Wednesday 21 November 2018

Flotation nation: loan sales and IPOs in a year when the crash was finally over

Investors in the likes of AIB, Eir and Irish bonds show Ireland's no longer the preserve of debt funds trading off our distress.

Ardagh Group chairman Paul Coulson rings the New York Stock Exchange bell to mark his company’s IPO. Photo: AP Photo/Richard Drew
Ardagh Group chairman Paul Coulson rings the New York Stock Exchange bell to mark his company’s IPO. Photo: AP Photo/Richard Drew

Gretchen Friemann

Ireland caught the attention of global capital markets this year, and for a change not just for the deleveraging loans frenzy that characterised the aftermath of the crash.

While private equity funds seeking big returns for risky assets are still a feature, the persistent vigour and dynamism of the domestic economy this year also attracted in the kind of staid, boring investors more concerned on having their capital returned than the return on capital.

Deirdre Somers, CEO of the Irish Stock Exchange; AIB chief executive Bernard Byrne; and the bank’s chairman, Richard Pym, as AIB returned to normal trading on the Dublin and London markets in a €3.4bn listing which was Europe’s largest this year. The exchange itself was sold later in the year. Picture by Shane O'Neill, SON Photographic
Deirdre Somers, CEO of the Irish Stock Exchange; AIB chief executive Bernard Byrne; and the bank’s chairman, Richard Pym, as AIB returned to normal trading on the Dublin and London markets in a €3.4bn listing which was Europe’s largest this year. The exchange itself was sold later in the year. Picture by Shane O'Neill, SON Photographic

Two emblematic deals of that trend were the part-privatisation of AIB and the Government's first negative-yield bond sale.

Despite the uncertainty of Brexit, 2017 marked the culmination of a gradual shift, with painful financial restructuring giving way to "normalised" trading.

The year began with a long-awaited IPO and closed with a final twist in the endless Eir saga.

Ardagh Group, now a global giant in the metal and glass packaging industry, debuted on the New York Stock Exchange in March, pricing at $19, the upper end of its valuation range.

The New Year should see the spotlight on Bank of Ireland with Francesca McDonagh at the helm and a ramp-up of activity. Picture: Arthur Carron
The New Year should see the spotlight on Bank of Ireland with Francesca McDonagh at the helm and a ramp-up of activity. Picture: Arthur Carron

The $307.8m deal, which represented just a 7pc sliver of the conglomerate, was preceded by a $2.2bn debt raise.

While Ardagh's long delayed stock sale points up the strength of the recovery in the US, the final big deal of the year, reflected rebounding international confidence in Ireland. French billionaire Xavier Niel claimed his acquisition of a majority stake in telecoms group, Eir, via his private holding company NJJ and Illiad, represented a long-term bet on the Irish economy.

His incursion into Eir reduced the stakes of US hedge funds Anchorage and Davidson Kempner, who in turn had risen to prominence as shareholders after more aggressive distressed players led by Blackstone had moved on.

In a year that witnessed the return of AIB to normal trading on the Dublin and London stock exchanges, the Irish exchange was itself a target of foreign direct investment.

In a deal that may well take years for the full effects to be known, Euronext swooped, eager to capitalise on the ISE's pre-eminent global role in debt and fund listings. How the Irish economy develops without a standalone stock market will have long term policy implications.

Aside from the AIB spectacular, which remains the largest European IPO of the year, buoyant equity markets also enabled US private equity behemoth, Oaktree to monetise and partially exit its sprawling Irish real estate portfolio, amassed in the wake of the Sovereign bailout.

Glenveagh Properties, formed from a combination of Oaktree's development land bank and the assets of Maynooth-based builder, Bridgedale, marked the second listing of a homebuilder in the past two years. It also ranked as the second-largest IPO of the year, behind the AIB juggernaut.

Rising land values have boosted both firms since listing, even if real construction output remains muted.

Also on the equity markets, there was the €270m floatation of Greencoat Renewables, a wind farm operator, which attracted investor interest predominantly for its 6pc yield. The deal was anchored by State investment fund ISIF - a serial investor across swathes of the nominally private sector now - and by AIB.

The handful of successful equity listings was matched by an unexpectedly strong year for debt transactions, with a mix of good and bad loans hitting the market. After the clear-out of Nama, the market was focused on the toxic loans still weighing on the banks' balance sheets.

Shortly before Christmas, and as reported by this newspaper, AIB fired the gun on the largest loan portfolio sale ever undertaken in its history, but while the €3.8bn Project Redwood deal has been in the pipeline for some time, the main action is set for 2018 with first bids for the mammoth bundle of non-performing loans due at the end of January.

The bank is unlikely to complete a transaction until June according to sources.

As the market speculated about how AIB and Permanent TSB, the lenders most burdened by boom era bad loans, intended to clean up their balance sheets, the largest loan deal of the year underscored the depth of international appetite that now exists for Irish residential mortgages.

At the end of October Danske offloaded €1.8bn of performing loans to Goldman Sachs and US funds giant Pimco in a fiercely competitive race that drew global heavyweights and elbowed aside final-round bidder, Bank of Ireland.

The sale of the remnant of the Danish lender's once sprawling Irish banking empire marked the end of Danske's near decade-long clean-up, but demand for the performing mortgages also illustrated the scale of the market's recovery.

The portfolio of 13,000 mortgages, many tracker loans extended to primary home dwellers, changed hands for close to 95c in the euro.

