Bank of Ireland prepares bond issue of up to €1bn

BANK OF Ireland is understood to be readying a €500 million-€1 billion bond issue on the back of Tuesday’s successful Government bond auction.

Buoyed by the strong demand for Ireland’s latest sovereign debt issue, which was oversubscribed 3.4 times, Bank of Ireland is likely to issue the debt “as soon as markets oblige”, according to Ciaran Callaghan, a banking analyst with NCB Stockbrokers.

The deal could happen in early September, he said.

“If the auction hadn’t gone as well, it would have made it more difficult for BoI, but it leaves the door open for the bank to get out into the debt markets again,” he said.

Last week Bank of Ireland chief executive Richie Boucher said he wanted the bank to “disengage” from the Government guarantee of bank debt “in a safe and prudent manner . . . as market conditions allow”.

However, the institution will likely take advantage of the State guarantee to test demand in the market, and according to Mr Callaghan, may follow this by “venturing into the unguaranteed arena” to raise further funds, possibly through a covered bond issue.

If Bank of Ireland manages to get a deal away, it could pave the way for the Republic’s other beleaguered banks to raise money – albeit Government-guaranteed debt – as Mr Callaghan suggested there is only a “remote possibility” for any other institution to raise unguaranteed money.

However, pricing of any such deal will be very important, with Bank of Ireland likely to pay a premium over sovereign debt. And, given that Europe’s second-tier banks are still having difficulty accessing the debt markets, it may prove challenging.

Irish Life Permanent was the last Irish financial institution to do a guaranteed issue back in April, and since then there has been no term funding by an Irish institution of a material size.

Since Tuesday, the spreads of Irish 10-year government bonds, which refers to the difference in yield from German bonds, have continued to tighten, although they still remain at very high levels, having dropped back slightly to 288 basis points yesterday.

German 10-year bonds were sold at the lowest rate in at least a decade yesterday, at 2.35 per cent, while 30-year bonds fell to a record low of 2.957 per cent.

In total, Germany sold some €5 billion in bonds, but the bid-to-cover ratio, which refers to the level of subscriptions for a deal, was low, in the range of 1.4 to 1.7.

Germany will sell €317 billion in debt this year, less than an original plan to sell €338 billion of debt, according to the 2011 draft financing plan. It will issue €320 billion of bonds and bills next year.

Portuguese debt gained after the nation raised more funds than it originally intended yesterday.

The Iberian country sold €775 million of three-month bills and €750 million of 12-month bills, after originally indicating that the proposed amount was €600 million for the three-month bill sale and €750 million for the 12-month auction.

Following the auction, Portuguese 10-year yields fell one basis point to 5.21 per cent, narrowing the securities’ yield premium over bunds by five basis points to 276 basis points.

The spread between German and Spanish bonds also narrowed yesterday, dropping by five basis points to 169.

However, despite the upturn by Europe’s peripheral economies, investors were yesterday recommended to sell bonds from these regions.

Andrew Roberts, head of European rates strategy at RBS in London, said that economies such as Ireland were “totally at the mercy of the business cycle”.

“If it turns over it’s going to get very messy for Europe in terms of sovereign credits and the banking system,” he said. – (Additional reporting: Bloomberg)