Life insurers offer Government debt deal that could net it €100m
Published 25/03/2011 | 05:00
THE State could book a gain of more than €100m if it agrees to a plan put forward by life insurers to use so-called 'sovereign annuities' as a proxy to buy back cheap Irish Government bonds.
The news comes as the State prepares to issue its first 'sovereign annuities' next month, offering life insurers long-term Irish Government debt that will ease the funding burden of pension schemes.
The scheme initially got a tepid response from the insurance community after the National Treasury Management Agency (NTMA) confirmed the new bonds would carry an interest rate "in line" with the rate Ireland is paying for its EU/IMF bailout.
The comments imply an interest rate as low as 5pc, against the 9pc-10pc that existing Irish bonds are currently commanding in the market.
Insurers have now come up with a scheme that would allow both their pension funds and the Irish State to benefit from the existing weakness of sovereign debt. The plan involves insurers buying cheap debt in the market and then trading it in with the NTMA for the new debt.
Based on yesterday's prices, insurers could buy Irish 15-year bonds with a face value of €100m for about €70m. They could then trade those bonds in with the NTMA for the new 35-year 5pc interest bonds.
If the NTMA agreed to give €85m of the new bonds in exchange for the €100m of 'old' bonds, then the insurance companies would end up with a better interest rate.
They'd be getting €4.25m a year, or 5pc of the €85m, even though they'd only spent €70m on the bonds. This would leave them with a yield of just over €6pc.
The NTMA would have booked a gain of €15m, since it would be exchanging a commitment to repay €100m for a commitment to repay €85m.
Depending on the actual deal agreed, insurance companies believe the gain for the State could be more than €100m, while the insurance companies could achieve an interest rate of more than 8pc.
The losers would be the investors who paid €100m for the old bonds and are now selling at a loss. The deal would also stimulate demand for existing bonds, boosting the price of Irish government debt.
A spokesman for the NTMA declined to comment on the prospect of such a deal.
The NTMA is legally empowered to do "direct" buy-backs of its own debt but while the banks have used the mechanism to inflict losses on bondholders, the NTMA has not.
This may be because a "direct" buy-back would see the NTMA having to hand back cash to the bond investors -- cash that is currently in short supply.