BANK of Ireland has offered to take as much as €1bn of Irish and UK mortgages back on to its balance sheet -- at a significant discount to the amount that the bank originally offloaded them for.
The plc yesterday surprised markets by offering to buy back €1bn of bonds from investors who took part in a €4.5bn securitisation of the bank's mortgage book back in 2007.
The original deal saw the bank sell the economic interest in the underlying mortgages to the bondholders. Under yesterday's offer, the economic interest in some of the mortgages would revert to the bank.
BoI is offering to pay between 28pc and 92pc of the amount investors originally paid for the bonds -- prompting Davy's analyst Stephen Lyons to suggest the bank could make as much as €300m from the offer.
The bank's spokesman declined to be drawn on how much capital BoI could potentially raise from the deal, though some market sources suggested a figure of closer to €200m.
Bondholders have until December 1 to offer their bonds to the bank -- the result of the tender will be published the following day.
If €1bn of bonds are bought back, the bank will effectively assume the risk of €1bn of mortgages being repaid -- at a time when Irish banks are mandated to reduce their risks and slim down their balance sheet.
"Reduction in long-term funding seems to go against the objectives of PLAR," said Davy's Lyons, referencing the Prudential Liquidity Assessment Review that mandated banks to sell off assets and improve their funding profiles.
It is understood that the tender has already been approved by the Central Bank, which is monitoring the banks' progress on their PLAR plans.
Sources also stressed that most of the mortgages covered by yesterday's assets were in the UK, where mortgages arrears have been significantly better than in Ireland.
The Irish mortgages involved are owner-occupier only, so the bank will not be taking on additional exposure to mortgages in the troubled buy-to-let category.
Sources also pointed out that the bank would only be paying a fraction of what the bonds initially sold for, so that discount would give BoI headroom to absorb any losses on the underlying loans.
The size of the discount will depend on the mix of bonds the bank ends up buying back.
Yesterday's offer guides prices of as low as 28pc for 'Tranche D' bonds -- the riskiest category of bonds that was only due to be paid off after other bondholders in that securitisation had gotten all their cash.
The price for Tranche A bonds, the lowest yielding and first to be paid, could be as high as 92pc.
"Those are the minimum prices, bondholders will come to the bank and say what they'd be willing to accept, it's a case of suck it and see," said one source.
The process is similar to 'sealed bids' at an auction, with bondholders having just one chance to submit a price without knowing what prices other investors are tendering.
Market sources expect interest to be high, with Lyons describing the tender as "a once-off opportunity for investors to exit what are illiquid (and will be more illiquid after this) long-dated securities".