Ireland stake in AIB may rise as dividends halted

 

Allied Irish Banks is suspending interest payments some bonds and share dividends, potentially forcing Ireland to raise its stake to near 40 percent as an "unintended consequence" of a state aid clampdown.

European Commission competition authorities have stopped banks including Royal Bank of Scotland from paying dividends on some securities as a condition of the state aid they have received, and Allied Irish Banks (AIB) joined those ranks on Tuesday.

It could force Ireland to take control of more of AIB, however, as the suspension of coupons on some bonds would trigger a "dividend stopper" on other cash payouts and force the bank to pay an interest payment in shares.

The government could have to take an extra 17 percent stake in AIB, to add to warrants worth a quarter of the company, to give it a 42 percent holding, according to Anna Lalor, analyst at Goodbody Stockbrokers.

There could be similar implications for Bank of Ireland, in which the government also owns preference shares.

AIB said it was in talks with European Commission lawmakers, including about being allowed to retrospectively pay the coupon on the bonds and a cash dividend on preference shares.

Brussels said it could adjust the restrictions on coupon payments if that would reduce the state aid received and its decision on AIB would not prejudice its stance on other Irish banks.

Analysts said it was uncertain if AIB will be allowed to make the payments. 

"We think the chances of such a procedure are low, as it would contradict the EC's guidelines and common practice in other countries" said Alexander Plenk, analyst at UniCredit.

Ireland last year pumped 3.5 billion euros (3.2 billion pounds) into both AIB and Bank of Ireland and set up a "bad bank" scheme as lenders reeled from big losses when a property bubble burst and a recession deepened.

DIVIDEND STOPPER

AIB will not pay coupons on 350 million pounds of Tier 1 and Tier 2 capital instruments, which were due on December 14.

That will trigger a "dividend stopper" for a year, preventing the bank paying a dividend on ordinary shares, the government's preference shares and other capital instruments.

There is an 8 percent coupon on the preference shares, worth 280 million euros, due on May 13.

AIB could instead have to issue the government with shares, although such a move would be inconsistent with the Irish government's objective of not taking a majority stake.

Analysts said the move was not a complete shock given the European Commission's approach to restructuring, citing precedents like Britain's Lloyds Banking Group.

By 1123 GMT AIB shares were down 3.9 percent at 1.49 euros, as the broader Irish market index rose 0.5 percent. 

Analysts said the talks between AIB, the Irish government and Brussels were likely to last into the first quarter.

"The EC has confirmed to AIB and the Department of Finance that, without prejudice to the outcome of its review of the restructuring plan, it is open, in arriving at its final decision, to giving full consideration to the approach outlined above" AIB said.