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AIB ready to join BoI by returning to bond markets

AIB is poised to follow Bank of Ireland by returning to the bond markets, with a deal possible as early as this week, the Irish Independent understands.

State-owned AIB, lead by CEO David Duffy, has confirmed to the Irish Independent that it updated its "covered bond" programme on Friday.

It means the bank is primed to issue new IOUs that are secured on pools of Irish residential mortgages.

The covered bond programme is updated annually, but it had fallen into disuse over the past three years, along with similar programmes of other Irish borrowers that have all been shut out of the markets.

The timing of the latest update of AIB's bond processes – just three days after Bank of Ireland raised €1bn – fuelled speculation that a second Irish bank deal is now imminent.

Bank of Ireland, headed up by Richie Boucher, left a huge amount of investors' money on the table when the bank accepted €1bn of the €2.5bn it was offered in a one-day bond auction. The 3.125pc interest rate that the bank has paid to borrow over three years is seen as compelling value by investors, who in some cases are losing money when they lend to the likes of German and US banks.


There has been a sea change on the markets over the past two to three months thanks to a dramatic loosening of the purse strings by the European Central Bank (ECB) that has the effect of encouraging investors to seek out riskier but higher-paying investments.

Last week investors in Bank of Ireland's bond were won over in particular by the extra 1pc interest to be had by lending to the bank rather than to the Irish government.

If AIB – which is all but entirely state owned – opts to seek its own bond deal it will be in order to reduce the bank's reliance on the European Central Bank (ECB) for ongoing liquidity.

That means the domestic mortgage market is unlikely to see much impact from any fresh cash raised, at least in the short term. Bank of Ireland, which is 15pc-owned by the Irish taxpayer, has already said it will use the €1bn raised last week to reduce its reliance on the central bank.

Banks can borrow from the ECB at an interest rate of just 1pc, compared with the more than 3pc charged in the markets, but over-reliance on the central bank is seen as unhealthy. It means all banks are under pressure to "normalise" their funding base.

AIB's plans also come as the Government's bank guarantee scheme is due to end next month.

Over the weekend, US investor Wilbur Ross said that the Government shouldn't renew the guarantee because not doing so would improve the reputation of Ireland's banks and help them normalise activities. The guarantee scheme costs the banks hundreds of millions of euro every year.

Irish Independent