Tuesday 16 October 2018

Bailed-out PTSB able to borrow for free

Jeremy Masding, Group Chief Executive, Permanent TSB. Photo: Colm Mahady/Fennells
Jeremy Masding, Group Chief Executive, Permanent TSB. Photo: Colm Mahady/Fennells

Gretchen Friemann

Permanent TSB is on course to borrow for the first time at a so called negative yield - meaning bond investors are prepared to lose money to hold debt secured on €500m of its Irish mortgages.

The State-backed lender's latest batch of residential mortgage-backed securities (RMBS), known as Fastnet Securities 13, will achieve an effective yield - or borrowing cost to the bank - of around minus 0.03pc. The deal is due to price today.

The negative interest rate underscores the demand among investors for investment-grade or low risk bonds, and the yawning gap between what banks can charge and how much they are paying, themselves, to borrow in a market propped up by the European Central Bank.

PTSB's deal was helped because its 2016 RMBS issuance, Fastnet 12, has risen in value and received a ratings upgrade earlier this month.

It now trades at a yield of close to O.2pc - some 0.20pc lower than the rate at which it was priced.

Yet while market dynamics helped PTSB raise money at ultra-cheap rates from the European money markets, the deal points up the ballooning spread to new mortgage rates. PTSB, along with its peers, charges new mortgages rates that be over 4pc.

Tight regulations, and the need for Irish lenders to hold more capital in the wake of the sovereign bailout, have helped drive up the cost of new mortgages, rendering the country one of the most expensive markets in the eurozone for new home loans.

Irish banks' relatively high stock of non-performing loans is threatening to result in heavier sanctions as the ECB attempts to speed up a cleansing of banks' balance sheets almost a decade after the crash.

PTSB remains one of worst-affected of the Irish lenders, with some 28pc of the total loan book classified as non-performing.

Its latest RMBS deal, however met with soaring demand, as had been widely expected.

PTSB, which drafted in Bank of America Merrill Lynch, Citi and Morgan Stanley as advisers to the deal, narrowed the pricing range on Monday.

Up to €413.1m of the bond issuance is backed by mortgages with top-notch credit ratings. According to Bloomberg the final guidance moved from a margin of over 30 basis points to three month Euribor rates, the EU's interest rate benchmark, which sit at -0.329.

PTSB also refused to expand the deal size, even though the home loans are drawn from a pool of performing mortgages worth over €800m.

RMBS deals have staged a comeback in recent years and are now classed as relatively low-risk as the debt is fully segregated from the bank.

Irish Independent

Business Newsletter

Read the leading stories from the world of Business.

Also in Business