price of €1.00 paying an annual dividend of 10.25%.
As regards AIB, the NPRF's directed investment in AIB now consists of:
3,500 million units of preference shares held at their issue price of €1.00 paying an annual dividend of 8.00%;
198 million ordinary shares valued at their current market price (18% of the bank's ordinary stock in issue)
In my statement to the House on 30 March, I said that the Regulator had determined that AIB must raise additional equity capital of at least €7.4 billion by the end of the year to meet the new base case capital standards and that, as the first step in meeting its capital needs, AIB would immediately commence the process of sale of overseas assets. The disposal proceeds will provide significant capital but may not be sufficient to address the full requirement. To the extent that the gap is not filled by the private sector, the State is willing to convert some or all of its preference shares as required on terms to be agreed that will provide full value for the State. Depending on the structure of the capital raising and the extent of private participation, no new Exchequer funding may be required. But if additional money is required, it will be provided by way of ordinary equity. Any additional capital requirement will be met from the National Pensions Reserve Fund.
The NPRF Commission will continue to publish information on the overall return on and value of the investments it holds in credit institutions at my direction in its quarterly Performance and Portfolio Updates.
As regards the treatment of changes in the value of the NPRF, the contribution of the NPRF to the General Government Balance is made up of the interest and dividends which it earns on its investments, less any costs associated with the administration of the fund. Any changes in the nominal values of investments held by the NPRF are not considered to be income or expenditure, as they affect the value of the stock of NPRF assets and do not have an impact on the General Government Balance. The payment to Government of ordinary shares in lieu of a dividend is considered as income in national accounting terms and, therefore, improves the General Government Balance by the same amount as if the Fund had received the dividend payment.