Jump to content

Fairfax to lead group investing in Bank of Ireland


Grenville
 Share

Recommended Posts

Thanks for posting.

 

I am happy holding FFH.

 

I like them buying in distressed markets.(certainly not something the average person like myself could be involved with otherwise)

 

They appear to be in good company on this deal as well.

Link to comment
Share on other sites

News articles are now flooding with details regarding the B of I recapitalization. First off, Fairfax is investing nearly US$420 million of its own capital into the deal. This immediately makes it one of its larger positions. According to Mr Watsa, “the market’s view of Ireland is wrong.” He praised them for taking drastic austerity measures quickly, as opposed to many of its other European peers.

 

Of the six original domestic lenders in Ireland, two have been shut down, another two have merged, and the fifth has been nationalized by the government. Bank of Ireland (if it survives) will thus be situated in an attractive oligopoly position once the crisis is past them.

 

Kennedy Wilson helped first find the deal. Their group has lately been busy purchasing Irish properties out of foreclosure, reasoning it to be an attractive long-term investment. Whatever their reasoning, it undoubtedly helped Fairfax get comfortable with BoI's loan book.

 

Two other direct quotes I thought worthwhile:

 

1. Fairfax’s team was left with the impression that the bank has taken larger writedowns in its portfolio of troubled real estate assets than even a worst case scenario would likely suggest, while the recapitalization plan should boost the bank’s Tier 1 capital level to a strong 15 per cent. The bank had been running its property portfolio through scenarios based on what happened in Nevada, the state hit hardest by the U.S. real estate crisis."

 

2. Mr. Watsa remains more of a bear about the U.S. and other parts of Europe. “We continue to be nervous about the economies in Europe and the United States,” he said. “We have very little ammo left – interest rates are at zero – and deficits are high and coming down, meaning government spending is coming down. We have to digest the booms of the past and it may take many years for that to happen.”

 

Link to comment
Share on other sites

"I find this IRE deal fascinating."

 

it's a BKIR deal not an IRE deal, for some incomprehensible reason, IRE shares are valued at more than double ($1.52) the price of BKIR shares (€0.11) (1 IRE = 4 BKIR)...... I don't think that Watsa would have invested in the Bank of Ireland if he had to pay the IRE share price, yet all IRE ADR investors happily spend double on exactly the same investment????

 

regards

rijk

Link to comment
Share on other sites

"I find this IRE deal fascinating."

 

it's a BKIR deal not an IRE deal, for some incomprehensible reason, IRE shares are valued at more than double ($1.52) the price of BKIR shares (0.11) (1 IRE = 4 BKIR)...... I don't think that Watsa would have invested in the Bank of Ireland if he had to pay the IRE share price, yet all IRE ADR investors happily spend double on exactly the same investment????

 

regards

rijk

 

You are correct rijk.  I was trying to figure this out as well.  I get a conversion number of around 0.60-0.70 US depending on the currency situation.  It is however impossible to arbitrage.  Very strange. 

Link to comment
Share on other sites

"It is however impossible to arbitrage.  Very strange."

 

yes and no, direct arbitrage is blocked as the ADR program has reached it's pre-approved limit, so you cant buy BKIR and exchange them for ADRs, however, if you are patient, you can short IRE, buy BKIR (London SE) and wait.....

 

looks like the size of the ADR program, definitely after the more than five fold dilution, is relatively small to the number of BKIR shares, consequently, IRE can be very volatile in the short term, long term, prices should get closer to parity.....

 

regards

rijk

Link to comment
Share on other sites

 

Some more details emerge

 

http://www.independent.ie/business/world/bois-new-shareholders-millions-richer-from-underwriting-fees-2835756.html

 

 

"The sale -- dubbed 'Project Foxtrot' in honour of Fairfax's lead role -- was put together in just four weeks after talks with private equity suitors collapsed when the Government refused to indemnify them against the bank's possible future losses.

 

The mechanics of the deal saw the quintet of investors agree to spend up to €1.1bn on shares that were not taken up by existing shareholders who'd been given the opportunity to take part in a so-called rights issue.

 

That arrangement made the quintet 'sub-underwriters' of the deal, falling behind the National Pensions Reserve Fund (NPRF) which had initially agreed to underwrite all €2bn of the issue.

 

The NPRF had underwriting fees of 4pc for its role. A spokesman for the Department of Finance confirmed that the new investors also got an underwriting fee.

 

The fee is likely to have been less than the 4pc enjoyed by the NPRF, implying a figure of less than €44m for the €1.1bn the quintet agreed to buy.

 

Their fee is still understood to have been in the tens of millions.

 

News of the underwriting fee is likely to fuel arguments that the quintet have got a fantastic deal on BoI at the expense of the taxpayer, but sources close to the department last night insisted the best deal for Ireland had been done. While the Government has paid €1.9bn for a BoI stake valued at just €300m today, the collapse in the bank's value since the first injection in February 2009 would have hit the state's investment, regardless of the outcome of this week's recapitalisation.

