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Bank of Ireland says may sell stock to help redeem preference shares

Sunlight is reflected off a deposit box on the exterior of a Bank Of Ireland branch in Belfast November 12, 2010. REUTERS/Cathal McNaughton

DUBLIN (Reuters) - Bank of Ireland (BoI) (BIR.IR) said it may sell new shares to help repay 1.8 billion euros ($2.4 billion) of state-owned preference shares the bank had to issue as part of its 2009 bailout.

A successful redemption of the preference shares would be a big milestone for the bank, the banking sector and for the Irish government ahead of its expected exit from an 85 billion euro international bailout next month.

The bank is keen to redeem the preference shares soon because the cost of buying them back increases by 25 percent, or 450 million euros, in March 2014 under the terms of its 4.8 billion euros bailout during the financial crisis.

BoI's statement came hours after Reuters reported a source familiar with the deal saying the bank, which is 15 percent state-owned, would issue up to 600 million euros of new equity to help repay the state.

The remainder of the 1.8 billion will be raised by issuing debt to private investors, the source said.

BoI said it was assessing a range of options in relation to the preference shares.

"Such options could include the bank facilitating a potential sale by the state of 2009 preference shares to private investors and some element of ordinary stock issuance to redeem a portion of the 2009 preference shares," the statement added.

Raising 600 million euros of new equity would involve the bank breaking stock market norms of a company not issuing new shares worth more than 5 percent of its stock market value without a special resolution from shareholders.

The source said the deal would be done at an overall profit to the Irish state, echoing comments from Finance Minister Michael Noonan who recently said the government would want a premium if the preference shares were redeemed.

Companies are able to issue new stock worth up to 10 percent of their equity if they use a financial structure known as a "cash box", where the new equity is channeled through a specially created company. Bank of Ireland would then buy the cash box.


The source said the bank would issue between 500 and 600 million euros of new shares, an amount equal to up to 7.4 percent of its 8.1 billion euro market value, through a placement.

The decision to issue more new equity than the 5 percent limit will reduce the state's 15 percent ownership stake in the bank and will reduce the bank's annual interest bill.

"I don't think there will be much, if any, negative reaction," said Ciaran Callaghan, analyst at Dublin-based Merrion Capital on whether investors would be aggrieved if so many new shares were issued.

"It's more likely that investors will welcome a successful refinancing of the instruments to avoid the principal step-up and repayment of state aid."

The deal could happen as early as next week but is unlikely to happen before the U.S. Thanksgiving holiday on Thursday, due to a large amount of U.S. investor interest, and the results of a central bank assessment of Irish banks' balance sheets, due this weekend.

Bank of Ireland became the only domestically owned Irish lender to escape full state control after a group of North American investors led by Wilbur Ross and Prem Watsa bought a 35 percent stake just months after Ireland signed up to an EU/IMF bailout three years ago.

The Irish state sold a 1 billion euro contingent convertible bond it held with the bank earlier this year and would be left with just a residual equity stake when the preference shares are redeemed.

The exact percentage will depend on how much new equity is issued and whether the state buys any of it. A spokesman for the Department of Finance said the state was "keeping all options open".

Shares in Bank of Ireland rose 0.8 percent to 0.27 euros on Dublin's Iseq, bringing their rise in the last six months to 40 percent.

($1 = 0.7404 euros)

(Additional reporting by Laura Noonan in London; Editing by Erica Billingham and David Holmes)