Kieran O'Donnell (Limerick East, Fine Gael)
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Question 147: To ask the Minister for Finance the projected cost to the taxpayer in respect of the recapitalisation of Allied Irish Bank and the Bank of Ireland; and if he will make a statement on the matter. [34313/10]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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On 30 March 2009 I directed the National Pensions Reserve Fund Commission to invest €3.5 billion in preference shares issued by Bank of Ireland and on 12 May 2009 I directed the Commission to invest €3.5 billion in preference shares issued by Allied Irish Banks plc (AIB). I gave these directions having consulted the Governor of the Central Bank and the Regulatory Authority and having decided that the investments were 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.

These investments were in perpetual preference shares with an annual non-cumulative fixed dividend of 8% payable in cash or, in the case of non-payment by either bank of the cash dividend, ordinary shares in lieu. The preference shares could be repurchased at par up to the fifth anniversary of the issue and at 125% of face value thereafter. Warrants issued with, but detachable from, the preference shares gave an option to purchase up to 25% of the enlarged ordinary share capital of each bank (following exercise of the warrants). The warrants were exercisable at any time from the fifth to tenth anniversary of issue of the preference shares or immediately prior to any takeover or merger of the bank concerned, whichever is earlier. The number of ordinary shares which may be acquired pursuant to the exercise of the warrants was subject to anti-dilution protection in line with market norms for warrants. Accordingly, the warrants will be proportionately adjusted for any increase or decrease in the number of ordinary shares in issue resulting from a subdivision or consolidation of units of ordinary shares. The warrants will also be proportionately adjusted for any capital distributions by the bank and for certain bonus issues or rights issues by the bank.

In February and May 2010 the Fund received ordinary shares in Bank of Ireland and AIB respectively in lieu of cash as payment of the first dividend on its preference share investments. The payment was made in the form of ordinary shares as the European Commission has requested that discretionary coupon payments on Tier 1 and Upper Tier 2 capital instruments in Bank of Ireland and AIB not be paid while it considers each bank's restructuring plan. The number of shares issued in each case represents the amount of the annual preference share dividend divided by the average share price in the 30 trading days prior to the date of issue.

On 25 April 2010, again 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) 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 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 participated 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 converted a further 627 million units of its preference stock into ordinary stock.

Fees

The NPRF received €52 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 involved no new investment by the NPRF in Bank of Ireland and was funded entirely via conversion of preference stock. Including the cancellation of the warrants issued in conjunction with the preference stock and fees, the NPRF has received total cash income of €543m from Bank of Ireland for participation in the transaction.

The NPRF's directed investment in Bank of Ireland now consists of:

1,900 million units of ordinary stock valued at their current market price (36% of the bank's ordinary stock in issue); and

1,837 million units of preference stock held at their issue price of €1.00 paying an annual dividend of 10.25%.

The NPRF's directed investment in AIB now consists of:

3,500 million units of preference shares held at their issue price of €1.00 paying an annual dividend of 8.00%.

198 million ordinary shares valued at their current market price (18% of the bank's ordinary stock in issue).

On 30 March 2010 I gave details to the House of the further capital needs of the banks in order to meet the Financial Regulator's requirement of a Tier 1 capital ratio of 8%, of which 7% must be equity. In the case of AIB I said the Regulator has determined that AIB must raise additional equity capital of at least €7.4 billion by the end of the year to meet the new base case capital standards. AIB immediately commenced the process of the sale of overseas assets as a first step in meeting its capital needs.

The Central Bank has now assessed the impact of the increased NAMA discount on AIB's capital requirements and has concluded that an additional amount of €3bn will be required. This brings the total capital requirement for AIB, after deducting the capital generated on the sale of its Polish subsidiary, to €7.9bn.

In order to afford every opportunity to AIB to raise as much as possible of the required capital from the markets and to minimise further Government support, it has been decided that this capital requirement will be met through a placing and open offer to shareholders of AIB shares to the value of €5.4bn. This transaction will be fully underwritten by the National Pension Reserve Fund Commission (NPRFC) at a fixed price of €0.50 per share and is expected to be completed in 2010 subject to shareholder and regulatory approval. If necessary, the NPRFC's underwriting commitment will be satisfied by the conversion of up to €1.7bn. of its existing preference shares in the bank into ordinary shares along with a new cash investment for the balance of €3.7bn in ordinary shares. This transaction structure assumes the sale of AIB's stake in M&T Bank and disposal of other assets in due course.

In the event that the bank's residual capital requirement is not met through asset sales by 31 March 2011, any shortfall will be met by the conversion of a proportion of the remaining €1.8bn. of preference shares. The company will issue a prospectus in relation to the open offer in due course giving details of the transaction, underwriting structure and timing. In the first instance, existing shareholders will be given the option of subscribing for the whole or part of their entitlement to new shares under the offer pro rata to their existing holdings. New institutional shareholders may also be permitted to subscribe for new shares. Any additional capital required will be provided by the NPRFC.

Ireland is committed to ensuring that all additional aid to AIB will be granted in line with State aid rules. To this end, it will notify the new measures to seek State aid approval before they are implemented. As a consequence of these actions it is likely that the State will hold a majority shareholding in AIB.

The high level of State support being provided to AIB, as an institution, is absolutely necessary given the central role that AIB plays in the Irish economy and in the Irish financial system. In the coming weeks I will be working closely with the Board of the Bank on behalf of the Government to ensure that AIB successfully overcomes its current challenges and develops a renewed strategic focus on the Irish market following the divestiture of its overseas operations.