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The initial public offer of Telecom Eireann shares required the handling in a short time frame of £5.3 billion in cash. £2 billion of this had to be returned to retail investors, £1.8 billion was invested by them and £1.5 billion was settled against shares by institutional investors.
The initial public offer of Telecom Eireann shares required the handling in a short time frame of £5.3 billion in cash. £2 billion of this had to be returned to retail investors, £1.8 billion was invested by them and £1.5 billion was settled against shares by institutional investors.

Retail Offer

The two different tranches were managed in quite different ways. AIB Bank was appointed as receiving bank for the retail offer, as part of its overall role as a Global Co-ordinator of the share offer. To handle the incoming wall of cash, up to 100 separate accounts in the name of the Department of Public Enterprise were set up. These were divided for administrative reasons into accounts that would handle direct debits, cheques, non-direct debit instruments and refund of direct debits and non-direct debit payments. The multiple accounts were generated by sub-divisions of those categories.

In planning the retail share offer, the Department of Finance had estimated that between ¬£3 and ¬£5 billion would be paid into these accounts; in the event the amount was ¬£3.8 billion. A banker‚€ôs immediate reaction to the lodgment of such an amount would be ‚€‘ after the initial delight ‚€‘ how to place it and what rate to give. The balance sheet of AIB would have been altered significantly with the rapid deposit of such an amount. The customer accounts, deposits and interbank deposits of Allied Irish Banks p.l.c. ‚€‘ the relevant part of the AIB Group ‚€‘ totalled ¬£19.3bn on 31 December 1998, so an extra ¬£3.8bn would have had a large effect. The placement on the interbank market of such an amount was anticipated to be problematic for AIB as regards its credit limits to other banks.

For the Government, there was also an issue of the concentration of its credit risk exposure to one bank, albeit for a short time. And additionally, there was a concern about the effect of the liquidity of the Irish banking market of such an amount, in large part, having being diverted from other banks to one bank.

The System

During one week of intense discussions between the main players in late May, these issues were dealt with by the design of a system to minimise these risks. The design team consisted of Tony Grimes and Bob O‚€ôHara (Central Bank), David Doyle, Dermot Mulligan and Tony Lynch (Department of Finance), Deirdre de Bruin (Public Enterprise), Fionan Coleman, John Corrigan and Brendan McDonagh (NTMA) and Tom Durk (AIB).

At 4.30pm on each day on which the cash from retail investors was drawn down by AIB, the NTMA wrote a one-day rollover Exchequer Note to the Department of Public Enterprise in return to for the transfer to it of the cash balance at that time. The NTMA‚€ôs account at the Central Bank was credited with the cash amount by a transfer out of AIB‚€ôs account at the Bank. A small portion of these funds was lent back out to Irish banks by the NTMA, addressing the potential liquidity problem in the Irish system. Thus, the cash from the retail share subscriptions found its way to the balance sheet of the European System of Central Banks and was ultimately available to be lent out on the Euro repo market in Frankfurt. Also, the State no longer had a concentrated credit risk with AIB and AIB faced no credit limit problems of its own. But, like the other banks, AIB still had to replenish the liquidity in its own accounts caused by the share subscriptions.

As for the interest rate, the NTMA received Eonia, the Euro Overnight Index Average, (at about 2.6%) on its deposit at the Central Bank, and passed on the same rate to the Department of Public Enterprise in its notes. Some residual funds were left each day in AIB after 4.30pm and Eonia was also paid to the Department of Public Enterprise on these. Interest was earned on the full amount, including the £2bn eventually refunded to retail investors. The overnight interest on £3.8bn at 2.6% is £270,685.

The system of receiving cash in AIB and the NTMA issuing notes is put into reverse for refund payments, with AIB issuing cheques and direct credits.

Curiously, in the earlier Irish Life £250 million IPO, some refund cheques, amounting to a few hundred thousand pounds, were never cashed by retail investors and the money eventually reverted to the Exchequer. With £2 billion being refunded in the Telecom Eireann flotation, non-encashments were on the same scale could result in a tidy sum reverting to the Exchequer!

Institutional Offer

The management of the cash proceeds from the institutional share offer was simpler. Although dealing in shares commenced on 8 July, this was conditional. Settlement only took place on 14 July. On that day, the proceeds of the share offer was settled through the Crest system in London and paid into the account of the the Department of Public Enterprise at Merrill Lynch. This balance was transferred immediately to the Exchequer account at the Central Bank, and thereafter treated in the same way as the retail cash.

The Difference

In regard to the retail offer, why was there a need for the NTMA and its notes? The requirement to refund retail investors ‚€‘ which did not apply in the institutional offer ‚€‘ meant that the Department of Finance was up against the requirement for statutory authorisation for payments out of Exchequer accounts. Since the amount was indeterminate until the last moment, it was easier to have refunds made by AIB as receiving agent than pass a law to allow for refunds from the Exchequer.

AIB‚€ôs fees for acting as receiving agent were covered in its overall fee; it did not earn interest on the subscribed amounts.

The system worked very satisfactorily from the Department of Finance point of view. It was new, but should be capable of being used again for the next big semi-state share offer.

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