Irish Life & Permanent (IL&P) has inked a large securitisation on part of its life assurance book, which will release €200m of capital as the group looks to bolster its weak banking unit's financial position, according to well-placed sources.
IL&P stands out as the only state guaranteed institution in the sector that will not be participating in the National Asset Management Agency -- or require a taxpayer bailout.
The Irish Independent previously reported that group management estimates Permanent TSB would need in excess of a €500m capital injection before taking part in an industry-wide merger. It is now likely that the group will resort to a rights issue to plug the gap between what is released from a life securitisation deal and the €500m-plus requirement.
IL&P recently got approval from shareholders and the High Court to set up a new holding company, which would make it easier to hive off Permanent TSB into consolidation among the country's second-tier lenders.
Irish Nationwide and EBS are currently in merger talks, while IL&P is gearing itself for a potential deal with the combined building societies later this year.
Market sources said an announcement on IL&P's securitisation deal is expected over the coming weeks, pending approval from the Financial Regulator. The group declined to comment.
IL&P had previously envisaged transferring all the capital released through a so-called value in force (VIF) life securitisation to its banking unit.
But sources suggested that the life business may continue to hold most of the capital, as a result of a deterioration in its own business last year -- even though management believe its medium to long-term prospects remain strong.
The group signalled last November that the life company's embedded value would take a €105m full-year hit from its exposure to the downturn in commercial property across Europe.
Group chief executive Kevin Murphy told analysts that, as a result, Irish Life would not be paying a dividend to the loss-making bank for 2008.
The ability of IL&P to tap its life assurance book for capital stems from the fact that a new insurance reserves regime -- Solvency II -- will be introduced in the coming years, leaving it with an overcapitalised life business.
In anticipation of this, Irish Life can enter into securitisation or reinsurance deals to release capital in advance of the new system coming into force.
It struck a similar deal with Swiss Re in late 2008, which allows it to release up to €250m in capital over a three-year period.