Business Irish

Friday 19 September 2014

BoI is first bailed-out bank back in the bond markets

Published 14/11/2012 | 05:00

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€1bn of debt raised at auction without any support from State

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BANK of Ireland has become the first bailed-out bank since 2009 to borrow on the markets without government support.

The partially state-owned lender raised €1bn of three-year debt at an interest rate of 3.125pc. The money means that it can now cut its reliance on funding from the European Central bank.

Finance Minister Michael Noonan welcomed the news, saying it was "important in decoupling the sovereign from the banks." This is because the debt raised by the bank does not come with a state guarantee.

It is Bank of Ireland's first bond deal of any kind since 2010 and represents an important step towards "a more sustainable funding position", the bank itself said.

The cost of borrowing compares to the interest rate of 4.1pc that the bank charges its mortgage customers with standard variable rate home loans.

A busy auction saw investors offer to lend more than €2.5bn to Bank of Ireland, which eventually accepted €1bn of the money available.

The bank raised the debt by issuing so-called 'covered bonds', a type of debt secured in this case on a pool of Irish home loans, as well as guarantees from the bank.

Covered bonds are being seen as a safe investment, especially by German banks, which like the extra security offered by the mortgages that are used as collateral.

The 3.125pc interest rate is 1pc higher than the State would pay to borrow over the same period. That is unusual for a covered bond. They can usually raise debt at a lower cost than even governments, thanks to the collateral involved.

German and Austrian investors were the main purchasers of the Bank of Ireland covered bond. They accounted for 37pc of the cash raised.

UK investors accounted for a further 19pc. Just 2pc of the money was raised on the domestic market.

Earlier yesterday, Bank of Ireland told investors that the number of its mortgages in arrears was still increasing but that the pace of new problems had continued to slow since June.

Trading update

The comment was part of the first trading update to include details of the bank's performance since the end of June.

Bank of Ireland shares closed up just over 1pc last night on the Dublin market, at 9.4 cent.

In its trading update, the bank said it was ready to exit the government guarantee and told investors that it expected to see its loan losses decrease.

It said: "We maintain our expectation that impairment charges will reduce from the elevated levels experienced in 2011, trending over time toward a more normalised impairment charge as the domestic economy recovers."

The bank also said that its net interest margin – the difference between what it pays to borrow money and what it charges to lend it out again – was likely to improve when figures are published for the second half of the year.

This is the key driver of profit for banks.

Irish Independent

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