8. Directed investments
Ireland Strategic Investment Fund
The Agency holds Directed Investments subject to directions given by the Minister for Finance pursuant to section 43 of the NTMA Act 2014. The holding and management of the Directed Investments, the exercise by the Agency of voting and other rights attaching to the Directed Investments and the disposal by the Agency of the Directed Investments must be conducted in accordance with any directions given by the Minister for Finance. Pursuant to the NTMA Act 2014, all assets of the NPRF governed by Irish law, including the Directed Investments, automatically transferred from the NPRF Commission to the NTMA on 22 December 2014 (becoming assets of the Ireland Strategic Investment Fund).
8.1 Directed Investments valuation
| 2015 Units Millions |
2014 Units Millions |
Valuation (€) 2015 Per Unit |
Valuation (€) 2014 Per Unit |
2015 €m |
2014 €m |
|
|---|---|---|---|---|---|---|
| Bank of Ireland (BoI) | ||||||
| Ordinary Shares 1 | 4,512 | 4,512 | 0.338 | 0.313 | 1,525 | 1,412 |
| Allied Irish Banks (AIB) | ||||||
| Ordinary Shares 2 | 2,711 | 522,556 | 4.5138 | 0.013699 | 12,236 | 7,159 |
| Preference Shares 3 | - | 3,500 | - | 1.300667 | - | 4,552 |
| 12,236 | 11,711 | |||||
| Total directed investments assets | 13,761 | 11,711 | ||||
| Directed Investments Cash (Note 12) | 240 | 1,109 | ||||
| Repurchase Agreements 4 | - | 765 | ||||
| Total directed investments | 14,001 | 14,997 |
1 The valuation of BoI ordinary shares is based on quoted bid prices.
2 Given the Fund’s ordinary share holding in AIB (99.9%), the Agency engaged EY to provide an independent fair value of the investments.
3 On 18 December 2015, pursuant to a Ministerial direction, 1.36bn of the AIB preference shares were redeemed and the remaining 2.14bn shares were converted into AIB ordinary shares. Subsequent to this, AIB performed a consolidation on a 1-for-250 basis in order to reduce the number of ordinary shares in issue. As a result of the conversion of 2.14bn preference shares to ordinary shares and the subsequent consolidation, the directed investment holding in AIB ordinary shares reduced from 522.6bn in 2014 to 2.7bn in 2015 (Refer to Note 8.3 for more detail).
4 The reverse repurchase agreement was an agreement to purchase Irish bonds and to sell them back to the original seller at a higher price at a fixed date in the future.
8.2 Directed investment valuation movement
| Bank of Ireland | 2015 €m |
2014 €m |
|---|---|---|
| Opening valuation | 1,412 | - |
| Transferred from NPRF | - | 1,421 |
| Investment gain/(loss) during the period | 113 | (9) |
| Closing Valuation | 1,525 | 1,412 |
Allied Irish Banks |
2015 €m |
2014 €m |
| Opening valuation | 11,711 | - |
| Transferred from NPRF | - | 11,698 |
| Preference share redemption | (1,700) | - |
| Investment gain during the period | 2,225 | 13 |
| Closing Valuation | 12,236 | 11,711 |
In determining the Fund’s valuation of AIB, EY considered a number of valuation methodologies including a valuation based on comparable company yields, comparable company analysis and precedent transaction analysis.
For the purposes of valuing the AIB ordinary shares, a comparable company analysis was deemed the most appropriate methodology. This analysis used comparable, publicly available, market multiples such as tangible book value relative to return on equity to allocate value to the ordinary shares. EY also had consideration to other multiples such as price to earnings and price to book.
The increase in value of the investment in ordinary shares between 31 December 2014 and 31 December 2015 is based primarily on three factors:
- Increase in net book value of AIB over the period;
- Increase in selected market multiple, based on improving trading performance of the company and a better outlook across the sector;
- The redemption and conversion of the preference shares in December 2015.
It should be noted that there are a number of sensitivities which may impact the AIB valuation including:
- Changes in sentiment and perceptions of investors regarding banks and the outlook for the banking industry and the broader domestic and European economy;
- AIB is heavily exposed to the domestic Irish economy. A change in economic conditions may impact on the implied valuations.
All other things remaining constant, e.g. a 1% movement in the valuation of the comparable peer group would have impacted the AIB ordinary share valuation by approximately €122.4m as at 31 December 2015 (2014: €72m).
8.3 Directed investment summary
At 31 December 2015, the Fund’s percentage ownership of AIB and BoI was 99.9% and 13.95% respectively (2014 AIB: 99.8%, BoI:13.98%).
Prior to the AIB capital reorganisation that occurred on 18 December 2015, the AIB preference shares historically paid an annual non-cumulative fixed dividend of 8%. If the dividend was not paid in cash, the Fund would receive the dividend in the form of ordinary shares. The preference shares could be repurchased by AIB at €1 per share within the first five years after issue and thereafter at €1.25 per share. The step-up to €1.25 per share became effective from May 2014. This had no impact on the dividend income.
On 13 May 2015 AIB paid the Fund a preference share dividend of €280m in cash and this was transferred to the Discretionary portfolio.
Pursuant to a direction dated 12 March 2015, the Minister for Finance directed the Agency to transfer €1.6bn from the Fund’s Directed portfolio to the Exchequer. This was effected on 19 March 2015.
Pursuant to a direction dated 20 November 2015, the Minister for Finance directed the NTMA (as controller and manager of the Ireland Strategic Investment Fund) to enter into certain agreements, and to take certain actions, to facilitate the conversion and redemption of its shares in AIB. Pursuant to this direction, the Minister for Finance also directed the NTMA to take certain actions regarding the proceeds of such conversion and redemption (including the cancellation of the EBS Promissory Note). The Ireland Strategic Investment Fund received proceeds of €1.7bn, dividends of €166m and 155bn of ordinary shares as part of this redemption and conversion (Note 11.3).
8.4 Developments since the year end
No events requiring adjusting or disclosure in the financial statements occurred after the end of the reporting period.