Price or Brexit? Jury out on Bank of Ireland Tier 2 failure

IFR 2299 7 September to 13 September 2019
5 min read
EMEA
Tom Revell, Helene Durand

Bank of Ireland Group postponed a Tier 2 transaction last Tuesday, with the blame laid at investor concerns over unfolding Brexit developments, although some observers pointed the finger solely at the price.

The failure of the trade abruptly ended a recent run of rapturously received subordinated bank trades and dispelled a sense that any higher yielding bond was sure to succeed.

Its fate could point to tightening credit market conditions facing issuers exposed to Brexit risks, although the causes of Bank of Ireland’s problems were debated.

The €300m (no-grow) 10-year non-call five-year trade was marketed with initial price thoughts of mid-swaps plus 270bp area via lead managers Citigroup, Davy, Mizuho, Nomura and UBS.

In contrast to recent higher-beta, higher-yielding trades in the FIG space, demand was slow to come in. At 11:18am, the book was reported at just €340m-plus.

The spread was fixed at 270bp, but even though it was oversubscribed, the bond was pulled. Bank of Ireland said it had postponed the deal “in order to ensure successful execution for both the issuer and investors”.

Lead bankers cited investor concerns over the expected newsflow around Brexit and the Irish bank’s exposure to Brexit risk.

While Bank of Ireland was in the market, British lawmakers were battling to stop the UK being able to leave the EU without an agreement, in opposition to Prime Minister Boris Johnson, and there was speculation a snap election could follow.

“There hasn’t been a significant change in the newsflow, but it was really about investor sentiment around the newsflow expected over the next 48 hours,” said a lead syndicate banker. “The risk of [the deal] trading wider was sufficient for the issuer to hold for more stable markets.”

He said the deal was shelved for now.

‘TOO GREEDY’?

Bankers outside the leads were split on the degree to which Brexit could be blamed for the failure of the deal, which would have been the first public Tier 2 from an Irish bank since September 2017.

One said Brexit noise could have been a factor, although he suggested the newsflow had been clear in the hours prior to launch.

“If you bring a deal against this backdrop, which also has ‘big topic’ risk, you need to choose timing very carefully,” he said.

Others said it was solely a question of price. Many bankers away put fair value at around 260bp based on UK comparables, arguing IPTs of 270bp area were therefore too aggressive given the fragility of the market.

“It’s completely down to price, although I get it – if I was a lead, I would totally blame Brexit,” said a syndicate banker away from the deal.

“I would have started at 300bp, looking to land at 275bp. This is the market we’re in, this is what’s needed … I think they got greedy and they missed it.”

‘THE WRONG CALL’

The lead syndicate banker disagreed, insisting the same deal at the same IPTs would have worked on another day.

He said many investors had, like the leads, seen fair value tighter. European comparables could point to fair value of 210bp-220bp, he said, suggesting the deal should have been priced somewhere in the middle of the 210bp-260bp range given Bank of Ireland’s UK exposure.

Instead, he blamed bad timing.

“As a syndicate, we made the wrong call on investors’ risk aversion that day to what was happening in parliament overnight,” he said.

The leads had aimed to get the deal done before Tuesday’s vote, when MPs took control of parliamentary business from the government, he said.

“With hindsight, the vote has gone against Boris, but if it had gone in Boris’s favour and they hadn’t blocked no deal that evening, then you’d have a high probability of no deal Brexit and you’d have seen UK Tier 2 risk 30bp or 40bp wider,” he said.

“Investors saw that as a 50/50 risk on that day, and therefore they stayed on the sidelines.”

Another source close to the deal explained the rationale for the timing. The issuer had been looking to refinance a €205m Tier 2 up for call in February 2020 and there was a feeling that prices will get worse towards the end of this year, he said.

Bankers suggested the deal’s sub-investment grade ratings on two out of three scores (it is expected to be rated Ba1/BB/BBB-) and its sub-benchmark size may have made it easier for some investors to pass up.