The latest Investing Matters Podcast with Jean Roche, Co-Manager of Schroder UK Mid Cap Investment Trust has just been released. Listen here.
I don't have much investment experience. Perhaps someone can advise whether it is entirely proper that insider directors can place to themselves massive amounts of shares at rock bottom prices, and top up with warrants too, when other shareholders are not invited to participate? There would have been no chance of buying that quantity at that price in the open market (IMO). Is it legal? Good governance? And I don't believe it was "approved" by the "independent directors". When did they meet to approve it and on what basis did they decide that equal treatment for all shareholders was not required?
For a start--all I've time for today- the State (NAMA) owes AIB 10-12 bn. in unpaid NAMA bills. People forget that, or don't realise it. (They might even decide to pay that now, in the form of "promissory notes", which, it seems, will satisfy our Regulator as equity capital ! ) (Another alternative might be to provide CoCo capital to AIB, loan capital- surely at the same interest rate as AIB lends its property to NAMA ?- which converts to equity in a downturn, and which, it seems, would also be acceptable to the Regulator (- he who used to "regulate" the UK leading banks before 2008, when they were losing a multiple of what Irish banks were losing !).. Anyway, don't panic.
Both banks are of comparable size, in terms of extent of customer franchise, depositis in normal times, assets, etc, with AIB being perhaps 30% bigger. Both, operating in the same market, should have comparable sized haircuts to face as a percentage of assets. Both have the same recovery potential if one takes a medium term view. As such, both are similar to each other and then different to other banks with whom they have been grouped and then tarred with the same brush. The current share price of both is very negatively influenced by the fact that they passed over tens of billions of assets to the State in return for a promise of continued funding, a promise which the State cannot deliver as its own credibility has sunk. (Probably for this reason, as an ECB executive recently intimated, NAMA decided to cut down remarkably on the issuance of bonds from last September, thereby hitting AIB extra hard with sudden increased haircuts.). The State made a major blunder in its bank support programme by offering its own guarantee to the banks in exchange for their property. Its own guarantee was, simply put, not tradeable. Therefore, the banks lost deposits, worsening the previous liquidity problem and forcing capital raising at a ridiculously low price. Share prices sank by 70% or so directly as a result of the States loss of credibility, especially last August. The State, which owes both banks many tens of billions of unpaid NAMA bills, has caused the wrecking of these banks and will have to fix them, and their shareholders. I believe that's what;s going on now, with new arrangements being made in secret. It's only my opinion.
I'm no expert. I regard AIB and BOI as being essentially in the same boat, and fundamentally different scenarios to Anglo/Irish Nationwide. AIB-BOI can be accused of reckless lending, prompted by the opinions of the media, politicians, economists, EU, international institutions, none of whom were waving red flags and some of whom- ECB, Fed Reserve, etc- were actually contributing cheap money to the boom. But these banks were not "evil" in any way, nor can they be accused of abuse of shareholders funds through substantial loans to directors, friends, etc. In spite of the CB Governor's continuing expressions of his wish to see these banks sold to foreigners- something he has been saying consistently since he took up office- I doubt that the Minister would like to see this outcome. I suspect that he wishes to "fix up" the two main banks and return them to shareholders, perhaps with apologies for having contributed, via NAMA, to their desperate state. I suspect he'll do this by restructuring them, although a merger seems unlikely, providing them deposits from elsewhere (Anglo), getting rid of their less useful assets, thereby improving their deposit- loans and capital ratios, and then getting the government out as soon as possible.. All that is conjecture. But it would be very good for shareholders. (I imagine he can issue himself "B" ordinary shares, which can be sold separately, and on different terms, to the Ordinary shares ) (But he may not see the need to..). Worst case scenario would be to sell to a UK or EU bank. Better would be to do a temporary arrangement with Arab or Chinese funders, such as a "coco" deal, where loan capital becomes equity under certain cirscumstances. All this may not come to pass, and of course the present Minister may be out of office soon and one cannot perhaps rely on a Labour Minister to see things the same way. (But, really, I believe no Irish government will go along with the idea that the savings of the Irish people must be managed by overseas directors, and outside the regulatory influence of an Irish Central Bank..). Considering that all parties will make the greatest efforts to see BOI-AIB survive, and that both banks still have a very valuable franchise in the Irish market for deposits and loans, it seems to me that both offer very substantial upside in the medium term ((2-5 years), and even in the worst case scenario (sale to abroad).
In a democracy, can a government smash and grab a bank and get away with it? The Minister declared that he would put in 3.5 bn at 0.50 cents, after the share price collapsed because of the last minute NAMA demand for an extra 3 bn. His intervention effectively capped the price at 50 cents. Before that, the price had been c. 1.00, before NAMA smashed it, with no convincing reason ever given for the extra 3 bn.. (It was probably because ECB indicated that it didn't want to collect any more NAMA bonds, so NAMA cut down on the issuing of them) Before then, the bank was making progress on the agreement it had with the CB and Regulator, to sell off assets, pay the NAMA discount of expected c. 30%, raise extra capital and still leave the shareholders with 50% of the bank. That's what shareholders agreed to in late 2009. They have not had the opportunity to vote on these matters since then !!. The government has since changed its mind, backed out of the agreement, and dramatically influenced the share price downwards. The government guarateee given in exchange for banks property by NAMA- that's all we got, a guarantee, no actual payment for our property - proved to be unfit for the purpose of getting funding from ECB. Finally, the government effectively takes over the bank without consulting shareholders. That's why the price is c. 30 cents, wrecked by government policies and incompetence I believe Lenihan wants to fix things up as far as possible and then hand the bank back to original shareholders. He has a moral obligation to do so. Anyway, IMF wants the government out of the banks as soon as possible...That's part of the MOU with them. As for Honohan's talk about selling to foreigners...1. He has been talking like that since he took up the job and 2. His government owes 24 bn NAMA related funds, less 30- 60% discount to AIB...Will they pay that before selling it to a foreigner? (What foreigner will accept an untradeable Irish government promise/guarantee??)...and 3. The shareholders can go to the Euro Court to claim their rights...So, at 30 cents its a very good punt.
