Getting ready for a successful return to the bond markets
The NTMA’s John Corrigan is cautiously optimistic about Irish plans to tap the market
NTMA Chief Executive John Corrigan
One of the key issues facing Ireland post bailout is whether we can achieve regular access to capital markets at sustainable interest rates to enable the Government to continue to meet the day-to-day running costs of the country.
We were locked out of markets in 2010 when the coupon on Irish sovereign bonds became unaffordable and the country was forced into raising €67.5 billion from the EU and IMF via a bailout programme.
Three years on, and the National Treasury Management Agency is poised to re-enter capital markets on a regular basis.
It has already had some success. In January it raised €2.5 billion in a bond that will mature in 2017. The interest rate was 3.32 per cent. In March the NTMA issued a 10-year bond at 4.15 per cent. This was the first 10-year issue by the agency since January 2010, and reflected improved sentiment towards Ireland as the economy continued to repair itself slowly and the country complied with the conditions of the troika bailout.
With Ireland exiting the bailout this month without the safety net that a precautionary credit line might have provided, what are the NTMA’s plans to tap the market in 2014?
Agency chief executive John Corrigan says we will have about €20 billion in the kitty by the end of December. In addition, around €800 million remains to be drawn down from the troika early in the new year.
“That should keep us going well into the first quarter of 2015,” he says.
Among other things, it will be used to meet a bond redemption in January for just shy of €7 billion.
Next month will see the NTMA reveal its plans for fundraising next year.
“We’ll probably issue between €6 billion and €10 billion [next year],” Corrigan explains. “We’ll announce in January what the complexion of that is likely to be. Ideally, it will involve some auctions during the course of 2014 because the challenge is achieving a regular return to the markets on a sustainable basis.
“We raised €7.5 billion in the bond markets [in 2013] but that funding was on an opportunistic basis. We sort of jumped out of the bushes when we thought it was right. We need to get into a pattern that shows we have regular access. That’s the key.”
The NTMA plans to meet with primary dealers in London this month to gauge their views on Ireland’s return to capital markets. “It’s the primary dealers who are dealing with the markets on a day-to-day basis. They know what’s likely to travel. If we were to do a syndicated issue in 2014 . . . five or so primary dealers would be drawn from this group [in London].”
There will also be trades in short-term treasury bills, or T-bills as they are better known. These are typically €500 million in size with three-month maturities. Corrigan describes them as “tactical funding”.
Irish bond yields are currently around 3.5 per cent, below the 4-4.5 per cent level that we would have been paying before the economy crashed when we were an AAA-rated country. This reflects the current low interest rate environment globally. “What that tells you is that the bond markets are dislocated for all the reasons that are well rehearsed,” he says. “So it makes sense to lock in at the longer end [longer-dated debt].”
Corrigan is more interested in the spread over German yields, which is about 175 basis points. This is the risk premium attaching to Ireland at present. “The spread of 175 over Germany is not for nothing. It’s not a risk-free investment.”
Will the NTMA move early in the new year to secure funding while interest rates are so low? “We’ll have to wait and see. You have to be very sure-footed. You never say you’re going until you’re absolutely certain you’re going.”
A key issue in a successful return to the markets would be a re-rating by Moody’s of Ireland to investment grade. In September Moody’s changed its outlook on Ireland’s sovereign rating to stable from negative but stopped short of moving us from its Ba1 sub-investment grade, which Corrigan says would have a number of benefits for us. We’re just one notch away.
“It’s very important. The Asian investors, where we would have had a good following [before 2008], have been largely sidelined by the fact that Moody’s has us at sub-investment grade. And there are odd pockets of investors around Europe as well whose mandates from clients would only allow them to invest when the credit rating is investment grade from the three main rating agencies. That’s the typical investment mandate that you have in Asia and the Far East.”
The NTMA has been pounding the pavements in the past two months in Asia selling the Irish story to investors. “Certainly there’s appetite and it’s the marginal investor that can help your yield . . . so it is important.”
Moody’s recently moved Portugal to a stable outlook and its eurosceptic view appears to be softening. “We see that as a positive,” says Corrigan. “It wasn’t necessarily conditions in Ireland that were holding back Moody’s but they had a take on the euro zone as a whole that was sceptical. We would be quietly hopeful.”
The NTMA has used Minister for Finance Michael Noonan to help sell the Irish recovery story overseas. He regularly pops up on Bloomberg TV for interviews and attends investor sessions where possible.
“He’s a straight talking man. That’s one of the small-country advantages that we have. Ratings agencies wouldn’t normally get access to the finance minister as they would with Ireland.”
It’s not all honey and jam. The general government debt is estimated to stand at €206 billion by the end of this year or 124 per cent of GDP. The cash interest cost of the national debt this year will be about €7.2 billion, rising to €8.2 billion in 2014.
What are the challenges that could scupper Ireland’s return to regular market funding?
“There’s a lot of uncertainty still remaining in the euro zone, although the white heat surrounding it has calmed down.
“We also have to see the unwinding of the quantitative easing in the United States, and we saw a trailer earlier this year of how the market might react if it’s not handled carefully.
“Then we have the [euro zone] bank stress tests towards the back end of 2014. The deferral of the [Irish] stress tests to coincide with the euro zone-wide stress tests was seen as a positive by the investment community because it meant we weren’t being picked for special treatment. Nonetheless, there’s a risk there.
“I don’t believe we’ll have an issue accessing the funds. The question is over time to continue to run a primary surplus that will get the debt-to-GDP level down to what is more acceptable to capital markets. We’re committed to doing that anyway under the various EU protocols but that would reflect itself then in a narrowing of the spread [with German bonds].”
Corrigan has no regrets about the decision to exit the bailout without a precautionary credit line in place.
“We didn’t need it anyway because if you got a credit line it only applies for 12 months. We have the cash in the bank [for the next 12 months],” he says.
Hasn’t he changed his tune? After all, only a few months ago he was talking about it being a “good club” for Ireland to have in its golf bag.
“We would have discussed this with investors and with the ratings agencies and they were very relaxed about it. They see us as having been put through the ringer with stress tests and other troika measures.
“They see us as having delivered on most if not all of the troika measures and we are in relatively good health.
“But we are cautious people and that prompted me to say that it would have been a nice club to have in the bag. Overall, I think we’re in a good place and have a good story to tell.”