Goldman Sachs and Pimco plan to securitise the portfolio early next year - meaning the mortgages will be bundled up and sold as a tradeable bond.

The strategy is aimed at capitalising on the desperate dash for yield amid a protracted period of low interest rates.

Permanent TSB securitisation of performing mortgages in October pointed up the accessibility of market for bond issuers.

The part-nationalised bank raised €500m from debt market investors and while the overall rate for residential mortgage backed security, dubbed Fastnet 13, delivered an overall yield of .25pc - the portion of the book that attracted a top-notch rating priced at a negative yield - meaning investors gave PTSB money to hold those securities.

As the freshly sold Danske book is considered high-quality, Goldman Sachs and Pimco stand to profit from the same spread.

Inevitably, one deal dwarfed all others in 2017. AIB's return to normal trading on the London and Dublin stock markets in a €3.4bn initial public offering had been in gestation for two years.

Even so, it was a watershed for the banking industry and economy.

There had already been false starts but in early 2017 supportive markets swung in behind AIB, ending months of "will they, when will they?" speculation.

There could be no room for error. Seven and a half years ago taxpayers sank €20.8bn into the stricken lender as part of a wider rescue of the Irish banking system - a moment characterised by the then Finance Minister Brian Lenihan as a "nightmare" for the Government and the Irish people.

This selldown of a first slice in one of the pillar banks wasn't entirely uncontroversial.

The sale was Government policy but there was a political wobble after a failure by Fine Gael party whips saw an embarrassing motion against the deal passed in the Dáil, even if it had no real effect.

A row over how best to use the proceeds of the deal - to reduce the national debt or prime the economic pumps - then faded as quickly as it flared up

Aside from timing - ultimately determined by the French Presidential election, and the unexpected UK election poll - the IPO's valuation needed to set the stage for a future, more lucrative exit by the State.

Six months after the part-privatisation, and following a near 25pc surge in the share price, the scale of recovery for taxpayers' from the bank bailout remains a subject of debate.

Some calculations put the final AIB rescue bill at over €28bn - a figure that, among other things, takes into account the acquisition of senior Nama bonds issued to IBRC, and we're nowhere near that level of repayment yet.

The question about when and how much represents a fair settlement to the taxpayer is likely to rumble on for some time, particularly as AIB CEO Bernard Byrne is publicly encouraging the Government to offload another stake.

Earlier this month he claimed the recent leap in the bank's share price could help recoup the full cost of the bailout, though he puts that bill at the lower end of the scale.

Meanwhile, given the scale of public ownership, AIB, along with Bank of Ireland and Permanent TSB, all remain subject to a Government-imposed salary cap of €500,000.

AIB's IPO prospectus, the ongoing ban on bonuses and share incentives for executives, as a result of its bailout, was described as an obstacle to future performance as it prevented directors from "aligning" their interests with investors.

The document stressed the current pay structures could result in senior management losses.

Once the bank is free of State ownership - and some in the market argue taxpayers should retain a significant holding in order to prevent a repeat of the past and ensure the bank operates as a beneficent force - those constrictions are likely to fall away. For the moment however the pay cap, introduced in 2009, remains an "evergreen piece of legislation".

The lack of variable pay seemed to leave little dent on investors' appetite however as the IPO's launch sparked a surge of interest from hundreds of international investors.

Strong demand meant the Department of Finance, which ultimately led the share sale, was able to pick and choose which investors were allocated shares, and ensure no one player became too dominant on the register. After a long phoney war, Project Viking, as AIB's partial privatisation was dubbed, went off without a hitch.

Demand was fuelled by the 2016 full-year results and, crucially, the commitment to a dividend, that opened up the institutional investment market restricted to income-generating stocks.

AIB's non-performing exposures provided a constant theme to the numerous investor meetings held by the Government's nine-strong advisory syndicate that was led by global lead arrangers, Davy, Deutsche and Bank of America Merrill Lynch and included Goldman Sachs, Goodbody, Investec, Citi, UBS, and JPMorgan. Rothschild acted as the Government's independent advisers.

As AIB continues to hit its profit targets, all eyes are now trained on the bulging capital buffers that are set to reduce once the bank purges its balance sheet of legacy assets.

The €3.8bn Redwood blockbuster, in combination with other deals including a sale of NPLs in Northern Ireland, and initiatives such as the mortgage to rent scheme - will leapfrog the bank towards this goal.

It will also pave the way for bumper payouts to shareholders, either via a special distribution or a share buyback scheme in 2020-21.

This act may mark the final chapter in the bank's rescue but it is likely to take far longer for the spectre of its catastrophic collapse to fade.

If 2017 was AIB's year to shine, Bank of Ireland's new CEO Francesca McDonagh's arrival in the autumn is the harbinger of an expected ramp-up in activity there next year.

Coincidentally, or not, the arrival of a new broom to replace long-time incumbent Richie Boucher, saw Bank of Ireland finally face up to the scale of problems with the treatment of customers in the bank's tracker mortgage book.

This included massively increasing, to between €150m and €175m, its additional provision to fund redress and compensation payments, from a previous €25m.

The tracker scandal, across the banking system and including all of the main banks, was a huge part of the story of 2017.

Finally there was relief and redress for customers but it leaves huge question marks over conduct within the sector, regulatory oversight of banks, and for investors, transparency about what else could be bubbling under the surface.

Irish Independent

Business Newsletter

Read the leading stories from the world of Business.

Also in Business