Monday 16 September 2019

NTMA cancels another €500m worth of Anglo-linked bonds

The Central Bank
The Central Bank

Colm Kelpie and Donal O'Donovan

The National Treasury Management Agency (NTMA) has "cancelled" another half a billion euro worth of bonds linked to the liquidation of the former Anglo Irish Bank after buying them from the Central Bank.

As part of the liquidation of the Irish Bank Resolution Corporation (IBRC) in February 2013, the Central Bank acquired €25.03bn of eight long-dated so-called Floating Rate Notes (FRNs), and €3.461bn of the Irish Government 2025 Fixed Rate Bond, which was due to mature in March of 2025.

The NTMA announced yesterday that it had cancelled another €500m of the Irish Floating Rate Treasury Bond due to mature on 18 June 2038.

It is the fourth time that the NTMA has done this, meaning the €2bn bond now no longer exists.

The Central Bank originally received these bonds as part of the liquidation of the Irish Bank Resolution Corporation (IBRC) in February 2013 - the so-called Prom Night, when the notorious promissory notes used to bailout the scandal-hit bank were cancelled and exchanged for standard government bonds.

But under the deal, the Central Bank had to agree a disposal schedule.

Interest is paid twice a year on the Floating Rate Bonds, on June 18 and December 18.

Interest is based on the six-month Euribor interest rate, plus the individual margins applying to each of the eight bonds.

Seamus Coffey, economics lecturer at University College Cork, said the NTMA hopes there will be interest rate savings from the transaction, as the NTMA would have used borrowed money on current cheap interest rates to obtain the bond.

"The Floating Rate Notes are probably at a low interest rate at the moment but because interest rates may go up, and are definitely going to go up between now and 2038, you may pay more interest in the future," he said.

"What the NTMA is doing is locking in the low interest rates now in a fixed rate, and are cancelling a floating rate bond, in the hope that there will be interest rate savings in the future."

Mr Coffey said he didn't see any potential downside for the taxpayer from the move, as the Central Bank needs to get rid of the bonds anyway.

"Unless interest rates are extraordinarily low in 25 years, but that's unlikely," he added.

"It's likely that the Central Bank is making a profit, because the NTMA is buying them at market value, but most of that profit will be returned to the Exchequer in the Central Bank surplus next year," he said.

"The Central Bank has to sell these anyway. The Central Bank could sell them to a third party and the risk to the State, because these are Floating Rate Notes, is if interst rates rise, we'd have to pay more interest to that third party.

"Whereas if the NTMA buys them, the Floating Rates Notes are cancelled and the NTMA has borrowed at fixed rates for a very long time.

"It reduces the interest rate risk for the State."

In December last year, the NTMA purchased from the Central Bank and subsequently cancelled €500m nominal of the Floating Rate Treasury Bond maturing in 2038.

It did the same in June and in August.

Irish Independent

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