I agree with OMLoyalist, today, 10.52. Lenihan announced a rights issue and effectively capped the share price at 0.50 cents. He has a moral and legal obligation to follow through. In fact, his policies brought the price down from over a euro previously, when shareholders were persuaded to go into NAMA on the basis that this would sort out recapitalisation requirements and they would still end up owning half the bank. But NAMA (Lenihan) gypped them, offering...Not valuable guarantees to enable the bank to source liquidity,...but worthless bonds that nobody, including ECB, would touch; and, instead of taking AIB property at an expected discount of 30%, they demanded 30% extra at the last minute. Lenihans policies wrecked the banks. He cannot escape accountability. Perhaps, after all, he is secretely trying to fix things in his recent actions. (He could- and should- sort out the liquidity and capital ratio problems, put the bank back on track and then let the bank buy him out for a token profit, in 2-3 years, leaving the A shares to benefit)
I remain an optimist, but the time frame has extended. It seems all parties involved are determined that this bank will survive and eventually prosper. But who will own it is the question for us. The government wants to reorganise it as successfully as possible and as soon as possible. it now has the cash to do so. it also has the power to move some deposits in there. ...I suspect it wants to get out at a profit and as soon as possible. Anyway, the IMF has dictated that it must exit as soon as possible. So, it may issue "B" ordinary shares, which can be sold on without committing the A ord. chaps like us. At a fair price in 2-3 years time, the bank may buy back the Bs and thereby enhance the As. Or a foreigner. I suspect that the government will want to see substantial local ownership remaining after they exit, as a preference, and will want to do something for the traditional small shareholders which their banking policy has smashed.
With reports (below Thurs 13.50) about foreign banks interest in buying AIB, and reports today (Goodbodys) about the government approaching the Mid East Funds for suitable capital for the bank (= means the state's holding will be that much lower and the Mid East chaps will eventually divest, as they did with Barclays)...it seems to me that the share should be doubling in the short term. It seems nobody wants to nationalise the bank or wipe out existing shareholders (except perhaps at an "acceptable" price) - http://www.rte.ie/news/business/morningrep/download/1210goodbody.pdf
The financial situation is not as bad as we think..according to Goldnam Sachs, in a report published last week. We are forcing the banks to raise too much capital, they say, because the property they are transferring to NAMA is undervalued by NAMA. See http://brianodoherty.ie/wp/featured/2010/11/goldman-sachs-says-irish-bank-losses-not-so-bad/
It seems to me Mr. Lenihan has already committed himself to buying billions of shares at €0.50. If he backs out of that we'll sue !...Better, however, if he returns our NAMA property to us. And uses EU money to backstop his general bank guarantee. So, AIB can raise new capital itself. And raise government (and EU) guaranteed funding.
I think they are raising 10.4 bn of new capital, (incl. sale pof M&T, Poland, etc) of which 3 bn will be lost (together with all capital presently available) on the balance of NAMA transfers, leaving the bank substantially toxic-free, with available capital of 7.4 bn and perhaps c. 11.5 bn shares, although possibly less shares if they also bring in a strategic investor...not yet totally discounted, remember. Anyway, that seems to give a share price c. 0.65...However, earnings will be 0.10 per share, with future growth, so when things settle down, that could shove the share price up to 1.50. I would predict that that's the likely lower end of the possible price range over 2 years, assuming no further disasters. but I do not yet discount possibility of a new positive development. However, I'm a born optimist, so take your own advice
The RI is to be at 50 cents...That was fixed, in effect, when the government announced it would buy any extra shares at that price. Effectively that is now an upside cap, at least unless the RI terms are changed. Officially they have not been announced by the bank yet. (When that happens I suspect shareholders may be offered a discount on the 50 cents) AIB should be a takeover play. it will soon be ore debt-free (and toxic asset-free) than most comparable banks. At current price it could be bought for €320 million, or about a quarter of this years profits before write offs--i.e. core profits- or a quarter of its deferred tax assets--carried forward tax benefit/ savings on future taxes due to recent losses In 2 years time it should be worth somewhere north of 10 bn. Its €50 bn of quiality deposits will be attractive to many foreign banks. .I suspect that M&T or other bank already made approaches about buying it and the government stepped in to block it.. However, it could still be done and I feel that shareholders should not sell until it becomes really clear that the government will actually acquire the majority..That is, wait and see if some foreign bank launches a takeover attempt before the RI process is completed. IMO the upside potential is very good and downside medium term almost zero
The capital of the bank would be €7.4 bn (+non Tier 1 capital), which, divided by 8 bn. shares would be a euro per share and more...The projected earnings are c. 1 bn, so multiply that by 10 or more and we have a bank which will soon be valued at €10 bn. +The only question is how many shares must be issued...I think OmLoyalist over-estimates how much the present shareholders will be diluted.