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NPRF to pay for €5.5bn bank bailout

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  • NPRF to pay for €5.5bn bank bailout

IRELAND - The Irish government has confirmed it is to invest an initial €5.5bn into three banks, though the National Pension reserve Fund (NPRF) could earn up to €500m a year from the deal as it is expected to be the "main source of funding" for the recapitalisation.

In a statement, Brian Lenihan, minister of finance, confirmed the government plans to invest €1.5bn of core tier one capital in Anglo Irish Bank, to aid the restructuring of its capital.

This investment will be in the form of perpetual preference shares with a fixed annual dividend of 10% which will carry 75% of total voting rights - essentially putting the bank under state control - while the new board of the bank will include government representation.

The move is subject to the approval of ordinary shareholders at an extraordinary general meeting to be held on 16 January 2009, although the government revealed it was confident the investment would fall under the EU State Aid requirements and be approved by the European Commission.

It also confirmed the Bank of Ireland and Allied Irish Banks would each receive a €2bn capital injection from the state in the form of perpetual preference shares with a fixed dividend of 8%, in return for 25% of the voting rights in appointments of directors and 25% of the directors on the boards, and investment in these firms are expected to be completed by the end of March 2009.

A spokesman for the department of finance pointed out the exact source of funding for the investments are still being finalised but added "it is envisaged that the NPRF will be the main source of funding, subject to legislative changes for the fund, which will be brought forward by the government in the New Year".

The government revealed money for the Anglo Irish investment - expected to be completed by mid-January - would initially come from the Exchequer using the provisions in the recent Credit Institutions (Financial Support) Act 2008.

However, it is believed the minister for finance is "likely to transfer such shares to the NPRF after the NPRF act is amended", which means if the legislative changes are approved "it is envisaged the NPRF and minister for finance will take preference shares in the banks on the terms announced".

This will make the pension fund eligible for the dividends, payable in cash or ordinary shares, estimated to be worth approximately €500m a year from the three banks.

That said, the planned investment of €5.5bn could actually increase by at least another €2bn as Lenihan confirmed "the government will continue to reinforce the position of Anglo Irish Bank and will make further capital available if required so that it remains a sound and viable institution".

The government also said while it "encourages each institution to access private sources of capital", it admitted it would be prepared to "underwrite further issuance of core tier one capital and both Allied Irish Banks and Bank of Ireland have indicated an interest in such an underwriting of up to €1bn each".

Under the terms of the deal, all three institutions will be able to redeem the preference shares within five years at the issue price, although if it is longer than five years the price will increase to 125% of the issue price.

The banks have agreed in return to a credit package relating to a number of areas including increased credit to small and medium businesses and first-time buyers.

Brian Cowan, Ireland's prime minister, said: "The objective of these decisions is to ensure that the financial system in Ireland meets the everyday financial needs of individuals, businesses and the overall economy. As part of this recapitalisation package, I am very pleased that a number of measures to support small to medium businesses and mortgage holders have also been announced."

The decision to invest in the three banks follows confirmation earlier this month that the government had decided to use the funds from the NPRF to support the banking system in certain circumstances. (See earlier IPE articles: Rescue packages tap pension fund reserves and NPRF may be used to shore up Irish banks)

However Fine Gael, the opposition political party, claimed the move would be "unlikely to restore confidence in the Irish financial system", and called on the government to reconvene the Irish Parliament, the Dail, to discuss the proposals.

Enda Kenny, leader of Fine Gael, said: "The government has finally moved to recapitalise the banks. Given the scale of the investment involved of taxpayers' funds, and the risks associated with the investment, the government must recall the Dail to elaborate on its proposal."

And Richard Bruton, finance spokesman for Fine Gael, claimed the capital injections would not restore the confidence of domestic savers or international markets unless further steps are taken.

He claimed: "First, more private capital must now be raised by Allied Irish Bank and Bank of Ireland themselves. Second, we need a complete overhaul of the system of regulation and leadership of Irish banks. Finally, the government needs to set out a specific and credible plan for recovery in the real economy and stability in the public finances."

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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