IFR Top 250 2007: Wholesale funding is core
With US$20.1bn issued from 46 deals in the year to April 30 2007, Bank of Ireland ranks 34th in IFR’s top 250 borrowers. Investors have flocked to the opportunity to buy into the Irish credit story, and the bank has also been able to move more of its funding to the US, as William Thornhill reports.
With a wholesale funding ratio of 45% of its overall balance sheet, and sizeable annual balance sheet growth in the order of 20% or more over the last three or four years, "recourse to the wholesale capital markets is an integral part of Bank of Ireland's core strategy," according to Paul Flynn, director of the bank's wholesale liability group.
There are three core pillars driving Bank of Ireland's funding needs: the domestic retail business in Ireland, where it has a commanding market share; growth of its loan books in the UK through its Business Banking and Bristol and West units; and its global corporate lending business.
BOI's unsecured rating was recently upgraded by Moody's from Aa3 to Aa2, and it is rated A+ with Standard & Poor's, which has had the bank on positive watch since July 2006.
"Our strategy is very much about building liquidity pools on a global basis to enable us to have inward capacity in order to met BOI Group’s ongoing growth ambitions," said Flynn.
BOI's term issuance covers borrowing with maturities of more than one year. Into this category fall its US and European MTN programmes, the covered bond programme, US extendible note issuance and two mortgage securitisations – Ireland (Kildare) and the UK (Brunel).
The fact that all of BOI's covered bond and RMBS issuance has been warmly received is, in Flynn's opinion, partly to do with scarcity value. "People are very keen on these assets," he said. "They don’t often get that much of an opportunity to buy into the Irish credit story, so the scarcity premium helps."
Although the Irish housing market is seeing a slowdown in volumes, BOI's forecast for new mortgage lending growth next year is still in the healthy mid-teens area, down from the annual growth of more than 20% seen in recent years. Funding growth seen in the last few years is purely driven by BOI's organic lending growth and is not related to acquisitions.
BOI aims to fund itself from a central pool, accessing the markets that give it the deepest and most dependable source of liquidity along with the best execution. "There is no distinction between corporate funding, RMBS and covered bonds, as funding is all provided by a centralised global markets team," said Flynn.
"We use all the funding at our disposal on an ongoing basis to meet our growth ambitions. Within that context, it's not just about cheapness of funding but also about building out [public and private issuance] capacity," he said.
More recently, funding has been orientated towards the US, and with this in mind the bank opened an office in Stamford, Connecticut, in October 2006. The office aims to facilitate lending to mid-cap US corporate borrowers and it is staffed by an expansive team of professionals including acquisition finance and leverage finance specialists, as well as other teams involved in lending to the marine, media and finance sectors.
"We are doing more and more funding from the US as this is a market which we believe is hugely deep and liquid," said Flynn. Yankee CDs, US CP, Kildare RMBS and Brunel RMBS have all been placed with its US investors.
BOI has also issued two US extendible notes in the past two years. These were five-year deals that can be called by investors at any time. "The investor has right to call the trade on a monthly basis but they [investors] are incentivised to stay in the transaction."
The extendible notes programme gives BOI a blended cost of funding: in the first year, it might typically yield 4bp below Libor, rising by 1bp for every year the investor stays in the transaction.
Aside from the European and US CP programmes, BOI runs a plethora of other short-end shelves: Yankee CDs, London CDs, French CDs and Canadian dollar CP.
The bank had total outstanding capital markets borrowing of US$107bn at the end of the financial year to April 30 2007, and is expecting balance sheet growth in the high teens in the next financial year.