BoI must play safe to build on a winning issue
BANK OF IRELAND plays one of its biggest-ever poker games this morning, as it goes to the markets looking for up to €2 billion to fund its lending.
It’s a time for steel nerves for the bank’s Global Markets division, which handles its treasury and funding needs. But it’s not quite the leap in the dark of last September, when the bank blazed a trail by becoming the first Irish institution to issue an Asset Covered Security (ACS) in the first phase of a €10bn, five-year programme. Other Irish banks are expected to follow shortly.
ACSs are one of the banking industry’s responses to a common problem: as lending surges, banks are struggling to get their hands on the deposits they need to fund their loan books. Issuing ACSs allows banks to use the income from mortgage repayments to raise fresh finance.
Last year, Bank of Ireland looked for the first time to convince central banks, pension funds and investment managers from Europe and Asia to hand over €2bn in return for an income stream from mortgage repayments. It’s effectively a giant loan, secured on thousands of mortgages.
As it turned out, Bank of Ireland arrived on the ACS market in the same way as U2 sells concert tickets. It was swamped with demand and ended up with orders worth €6.5 billion, three times what it hoped for. The issue went on to be selected as the best of the €1 trillion that came on the market last year by heavyweight financial magazine IFR - not bad for a bond that made up 0.2% of the market.
Bank of Ireland Global Markets chief executive Mick Sweeney says last year’s issue was an outstanding success but takes nothing for granted this time around. He praises the quality of Irish legislation that was enacted in 2001 and put the country at the top of the ACS table worldwide.
Mr Sweeney says smooth co-operation between the Department of Finance and the banking industry put Ireland ahead of the game by creating an ACS regime that gives international investors what they want.
What makes bonds from a bank in a peripheral country like Ireland so attractive? Booming property prices that make the bank’s key loan-to-value measure of its mortgage book one of the lowest in the market. Add to that a strong bank, generating record profits and viewed by international credit rating agencies as one of the safest bets in town, and concerns over security are swatted away.
The bond allows the bank to borrow huge amounts at low prices. It also gives access to a new range of investors in faraway markets and makes its shares an easier sell to a wider range - good news for shareholders.
So why the nerves this morning? It’s a question of answering the investors’ questions the right way. They want to be happy they haven’t overpaid and that the bond is popular enough to allow them to trade their investment over its lifetime. Mr Sweeney and his colleagues have spent the last two weeks on roadshows in Europe and Asia getting a feel for the market.
How big should the issue be? The bank could look for anything between €1bn or €2bn, but will be conscious of the need to repeat last year’s positive reaction. The markets will implicitly expect this year’s version to be oversubscribed too, so it’s important not to be greedy.
Mr Sweeney will also lose sleep over the correct interest rate and term. At this level, even 0.01% makes an enormous difference and while last year’s bond was repayable over five years, investors this time are indicating a preference for between seven and 10.
A good poker face will come in handy.
