BANK OF Ireland has raised €1.5 billion selling a five-year bond backed by the bank’s mortgages in the first issuance of debt that partially falls outside the protection of the Government bank guarantee.
The bank said the bond sale represented “a first step” in the reopening of the wholesale funding market to unguaranteed debt issued by any Irish lender.
The bank said this was “highly significant” given that investors would not be guaranteed by the Government. It was the bank’s first public benchmark covered bond issue and its first public covered bond issue since 2006.
The bond was just over 2.5 times over-subscribed and more than 150 investors from 24 countries participated in the transaction. Some 96 per cent of the investors were from outside Ireland.
The issue was priced at 190 basis points (1.9 per cent) over the swaps rate, the benchmark for pricing bonds in the market.
Hypo Real Estate, the lender which has been rescued by the German state, raised €1.5 billion under a five-year covered bond at a cost of 50 basis points over the mid-swap rate on Tuesday.
Scott Rankin, analyst at Davy stockbrokers, said Bank of Ireland’s issue was “expensive compared with other banks” but “very significant” showing that the wholesale markets are “thawing”.
“It sends a positive signal to the market and shows that an Irish bank can secure money without the guarantee,” said Mr Rankin.
Davy said the bond provided “much-needed duration” to the bank’s wholesale funding given that 75 per cent of this funding was less than one year.
The broker said the downside to the issue was that the bank is using up assets that could be used as collateral to raise the funding. It had €17 billion of assets that could be used as collateral to raise funding at the end of March.
Bank of Ireland and Allied Irish Banks had their junior subordinated debt ratings cut by ratings agency Moody’s on fears that they will suspend interest payments.
The debt was downgraded three notches to Ba3 from Baa3 and ascribed a negative outlook, meaning they may be cut again.
The Government’s plan to acquire loans from the banks through Nama will require the approval of the European Commission, which may advise the banks to stop coupons on the debt, Moody’s said in a statement.
The downgrade reflected an assumption “of a higher probability of coupon suspension” on the debt as a result of negotiations between the Government and the Commission on Nama, Moody’s said.