 

A spokesman for the Department of Finance confirmed that BoI's new owners would be "locked in" to their investment for an unspecified period.

 

Earlier in the week, Fairfax Financial boss Prem Wasra told the Irish Independent that he saw the investment as a "long-term" play."

 

 

 

Link to comment
Share on other sites

rijk, What you are really proposing by shorting IRE is insurance on the stock going lower, or never rising.  The most likely outcome is that the BKIR shares rise to the value of the ADR units.  In that case there would be no gain with your proposal.

 

Better to work out if one thinks the capitalization will be enough, and buy the BKIR shares and forget about the ADRs. 

Link to comment
Share on other sites

rijk, What you are really proposing by shorting IRE is insurance on the stock going lower, or never rising.  The most likely outcome is that the BKIR shares rise to the value of the ADR units.  In that case there would be no gain with your proposal.

 

Better to work out if one thinks the capitalization will be enough, and buy the BKIR shares and forget about the ADRs. 

 

agree that today, after a successful recapitalization, which looked doubtful not so long ago, the future looks a bit brighter for BOI and a long BKIR looks like the right bet......

 

however, if you enter the short IRE and long BKIR position, and BKIR increases while IRE stays flat, you make a 60% return

more importantly, you have a market  neutral position, even if BOI would go bankrupt, you would still earn 60%

the only way to loose out would be for the spread to increase in the short term, forcing you to close the position and take a loss, or alternatively, the spread could stay at these levels indefinitely....

 

regards

rijk

Link to comment
Share on other sites

one element of the 2011 BOI restructuring plan was to convert approx €2 billion junior debt to equity at discounts up to 90% of face value

 

in 2009 and 2010 BOI reported €1 and €1.4 billion "gains on liability management excersizes" (page 56 & 57 attachment)

 

during the recent restructuring, approx €2 billion equity has been raised by debt to equity conversion at steep discounts (40-90%??)

 

does anybody have an estimate for the 2011 "gains on liability management excersizes" figure?

 

can anybody explain the theoretical process to calculate this number, for example, if €2 billion was raised at 40% discount, does that imply that the original face value of the debt was €5 billion and that consequently €3 billion would be reported as "gains on liability management excersizes"?

 

regards,

rijk

 

 

http://www.thejournal.ie/bank-of-ireland-deal-knocks-e2bn-off-taxpayer%E2%80%99s-bill-162377-Jun2011/

 

 

Link to comment
Share on other sites

  • 3 months later...

http://www.gurufocus.com/news/154337/will-you-follow-fairfaxs-prem-watsa-into-bank-of-ireland-ire

 

The real book value right now is running a little below .30 euro, maybe .27-.28, and then in the next few years it might be static, maybe it will go down a little, but it will be dependent on the economy's performance, and it will be dependent on the Bank of Ireland in terms of what it does, in terms of earnings. If you look at Bank of Ireland's track record in the past, it's done very well, and now it's well capitalized, it has a terrific CEO, it has a good management team, so over time, it should do very well for its shareholders. They are focused on doing well for their shareholders.

 

 

The number 0.3 euro Prem Watsa mentioned was for ordinary shares, before the 10:1 reverse split of the ADR. This would translate into about 30 euro per ADR. Therefore Bank of Ireland ADR is traded at about 12% of its book value, far below the valuation that Bank of America (BAC) or AIG (AIG) is traded. We all know that Bruce Berkowitz thinks both of them are extremely cheap.

 

What does this mean to other value investors like us? It means that we can buy these shares at about 30% of the prices paid by Prem Watsa and Wilbur Ross, or about 12% of the book value.

 

Link to comment
Share on other sites

this article is plain wrong......

 

fairfax paid €0.10 per BKIR.L share, which is trading at €0.09 today, so 10% discount to fairfax's cost basis

 

this price corresponds to 30% of bv......

 

the adrs were highly inflated at the time fairfax invested.....

Link to comment
Share on other sites

Where do people get this notion that Richie Boucher (the Bank of Ireland CEO) is even remotely capable? The only reason that Bank of Ireland isn't under the control of the Irish State was because they repeatedly diluted their own stake each time Bank of Ireland were supposed to raise capital. His Wiki page is completely damning, as is this other compilation of statements he made as the bank was in the process of imploding.

 

http://en.wikipedia.org/wiki/Richie_Boucher

http://www.thepropertypin.com/viewtopic.php?f=19&t=40459

 

I wouldn't trust the man to make the tea, let alone manage one of the biggest banks in Ireland.

Link to comment
Share on other sites

I don't know about Boucher, but all I can say is that Prem and Wilbur Ross won't sit idly by if the bank is put in any sort of jeopardy by mismanagement.  Who knows, they may already be working on replacing Boucher or adding directors to the board.  We don't know, so these are probably questions people can ask at the AGM or dinner.  Cheers!

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...