Richie Boucher: race against time

When Bank of Ireland completed a successful rights issue last summer as part of a €2.9bn capital raising exercise to meet new minimum levels introduced by the Central Bank in March, the institution was held up as a showcase bank for Ireland's recovery.

In a swift series of moves, chief executive Richie Boucher had managed a debt-for-equity swap, a private placement and the issue of new shares to keep the state as a minority investor with a 36% stake. Bank of Ireland's independence seemed assured.

Within half a year that reality had shattered. According to the terms of the EU/IMF bailout, the Central Bank now wants banks to hold reserves of at least 12% core capital. That meant Bank of Ireland would have to raise another €2.2bn by the end of February. If Boucher fails, the government will be forced into majority ownership of a fifth financial institution.

But the bank's options have narrowed dramatically since it last went to the markets in 2010. Analysts and institutional investors say there is little appetite to put fresh capital into any Irish bank, even the so-called best of a bad lot.

Sources said the bank would have a hard time convincing shareholders to support a new equity issue after the destruction of value following last year's fundraising, while new investors are wary of touching anything Irish until the sector is restructured later this year.

"I can't see shareholders following their cash," said one Dublin analyst. "There is still a lot of uncertainty."

Last week, the bank confirmed its sale of BIAM, its asset management arm, to fund manager State Street in a deal that added just €40m to its capital base. According to Bank of Ireland's EU-approved restructuring plan, ICS building society and New Ireland Assurance are to be sold next, but it is believed neither has attracted an offer yet.

One senior institutional investor said shareholders were hanging on for a "meaningful private percentage" in Bank of Ireland if Boucher can get a good result from the New Ireland sale and liability management exercises, such as debt swaps and buybacks.

Last month, Bank of Ireland surprised on the upside when it managed to raise €700m in equity capital through a successful debt-exchange offer. Although the bank achieved an encouraging 93% take-up, it is running out of debt to exchange. Because the Central Bank requires a certain level of junior debt to be maintained as a buffer in the capital structure, Bank of Ireland can probably raise a maximum of about €200m from further liability management, analysts said. AIB, by contrast, was able to approach the market last week with a 70% discount buyback deal on €4bn in debt securities.

Management has reportedly been exploring the possibility, with the NTMA, of bringing in sovereign wealth investors from Asia and the Middle East to bridge the capital gap before the February deadline. A senior industry source with knowledge of the contacts indicated the plans were notional and not far advanced, however. Previous efforts by Anglo Irish Bank to secure such investment came to nothing.

Ciaran Callaghan, bank analyst with NCB Stockbrokers, said raising equity from private sources such as wealth funds was unlikely given the uncertainty over the shape of Bank of Ireland's business in the future. He said the board could not give investors a "reasonable assurance" on the bank's outlook.

One problem is the contingent liabilities hanging over banks regarding assets transferred to Nama. Banks cannot quantify how much the asset agency might seek to claw back if commercial property loans don't cover the price of their acquisition.

"If I was a potential suitor, I would want to get rid of any contingent liability that exists under the bailout whereby the government can tap into banks in the future to plug Nama losses," said John Finn, managing director of consultancy Treasury Solutions.

The quickest route to the 12% capital minimum appears to be large-scale asset disposals.

The NTMA, which is managing the restructuring of the banking sector, has yet to decide on how to manage these. Michael Torpey, head of the the NTMA banking unit, told reporters this month that the agency wanted to avoid firesales and that "warehousing" assets for "years and years" would protect the taxpayer from immediate losses.

The EU and IMF are insisting on a restructuring deadline at the end of March. The same deadline has been set for new Central Bank stress tests on capital and liquidity, which should provide some detailed information on the relative strength of Ireland's banks after months of capital and deposit flight.

Those exercises will provide the kind of certainty the market craves, but they come a month too late for BoI, which has only weeks to scrape together the required fresh capital to avoid de-facto nationalisation.