Friday 22 September 2017

BoI bond price slip 'tainting the success' of €500m issue

Donal O'Donovan

Donal O'Donovan

Bank of Ireland's latest bond deal has underperformed in secondary trading, the first Irish bond this year to disappoint investors.

The bank had no problems borrowing €500m on the bond market last Wednesday, even paying less than anticipated thanks to good demand from investors, the overwhelming majority of which are based abroad.

The bond is a senior, unsecured and unguaranteed deal, which means investors must have confidence in the bank itself, rather than specific assets or even the State.

However, the bond has slipped in price on the markets since it was issued, meaning investors would not get their full investment back, if they tried to sell it to another bond trader straight away.

That is "tainting the deal's success", according to the influential International Financing Review (IFR).

The magazine said the yield, or return, that investors demand to hold the bond increased by 15 basis points, or 0.15pc, compared to the price the debt secured at the initial auction rate of 2.75pc.

Underperformance by a bond in secondary trading does not have any direct implications for a borrower – the interest charges the borrower pays and other terms do not change when a bond changes hands.

But trading levels do impact the interest rate that a borrower will pay the next time they go to the market looking for cash.

The head of wholesale funding at Bank of Ireland, Darach O'Leary, told IFR that the bank achieved everything it was hoping for.

The bond deal was managed for Bank of Ireland by BNP Paribas, Deutsche Bank, Morgan Stanley and RBS.

They managed to attract 120 investors in the initial auction, three-quarters of them asset managers. Of the other investors, 12pc were banks and 8pc were pension funds or insurance companies. German-based investors accounted for 18pc of the buyers, while 17pc were Italian, 15pc British and 15pc French.

RETURNS

However, the weakening after the auction suggests the deal was priced too cheaply to maintain support in secondary trading. Pricing bonds is a delicate balancing act between borrowers that want to pay as little as possible for debt, and investors seeking returns.

"Given the quality of the order book and allocations, we are confident that this bond will provide investors with solid performance given the fundamentals of Bank of Ireland," Mr O'Leary told IFR.

The global head of risk syndicate at Deutsche Bank in London, Christopher Whitman, told financial journal 'Dealbook' that Ireland had recovered strongly in the past couple of years, stoking demand for bonds.

"Many credit investors are now comfortable with Ireland, as well as with the Bank of Ireland," he added.

Irish Independent

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