Bank of Ireland’s dual-tranche Tier 2 transaction was one of many blow-out trades in the European financials market this year, but the issuer’s astute approach in uncharted waters set it apart.
The Reg S US$500m and £300m 10-year non-call fives (Ba1/BB Moody’s/S&P) were the first bonds sold from Bank of Ireland’s new holding company, established in response to post-crisis regulations that force banks to increase their stack of loss-absorbing liabilities.
BoI could have kicked off in the senior unsecured sector, arguably a far easier task. It took a long-term view, however, opting for Tier 2 to start building a buffer that will protect senior bondholders in the future and to better support its ratings.
In another twist, it built into the original deal announcement the option to issue in either US dollars, sterling, or both. That strategy offered a natural currency hedge for the lender’s multi-currency balance sheet, but it was virtually untested in those markets, having only issued euro-denominated capital in recent years.
“Dual-tranche is more challenging, but I think there was more reward for ourselves,” said Alan McNamara, head of capital structuring at Bank of Ireland.
Lead managers argued that BoI’s sub-investment-grade ratings in Tier 2 underplayed the bank’s strong turnaround since the financial crisis.
The execution itself was carefully designed. Leads leveraged the US$2bn of orders accumulated by the European open from Asian accounts – clear proof that the deal could remain a single dollar-denominated tranche unless sterling buyers buckled down and placed orders swiftly.
The strategy worked. Sterling investors plied BoI with more than £1.4bn of orders on top of the overall US$5.4bn in orders for the dollar tranche. The US$500m 10NC5 was priced at Treasuries plus 250bp, around 30bp inside initial levels, and the £300m 10NC5 at Gilts plus 270bp – the tightest-ever sterling sub-investment-grade Tier 2.
“It was a standout trade as it met both the issuer’s and investors’ objectives in a way that had not been done before,” said Morgan Stanley’s Niamh Staunton, a lead on the deal. “It showed significant thought leadership.”
The transaction marked the first dual-tranche Tier 2 in US dollars and sterling. Both tranches went on to rally strongly in the secondary market, the dollar tranche by 43bp in mid-November, two months after issue, providing the best possible platform for future issuance by Bank of Ireland as well as its Irish peers.
BNP Paribas, Citigroup, Davy and UBS were joint lead managers alongside Morgan Stanley.