Dáil Éireann Debate, Wednesday - 3 February 2010
94 Deputy Frank Feighan asked the Minister for Finance when interest is due to be paid on preference shares held by Government or the National Pensions Reserve Fund; if he expects these payments will be awarded; and if he will make a statement on the matter. [5223/10]
View answer147 Deputy Jim O’Keeffe asked the Minister for Finance the consequences of the decision of the European Commission to disallow payment of dividend interest by the Irish banks on the moneys advanced to them in return for preference shares; the impact on State ownership of the possible issue of ordinary shares in lieu of interest dividend; the situation on same; and if he will make a statement on the matter. [5138/10]
View answerI propose to take Questions Nos. 94 and 147 together.
As a condition of state aid approval, in respect of the recapitalisation by the Irish Government of both Allied Irish Banks and Bank of Ireland, the European Commission required that the two banks each prepare and present restructuring plans to the Commission. The plan for Bank of Ireland was submitted on 30 September 2009 and the plan for Allied Irish Banks was submitted on 13 November 2009. The restructuring plans must comply with EU guidelines in this regard and have regard to EU state aid rules.
The commitment to burden sharing by the institution is a key consideration of the EU requirements for restructuring plans. Drawing on this, the EU issued guidelines in October 2009 aimed at clarifying its position on burden sharing, in particular with regard to the non-payment of discretionary coupons for hybrid capital instrument holders. The basis of the Commission's policy is to ensure that the amount of state aid should not exceed the minimum necessary and to achieve appropriate burden sharing with bond holders. Commission practice in this area is guided by the principle that transactions such as coupon payments reduce the total regulatory capital of an institution and this is incompatible with a position in which those same institutions are still reliant on state aid to fulfil regulatory capital requirements.
In response to the Commission's policy in this area, Allied Irish Banks and Bank of Ireland have both been obliged to announce to the market that they cannot make discretionary coupon payments on tier 1 and upper tier 2 capital instruments. Non-payments of these coupons gives rise to a so-called dividend stopper, which prevents payments on a range of other hybrid capital instruments held by the two institutions, including the cash coupon on the State's preference shares. This would result in the activation of an alternative payment mechanism that would give rise to issuance of ordinary shares related to the cash amount of the dividend that would otherwise have been payable.
I am determined, in the context of ongoing discussions with the European Commission to secure agreement on the banks' restructuring plans, to resolve this issue to ensure that the State receives appropriate remuneration for its recapitalisation of these banks. Importantly, the European Commission is open to finding a solution, particularly since payment of a cash dividend on the State's preference shares was an important element of the Commission's approval for the state aid provided to the banks in the first instance. I will keep the Deputy updated on progress in this matter.
I thank the Minister for his helpful reply. Why did the Minister not exercise his rights to take ordinary shares, rather than going to the European Commission to try to find a way of getting an exception to its general ban on the payment of dividends? My understanding was that the Minister structured the deal in such a way that in the event of non-payment, he would receive ordinary shares, as the latter would appear to put the taxpayer in a position to gain from a recovery in the banks. Alternatively, is the Minister of the view that he wants the cash? Furthermore, how could general guidelines provide that dividends would be paid to one type of investor, namely, the State, while other investors would be excluded from such privilege? Would this not in itself be in breach of state aid by favouring one type of creditor?
There is a fundamental distinction between a bond that provided for the repayment of interest advanced on foot of an arrangement with a private investor and a capitalisation arrangement that was approved by the Commission itself. While the position is that the payments are stopped at present, that is without prejudice to the State making its case in the context of the restructuring plan that such preferential payments should be made. On the wider question raised by the Deputy as to the reason the State does not simply rely on the ordinary shares, the return on the preference shares is immediate and tangible, while the return on an ordinary share is a matter of some volatility, depending on the value of the equities in the market over time.
One certainly would get good value at present.
However, the whole point about the preference share arrangement is that it provided the taxpayers with an immediate return on that particular investment they made in Bank of Ireland and Allied Irish Banks. I believe the coupon was set at 8% and that particular coupon was a return to the pension fund from the institutions in question.
I refer to the Minister's investment of €7 billion on behalf of the taxpayer into Bank of Ireland and Allied Irish Banks through this preference share structure. Is the dividend on these preference shares a cumulative preference dividend so that the dividend rights accrue until such time as the banks ever pay a dividend, when that dividend comes first?
Under the new arrangements announced by the Department last evening the NTMA will take over the management of the Minister's shareholding in the credit institution. The National Pensions Reserve Fund, which is also under the remit of the NTMA, provided these funds. Will it be the NTMA's decision from hereon as to whether or not the option on converting the arrears of preference dividend into ordinary shares is taken up?
The NTMA does not decide that. Under the terms of the capitalisation arrangement the Allied Irish Bank dividend on preference shares is payable annually in advance on the anniversary of the 2009 issue date, which is 13 May, or the next business day. The Bank of Ireland dividend on preference shares is payable annually in arrears on 20 February or on the next business day. That is the position.
Does it accumulate?
I will have to write to the Deputy about this as I do not have the information to hand.
Normally in most companies it does accumulate.
The Deputy has asked a question.
There is no provision in the recapitalisation agreement for the conversion of the preference shares into ordinary shares. The banks can repurchase at par up to the fifth anniversary of the issue and thereafter at 125% of par. The effect of the restrictions by the banks would be to trigger the dividend stopper provisions of the Government's preference stocks and the pension fund would then become entitled to be issued a number of ordinary shares related to the cash amount of the dividend that would otherwise have been payable should there be no change in these circumstances. That is the position. It may be if the matter is still with the commission on 20 February that it can be left in dry dock until final advice is received from the commission
Does section 3 of last night's document mean the NTMA now makes the decision?
The Deputy should not address the House from a seated position until she is called.
Section 3 states that the NTMA is now managing the Minister's shareholding.
It has been managing my shareholding for the past year in practice also. There is no constitutional revolution here. The NTMA is subject to ministerial direction as an arm of the Minister for Finance.
It also has responsibility to the National Pensions Reserve Fund.
The Deputy cannot simply address the House from a seated position.
When does the Minister expect that the business plans that are with the European Commission in respect of the recapitalisation of AIB and Bank of Ireland will come back from there? What percentage shareholding does the Minister anticipate that the Irish State and the Irish taxpayer will have on the two main banks post recapitalisation?
I will not hazard any speculation on a percentage share that the State might or might not have in any particular institution as a result of capitalisation. I am in consultation with the Governor of the Central Bank, the regulator and my officials about the extent of capitalisation which will be required. The structural plans and their approval will have a bearing on that. Work on the structural plans is ongoing in the Commission and I anticipate the Commission will revert on the structural plans in the first half of this year.
A total of €560 million is due to the Irish taxpayer in February or May. What will happen to this? Will the taxpayer definitely get value of some sort on 20 February or 13 May or will this just be added to the money owing? A cheque is due to the National Pensions Reserve Fund on those dates and we need clarity on the Minister's view of what will happen on those dates.
Does the Minister anticipate that the State will have a controlling interest in the ordinary shares of the two main banks, namely, AIB and Bank of Ireland post recapitalisation?
Deputy O'Donnell is speculating about the future capital structures of institutions.
Which have huge implications for the Irish taxpayer.
We must determine the level of capital they require in the first place. With regard to the payment, it is set out in the agreement that an arrangement exists which will come into operation in default of payment. However, the question may still have to be determined as to whether the effect of European intervention is simply to freeze matters for a relatively short period of time. Whether it happens in February or some weeks thereafter, finality will be brought to this matter.
Written answers follow Adjournment debate.
