Dáil debates

Thursday, 17 January 2013

Other Questions

Banks Recapitalisation

5:20 pm

Photo of Brian StanleyBrian Stanley (Laois-Offaly, Sinn Fein)
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To ask the Minister for Finance if, following information from his Department that negotiations to sell €500m - €1bn of Bank of Ireland Contingent Capital Notes had concluded, he will set out in tabular form the companies and third party persons engaged by the State to act on its behalf in the matter including at pre-sale and marketing stage, an outline of the work undertaken, and the date of engagement and the fees payable. [1799/13]

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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To ask the Minister for Finance the loss of income to the State on an annual basis arising from the sale of its holding of Bank of Ireland convertible contingent capital notes; the reason the sale was undertaken at this time; and if he will make a statement on the matter. [2021/13]

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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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.

5:30 pm

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The sale of these CCNs, contingent capital notes, was kept very quiet and only announced several hours before it was completed. At €1 billion, this is the largest sale of a State asset this year and should be subject to proper scrutiny. The Minister gave many figures in his reply. It is clear from this and replies to other parliamentary questions that there has been a substantial reduction in returns on the notes to the Exchequer. One figure the Minister suggested is that the Exchequer will be down €18 million this year and €64 million next year as a result of this sale of CCNs. Many will ask how could we have lost such amounts and still announced it as a good development.

There is the question of who is the buyer of this CCN. If it were to be converted to capital, what percentage of the bank would the owner or owners have? There is also the question of who managed this sale. The Minister stated the shareholder management unit in the Department of Finance managed this. I do not want to cast any aspersions here but the head of that unit is Michael Torpey. While I wish him well, Michael Torpey will be Bank of Ireland's chief executive of its corporate and treasury division. There is a genuine question there without casting any aspersion on anyone-----

Photo of Seán BarrettSeán Barrett (Dún Laoghaire, Ceann Comhairle)
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Be careful now.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I have made it clear the reason I have raised this-----

Photo of Seán BarrettSeán Barrett (Dún Laoghaire, Ceann Comhairle)
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I would prefer if names were not mentioned.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The Minister actually welcomed this transfer yesterday.

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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Yes, but not in the House.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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He mentioned it in the public. I am not casting any aspersions on the individual in question.

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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The issue is about naming people in the House.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I am not casting any aspersions but a genuine question arises when someone who heads up the management-----

Photo of Seán BarrettSeán Barrett (Dún Laoghaire, Ceann Comhairle)
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Will the Deputy put a question because we are over time?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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When the person who headed up the management unit which dealt with the sale of these CCNs becomes a chief executive of the very same bank's unit dealing with similar issues and given the Government's commitment to a programme-----

Photo of Seán BarrettSeán Barrett (Dún Laoghaire, Ceann Comhairle)
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There is an implication there, Deputy, and it is wrong in this House.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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No.

Photo of Seán BarrettSeán Barrett (Dún Laoghaire, Ceann Comhairle)
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It is wrong and it is not in accordance with Standing Orders. It is as simple as that. Will the Deputy please allow the Minister to respond?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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There is a programme for Government commitment to allow for a cooling-off period for senior departmental officials transferring to the private sector. Will the Minister reassure the House there are no questions concerning this appointment?

Will the Minister also explain why this is such a good deal when our Exchequer position is worse as a result of this transaction?

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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The State has no interest in owning or operating banks. It was because of the catastrophic situation in which we found ourselves that the State had to put capital into the banks and take a shareholding in them. It has always been the policy to recover the taxpayers' money in so far as we could. Up to €1 billion was put into CoCos, contingent capital notes, and we recovered it in full in accordance with that policy. The taxpayer has lost nothing and has, as a matter of fact, gained €10 million on the transaction.

Regarding the issue of the coupon, in any investment one measures risk by the interest rate charged. I mentioned the investment and the ESM, European Stability Mechanism. The reason one had to pay a small commission to get into that mechanism was because there is no risk to one's money. The reason one gets 10% on CoCos is because there is a very significant risk. If the capital holding in the bank were to decline below 8.5%, the CoCos get automatically transferred into equity. As soon as that happens, bad debts can burn it up. One can lose one's full capital as a result. That is why one gets 10%. The interest rate always measures risk. The lower the interest rate, the lower the risk. The higher the rate, the higher the risk.

In my judgment, it was a good idea to take the taxpayers' money out in full even though if we continued with the risk, there would be an annual yield. That was my judgment call. Other people can argue it other ways but I believe the taxpayer has had enough of risk over the years. If I can get money out at par through preference shares or CoCos – there is quite a lot of them through the system – I will sell at par. That is because any arrangement we can get from Europe, I do not believe we will get it at par.

Photo of Seán FlemingSeán Fleming (Laois-Offaly, Fianna Fail)
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I understand it was a judgment call. What are the budgetary implications for 2013 of not having the income from this source?

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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It comes to between €17 million and €18 million.

Photo of Seán FlemingSeán Fleming (Laois-Offaly, Fianna Fail)
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That is a serious figure and I hope social welfare recipients, medical card holders or home help will not be paying for that next October.

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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We are okay. We have it well covered under the December returns.

Photo of Seán FlemingSeán Fleming (Laois-Offaly, Fianna Fail)
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Presumably the initiative for this came from Bank of Ireland as it is in its interest to get the State out of its realm as much as it is the State's. Did Bank of Ireland do most of the running in this sale?

Last year the Minister for Public Expenditure and Reform made a big play that he had got a commitment from the troika that 50% from the proceeds of the sale of State assets could be used for job creation and investment purposes. Is half of the money from the sale of the CCNs going into this fund or will the full €1 billion be taken off the national debt? If it is going against the national debt, why is 50% not being used for job creation?

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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This was borrowed money which was put into recapitalising the banks as part of contingency funding in case the banks needed it. As I explained, there was a high risk so there was a 10% coupon on it. It has been the Government's decision that any moneys got from the sale of assets in the banks will be used to reduce the debt because that money was always borrowed. We cleared the debt with the sale of the asset.


On the issue of the official to which Deputy Pearse Doherty referred, he went on holidays to Australia on 14 December and did not return until last week. In accordance with normal practice, he will not take up duty in the banks for another two months. There is a kind of cordon sanitaire for three months so there is no conflict of interest in the way this was operated. It is a general policy to reduce the borrowed moneys put into the banks by the taxpayer.