From Reuters:
Bank of Ireland (BKIR.I) hopes to raise more than a quarter of the 4.2 billion euros (3.7 billion pounds) of capital it needs to find by June through a debt for equity swap, the Irish Independent said on Saturday without citing any sources.
The bank believes it can boost its capital by more than 1 billion euros by offering investors who hold 2.6 billion euros of junior bonds the opportunity to swap them for equity, the Irish Independent said...
The bank, which said it would work to raise cash through a combination of capital-management initiatives, raised 3 billion euros through similar exercises last year when its share price was at around 1 euro.
Please note, they are not raising new capital by doing this, they are cancelling EUR 2.6 billion of liabilities (whose market value is presumably somewhere in the region of EUR 1 billion) and giving the creditors new shares worth EUR 1 billion. But that's as good as raising EUR 1 billion in new cash by issuing shares and buying back the bonds at a discount.
Either way, it's infinitely preferable to expecting the taxpayer to cough up.
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8 comments:
And can this dfes go on indefinitely?
I don't know the rules overseas, but I believe in the US, in case of default later on, debt gets paid first and equity is subordinated to debt. So in addition to raising cash by way of reducing debt by way of issuing a lower denomination of equity for the higher denomination of debt, they may also be subordinating their legal responsibility to pay out to former creditors who now get put to the back of the line in case of bankrtupcy trouble down the road.
JH, yes of course. There are lots of different ways of doing it.
Anon, there's a sliding scale of creditors, between ordinary trade creditors (printed who deliver leaflets, employees, depositors, senior bondholders, junior bondholders). It's up to common sense (i.e. you) to make your own decision where to draw the line between being a creditor of the bank and part-owner of the bank.
I personally would draw the line between 'depositors' and 'senior bondholders' but Black Raven is adamant that senior bondholders have a contract with the bank that gives them priority over depositors etc.
The value of equity in an Irish bank is about as real as the "reality" of leprechaus. Still, if you can cash in exchange for an illusion, why not?
JH - The only difference between debt and equity (other than priority which isn't standardised anyway), is that equity, in theory at least, adjusts it's face value as the thing which it represents changes in value, while debt does not.
In that sense, debt ignores reality, on both the up and downsides. I don't really understand the appeal. If the equity goes up, then debtholders lose out on the increase. If the equity goes down, the debt's more likely to be defaulted on rather than actually get paid.
Mus, indeed, but better a D4E than anything else. PS well done for reader's letter in FT last week.
F, by and large, bonds do not ignore reality. Sometimes their value is highly speculative but we can assume it is usually correctly priced. Apparently the banks are writing down their bonds to market value and booking the difference as a profit (which it is, in a very roundabout way).
Sometimes their value is highly speculative but we can assume it is usually correctly priced.
Maybe I'm thinking of something else. Isn't a bond a promise to repay a fixed amount so far down the line? Either the bond gets repaid and the given time or you default. Part payment isn't really an option, no?
So if the company's position is such that it can't afford to repay all the bonds, then the bonds simply aren't worth face value.
Is that called something else?
F, in real life, bonds trade at anything from a few pence to slightly more than a hundred pence per £1 face value. The price takes into account the interest rate and likelihood of default.
And yes, there is such a thing as part-payment of bonds (esp. in the banking sector - a lot of banks have bought back some of their bonds at rather less than par value - the bond holders accepted that 50 pence in the hand was worth more than £1 in the bush).
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