Q&A: So what’s happening at Bank of Ireland this week?

In the final part of a three-pronged capital-raising plan to generate cash totalling €3.56 billion, the bank is seeking to raise €1.09 billion from shareholders by issuing new shares in a so-called rights issue.

Shareholders will be asked to approve the plan at an extraordinary general court (meeting) in Dublin tomorrow.

As part of the plan, the Government is converting €630 million of its preference share investment to ordinary shares in the rights issue.

The €3.56 billion capital target includes another €1.04 billion of the Government’s €3.5 billion preference shares being converted to ordinary shares, €500 million of new shares the bank has agreed to sell to institutions, and €290 million from issuing new shares or cash to some bondholders in settlement of their outstanding debts.

Why is the bank doing this?

Bank of Ireland needs cash to boost capital to a level demanded by the Financial Regulator in March to absorb losses from the transfer of bad property loans to the National Asset Management Agency as well as on other loans.

Some €2.94 billion of the €3.56 billion raised will bolster capital beyond the €2.66 billion that has been demanded by the regulator. A further €490 million of capital raised will be used to buy out the State’s warrants which gives the Government a future option to take a larger stake in the bank. Another €130 million will be required for costs associated with the exercise.

How much of the bank will the State own after all this?

The Government shareholding will stand at 36 per cent.

How does a rights issue work?

It allows shareholders to buy new shares at a discount to their price in the market (which encourages them to participate) and raises cash for the bank.

They have “rights” to acquire a certain number of new shares as a proportion of the shares they currently own.

In this case, shareholders who “take up their rights” can purchase three shares for every two they hold.

How are the new shares priced?

They are priced at a discount to the theoretical ex-rights price or Terp, which is the implied share price of the bank expected after the rights issue has taken place.

The bank will issue 3.1 billion new shares at 55 cent – a discount of 64 per cent to last Friday’s closing share price. The Terp is calculated by adding the existing value of all Bank of Ireland shares at last Friday’s closing price and the value of capital raised selling the new shares, and dividing this by the total number of shares afterwards.

The two billion existing shares in issue were worth €3.2 billion last Friday at €1.53 a share.

The issuing of 3.1 billion shares at 55 cent a share will raise the bank €1.725 billion, giving the bank a market value of €4.9 billion after the rights issue.

Dividing this by 5.227 billion – the total number of shares after the rights issue – gives a Terp of 94.4 cent a share. The rights issue is priced at a 41.7 per cent discount to the Terp.

How much will the new shares cost an existing shareholder?

Let’s say you hold 1,000 Bank of Ireland shares. Under the rights issue, you can buy up to 1,500 new shares at 55 cent a share. This will set you back €825 but will maintain your existing shareholding.

What if a shareholder doesn’t want to participate?

Your shareholding will be diluted as you will hold the same number of shares but a smaller percentage of the shares in issue as the number of Bank of Ireland shares on the market will jump from two billion to five billion.

Can you sell your right to buy new shares if you don’t partake?

Yes, but the price you get depends on the share price at the time you do this. Your rights to buy shares will also be sold on if you chose to do nothing and you will receive a cheque by June 25th.

If the price achieved (less costs) is higher than the rights issue price of 55 cent, you will be sent a cheque for this sum. If not, you’ll get nothing.

The cash position of a shareholder should remain broadly the same as before if you decide to sell your rights because you will hold a lower value of shares but receive cash for the rights you sell on, roughly covering the difference.

If you decide to sell your rights, you must post back by May 31st the provisional allotment letter (PAL) the bank will distribute after tomorrow’s meeting to Computershare, which manages the bank’s share register.

The value of your rights will be separately listed from Thursday.

Can you take up some of your rights and sell the rest, potentially using the proceeds to help buy the new shares?

Yes. This is known as “swallowing the tail” in the market. Again,

let’s say you have 1,000 shares, you can buy 750 new shares – or half your entitlement – at a 55 cent a share, costing €412. If you sell on the rights for the remaining 750 new shares, you could make €295, assuming you receive the difference between the Terp (94 cent a share) and the rights issue price (55 cent a share).

When can shareholders do this?

The market to trade rights will open from Thursday when the rights issue subscription period begins. It ends on June 8th.

You must notify Computershare by June 2nd if you wish to buy some new shares and/or sell on some or all of your rights to buy shares. If you wish to take up some or all your rights to buy new shares, you must submit your PAL to Computershare by June 8th notifying it of how many new shares you want to buy.

Can you participate if you do not hold any of the bank’s shares?

No. Investors would need to have bought shares by close of business yesterday to participate.

Will Bank of Ireland still raise enough cash whether retail shareholders take up their rights or not?

Yes, the rights issue is guaranteed; it is being fully underwritten by four banks and Davy stockbrokers, which have in turn signed up about 50 sub-underwriters to help take up new shares if existing shareholders shun the issue.

Then why does the bank want retail shareholders to participate if institutions are backing the deal?

The bank wants as diversified a shareholder base as possible to spread risk so that it is similar to other companies and is not exposed to any one shareholder offloading large amounts of stock, potentially destabilising the bank.

Does the rights issue affect many people?

Yes, Bank of Ireland has 95,000 retail shareholders with an average holding of 5,000 shares; 30,000 shareholders each hold 500 shares or less.