Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

I propose to take Questions Nos. 7 and 11 together.

As announced by my Department last week, the State was successful in disposing of its entire €1 billion holding of contingent capital notes, CCNs, in Bank of Ireland. The transaction followed an initial approach by a number of investment banks to the Department late last year which indicated that there was sizeable investor interest in the State’s CCN instruments and particularly the holding in Bank of Ireland. The sale was managed by officials in the Department’s shareholder management unit, with many years’ experience working in financial markets and was not only timed to take advantage of the improving sentiment towards Ireland and its banks but the huge rally seen in international debt markets which has continued into 2013.

The transaction when announced saw the State presented with the opportunity to dispose of a minimum of €500 million of its position at a price of par. This stemmed from an underwriting commitment provided by the consortium of banks – UBS, Deutsche Bank and Davy – having done a preliminary assessment of market appetite for the notes. In the end the book build process generated significant excess demand to enable the State to dispose of its entire holding in the CCNs at a price of 101% of their par value plus accrued interest. This generated a profit for the State of €10 million. Taking account of the coupon paid to the State last year, the taxpayer has earned a total return of over 15% in the space of 18 months.

My officials had full visibility during the book build and pricing phases and were also provided with some valuation advice from NCB Stockbrokers which helped inform their judgment. The transaction was well received in the market and indeed the CCNs traded a few points higher in the after-market during their first few days of trading. This reflects a market recognition of a very successful transaction for Ireland, one in which we have exited this element of support to our banks with a profit. It points to a recognition that Ireland is successfully working to correct the very deep failings that have affected us in the past number of years. In recognising this, however, we must also acknowledge that this after-market price is for a very small volume of stock compared with the €1 billion size of the transaction.

The transaction was settled on Tuesday, 15 January and the State was paid proceeds of just over €1,056 million, comprising the nominal principal amount of €1,000 million, interest accrued of over €46 million covering the period 29 July 2012 to the disposal date, and a profit of €10 million. Fees payable by the State will be minimal in the context of the transaction and will relate to legal expenses and valuation advice provided by NCB. For commercial reasons I am not at liberty to disclose these however. The fees paid to the banks, which are the most significant, are being covered by Bank of Ireland.

The State’s investment in these instruments dates back to the 2011 PCAR exercise, and the successful exit from a large portion of this position represents another step along the road to normalising the State’s relationship with the banking sector. It is Government policy to separate the State from its banks, a policy which I believe has shared support in this House. This policy will see the State this year remove the guarantee of bank deposits and liabilities which dates back to September 2008 and it also requires us to exit our bank investments over time and when conditions allow. It is true that as the CCN investments were earning the State a generous 10% return per annum, the Exchequer will have to forgo this income but will also reduce its risk exposure to the banking sector. The State made this investment only out of necessity and it is pleasing that we have been able to exit this portion of our investment early and profitably.

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