On 25 April 2010, having consulted the Governor of the Central Bank and the Regulatory Authority and having decided that it is 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 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) has 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.
Warrant cancellation
The NPRF has 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 will participate 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 will convert a further 627 million units of its preference stock into ordinary stock.
Fees
The NPRF will receive €51 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 involves no new investment by the NPRF in Bank of Ireland and is being funded entirely via conversion of preference stock. Including the cancellation of the warrants issued in conjunction with the preference stock and fees, the NPRF will receive total cash income of €542m from Bank of Ireland for participation in the transaction.
On completion of the transaction, the NPRF's directed investment in Bank of Ireland will consist of: 1,900 million units of ordinary stock valued at their current market price (36% of the bank's ordinary stock in issue including the bonus stock issued to the NPRF in lieu of a cash dividend on the preference stock in February 2010); and 1,837 million units of preference stock held at their issue price of €1.00 paying an annual dividend of 10.25%.
The return on the investment comprises dividends received on the ordinary and preference stock, changes in the market value of the ordinary stock and receipts in respect of the cancellation of the warrants and transaction fees. Bank of Ireland's share price has been volatile since the announcement of the transaction. It is not uncommon for the volatility of a stock to increase during a rights issue period. Additionally, market volatility globally has increased in recent weeks.
The NPRF Commission will continue to publish information on the overall return to and value of the investments it holds at my direction in credit institutions 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.