Covered bonds: Investors pile into Irish mortgages as BoI returns
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Covered bonds: Investors pile into Irish mortgages as BoI returns

€2.5 billion orders for €1 billion deal; Deal underscores appetite for peripheral risk

In a transaction that would have been unthinkable this time last year, an Irish bank attracted €2.5 billion of orders for a €1 billion non-government-guaranteed bond in November. The feat was achieved by Bank of Ireland, which publicly syndicated a three-year covered bond at 270 basis points over mid-swaps on November 20.

"Today is an important milestone on the path to full independence for our banks," said Irish finance minister Michael Noonan when the deal was closed. "This issuance is further evidence of the strengthening and normalization of our banking system. It is a clear show of confidence in the restructuring of the sector and its viability into the future by international investors." It is also the first time that the bank – Ireland’s healthiest – has accessed the markets since October 2010.

The deal, which was lead managed by Citi, Morgan Stanley, Nomura, RBS and UBS, capitalizes on a recent resurgence of interest in peripheral bank paper, evidenced by recent deals from Banco Espírito Santo of Portugal and Spanish insurer Mapfre. "Pre-summer we were still very much operating in a market with very tight windows of execution," says Nick Dent, head of EMEA DCM syndicate at Nomura in London. "However, the market has matured in the last couple of months, with different types of product finding investor support and issuers like Santander hitting the market in size."

Offering a 100bp premium over the sovereign the deal was clearly an effort to establish some cohesion around where secured Irish bank risk should price.

"When an issuer hasn’t been in the market for a long time you must get the process right," Dent tells Euromoney. "One had to get into the mindset that, while there were some quotes in the secondary market, they were for older bonds; 100bp over was a pretty attractive proposition." Pricing at 99.8%, the deal yielded 3.191% and drew in 190 investors.

This transaction is symptomatic of the growing enthusiasm for Irish risk, but the residential mortgage market in the country still has a long way to go. In August, analysis from Davy Stockbrokers revealed that over 50% of Irish mortgages are in negative equity. The firm forecast that owner-occupier arrears will peak at 16.5%. The level of investor interest is testament to the popularity of the covered bond instrument (and the protection against bail-in that comes with it) together with the quality of information available on a bank that is still 15% owned by the state and reported a €907 million pre-tax loss for the first half of this year.

"Ireland is well organized and there is good transparency in news flow," says Dent. "That helps in temperamental markets. A covered bond is easier for investors to understand, and having the collateral backing will help Irish banks get over the line."

The expectation is that the reception given to the Bank of Ireland deal might encourage other Irish lenders, Allied Irish Bank in particular, to return to the asset-covered securities market next year. "This deal sets a clear precedent," Dent declares. "To get a book of this size shows that it wasn’t just a hit and run."

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