Monday 22 January 2018

State-backed bank bonds command yields that are 'eye-catching'

Laura Noonan

GOVERNMENT-guaranteed bank bonds are now commanding interest rates of as much as eight percentage points higher than Irish sovereign debt -- even though both instruments are unequivocally backed by the Irish State.

The "eye-catching" difference in the interest rates is revealed in a note by stockbrokers Davy's, which cites "unjustified" concerns about the Government's commitment to bank debt as one of the reasons for the discrepancy.

Irish sovereign debt has rallied strongly since the European Central Bank reinstated a programme to buy government debt on August 4 and Ireland secured an interest rate reduction on the European portion of its bailout.

The yield on Ireland's three-year bond has fallen below the 10pc mark in recent days.

"Despite this tightening, the performance of Irish banks' eligible liabilities guarantee paper [Government-guaranteed bonds] has lagged and spreads have widened to eye-catching levels," Davy's told clients yesterday.

IL&P bond

Irish Life & Permanent has a three-year bond yielding about 18pc, AIB has a three-year bond offering about 15pc and Bank of Ireland has a three-year instrument that's now offering 14pc, according to data from Davy.

Yields for bonds of other maturities are also high, with Anglo's and EBS's five-year bonds both offering about 15pc, and Bank of Ireland's five-year offering 13pc -- against yields of less than 10pc for the Irish government five-year bond.

Davy credit analyst Stephen Lyons said some of the interest rate differences were explained by the lower liquidity in Irish bank bond markets, which always makes investors demand higher interest rates since it's harder for them to sellout.

But he stressed that the "magnitude of the interest rate gap" was "indicative of concerns about the guarantee scheme under pinning bank debt".

"The change of the rules of engagement for Irish banks' subordinated bonds, facilitated by the Credit Institutions Stabilisation Bill, fuels these concerns. . .

"However, we believe these concerns are unjustified as the State unconditionally and irrevocably guarantees payment," Davy added.

Debt market

Mr Lyons said the debt market for Irish banks didn't seem to be taking much account of the relative creditworthiness of the different banks, even though that creditworthiness is the first buffer guaranteeing bonds' repayment.

Bank of Ireland, seen as the healthiest bank after its recent €5.2bn recapitalisation, has some bonds that are offering yields almost as high as those debts owned by minimally-capitalised Anglo debt, data from Davy Stockbrokers shows.

Mr Lyons said that the situation made government-guaranteed debt an attractive option for investors who were convinced by the Irish story and considering investing in the Irish sovereign.

Irish Independent

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