BANK OF Ireland will seek to raise €1.91 billion from shareholders through an 18-for-five rights issue this month as part of its drive to boost its capital base by €5.2 billion to meet regulatory requirements.

The stock has been valued at 10 cent each – a 13.8 per cent discount on the closing price of the bank’s shares in Dublin yesterday.

The rights issue will be fully underwritten by the National Pensions Reserve Fund Commission on behalf of the State.

With many shareholders unlikely to take up their options, the State is likely to become a majority shareholder in the bank.

This would make it the fifth Irish financial institution to be majority owned by taxpayers.

At present, the state owns 36 per cent of Bank of Ireland. As part of the rights issue, this can increase to a maximum 70 per cent.

The state is also providing €1 billion in contingent capital for Bank of Ireland as part of its capital-raising measures.

The bank announced yesterday its recent liability management exercise – which imposed discounts on subordinated bondholders – had generated €1.96 billion in core Tier 1 capital for the institution.

In addition, a similar exercise, which is likely to be imposed by the Minister for Finance on the bondholders who didn’t accept the bank’s debt-for-equity offers, is expected to generate €510 million in capital. About 74 per cent of subordinated bondholders agreed to swap notes for equity or cash at a discount.

In total, Bank of Ireland needs to raise €5.35 billion. Of this, €4.2 billion is required to bolster its core Tier 1 capital ratio and €1 billion is needed in contingent capital.

These are required to meet targets set out by the Central Bank following its prudential capital assessment review earlier this year.

The bank also expects to pay €150 million in expenses arising from its capital-raising measures.

Shareholders will be asked to approve the terms of the rights issue at an extraordinary general meeting in Dublin on Monday.

This is expected to be a formality. The results of the rights issue will be released on July 26th, at which point the size of the State’s shareholding in the bank will become clear.

By capping the State’s holding at 70 per cent, Bank of Ireland has ensured that it will have a sufficiently large free float of shares to retain its listing on the main market of the Irish Stock Exchange.

Bank of Ireland said yesterday that the pension reserve fund had passed up the opportunity to exercise an option to take a 15 per cent stake in the bank.

This option had been put in place to ringfence a holding that could be sold to a private equity investor.

The bank said it held talks with a number of private equity players but had not been able to bring them to a “successful conclusion” at this time. However, it is possible that a stake in the bank could be sold to a private equity player in the future.

This would most likely be facilitated by the State offloading some of its stake in the bank.

Bank of Ireland’s shares closed yesterday in Dublin at 11.6 cent.

Meanwhile, the International Swaps and Derivatives Association was asked yesterday if a restructuring credit event, or default, had occurred in relation to Bank of Ireland.

The industry body decides whether a credit event has occurred, a ruling that would trigger the payout of credit default swaps, which are used to hedge risk on the likelihood of default.

The request is related to the haircuts being required on subordinated bondholders.

It was submitted anonymously as a “general interest question”, according to the body’s website.

State property bank's capital needs

BANK OF Ireland is likely to become majority owned by the State when its latest capital-raising exercise is completed this summer.

In all, Bank of Ireland needs to raise €4.2 billion in core tier one capital and €1 billion in contingent capital.

It also has to pay €150 million in expenses and adviser fees.

To date, the bank has generated €1.96 billion by applying haircuts to subordinated debtholders.

Shareholders will now be asked to cough up €1.91 billion through a rights issue, underwritten by the State.

This means that taxpayers will pick up the slack from any shareholders who choose not to follow their money in the rights issue.

The State is also providing €1 billion in contingent capital to meet regulatory requirements.

Another €510 million is set to be raised by Minister for Finance Michael Noonan using legislation at his disposal to impose discounts on junior bond holders who haven’t played ball with the bank’s capital raisings.

The State currently owns 36 per cent of the bank, and this could rise to a maximum of 70 per cent.

If it does, Bank of Ireland will join AIB, Anglo Irish Bank, EBS and Irish Nationwide as majority owned by taxpayers.

Irish Life & Permanent – or its banking subsidiary Permanent TSB – will follow the same path shortly. CIARÁN HANCOCK