Monday, 10 December 2018

Covered Bond

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Out of the ashes: Having been locked out of covered bonds since 2009, Bank of Ireland achieved a startling response from investors when it returned to the market. It attracted some €2.5bn of demand and wedged open an issuance window for other Irish banks. Its €1bn three-year issue is IFR’s Covered Bond of the Year.

To see the full digital edition of the IFR Review of the Year, please click here.

Bank of Ireland achieved the seemingly impossible in 2012 and broke a three-year public covered bond drought in a country that had been left battered and bruised by recession and locked out of the debt capital markets.

Looking back to last year’s winner, Italy’s UniCredit was rewarded for pricing a deal at mid-swaps plus 165bp that subsequently widened by 160bp. But such was a year where the mere presence of a peripheral bond in the market, no matter how much it underperformed, was seen as an achievement.

All that changed in the second half of 2012. European Central Bank President Mario Draghi pledged to do “whatever it takes” to stem the euro crisis, which spurred a massive risk rally that saw Irish covered bond spreads tighten by more than 300bp.

It was through this bright and unexpected window that Bank of Ireland chose to sell a €1bn three-year covered bond at mid-swaps plus 270bp on the back of €2.5bn of orders.

“It is hugely significant for Bank of Ireland to be back in the public benchmark markets,” said Darach O’Leary, head of wholesale funding at Bank of Ireland.

“It is further evidence of Bank of Ireland’s commitment in continuing to repay more cost-attractive monetary authority borrowings with sustainable market-based funding,” he added, referring to the ECB’s 1% liquidity tap as well as other central bank funding.

Syndicate bankers, the issuer, market observers and even the country’s finance minister were thrilled to witness the bank’s success as the bond was deemed to be milestone for Ireland’s battered banking sector.

“Today is an important milestone on the path to full independence for our banks,” Finance Minister Michael Noonan said in a statement.

“This issuance is further evidence of the strengthening and normalisation of our banking system.”

The timing of the deal was perfect. Not only did it come at the end of a near 10% decline in the cost of Irish sovereign debt; it also came hot on the heels of Portugal’s Banco Espirito Santo that paid 6% yield to access the unsecured bond market at the end of October.

BES’s notably high funding costs, which the bank itself admits are not sustainable in the long term, suggested to the market that covered bonds may be a more realistic option for those issuers that are more cost-conscious.

The deal’s careful execution by lead managers Citigroup, Morgan Stanley, Nomura, RBS and UBS offered a template of how issuers should go about funding and propelled the country’s banks on a road to recovery.

Adding to the success of the bond, international investors bought nearly all of the paper (98%) and this non-domestic interest is viewed as a key marker of a peripheral bond’s standing in the market.

In the broader context of the covered bond market, Bank of Ireland is a triumph like no other.

At the time of writing there is growing speculation that Allied Irish Banks is now looking at doing a deal that could come before the end of the year and would set Ireland’s banks on a firm footing to wean themselves off their current ECB funding lifeline.

“With more than €2.5bn of orders there is now room for others to take advantage of the demand that is clearly available for high-yielding credit from Europe’s periphery,” said Jez Walsh, head of covered bond syndicate at RBS.

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