IRELAND - The National Pension Reserve Fund (NPRF) is set to increase its investment in the Bank of Ireland as part of the bank's plan to raise equity to meet new capital requirements set out by the financial regulator.

The NPRF will increase its investment in the bank to a maximum of 36% of ordinary stock capital.

In March the Department of Finance confirmed that the Bank of Ireland would have to raise more capital to meet new rules. While the money was expected to be raised through private capital, the State committed to supporting the process by converting part of its preference shares - issued when the NPRF invested €3.5bn in the Bank last year - to ordinary stock. (See earlier IPE article: NPRF may have to further subsidise AIB)

The NPRF has now confirmed its participation in the capital raising will consist of converting 1,036 million units of its preference shares into ordinary stock in order to pay for a subscription of 576 million units of ordinary stock in the placing.

In addition, it will participate in the rights issue by taking up the full allocation it is entitled to under the rights issue, which again will be paid for by the conversion of some more of the preference shares into ordinary stock. This is on the condition that the rights issue is approved by the Bank of Ireland''s shareholders at an EGM on 19 May 2010.

However, in return for giving up some of the preference shares, the coupon rate on those remaining with the NPRF will increase from 8% to 10.25%. The Bank of Ireland will also purchase from the NPRF all the warrants issued at the same time as the preference shares for a total of €491m, while the pension fund will also receive €51m in fees for the transaction, bringing its cash earnings from its participation to €542m.

The NPRF stated its directed investment in the bank "will not be greater than 36% of the bank's ordinary share capital, and may be lower depending on the outcome of debt for equity offers by Bank of Ireland".

But this is still more than double the 15.7% of ordinary share capital held by the NPRF in February 2010 when it received €250.4m of shares in lieu of a cash payment of the preference share dividend. (See earlier IPE article: Irish roundup: Bank of Ireland, AIB)

Brian Lenihan, minister for finance, said the transaction had been agreed in market terms that will allow the State and its taxpayers to achieve a significant return on its investment.

He added: "When this deal is complete: The state will hold a valuable approximately 36.5% share of the bank. The state will continue to hold approximately €1.78bn of preference shares and these will earn a higher coupon of 10.25%. The state will get €491m profit for its warrants. The State will receive €51m in fees for conducting these deals."

Lenihan argued that the transaction is consistent with the government's preference for private market solutions to capital raising, but added the "overriding objective of the government's banking policy is to ensure a healthy functioning banking system that can meet all the needs of the economy. This announcement is a crucial step in realising this objective."

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