B of I raises €1bn in return to bond market

Bank of Ireland became the first Irish bank to borrow in the public markets in more than two years as it raised €1 billion, almost all of which was sourced from overseas lenders. The bank also said it was ready to exit the costly bank guarantee scheme introduced in 2008.

The buyers of the new bond, which is secured on Irish residential mortgages, will get an interest rate of 3.2 per cent. The bank planned to raise €500 million initially but it borrowed more on strong interest from lenders offering up to €2.5 billion after five global banks tested investor appetite.

The three-year debt raised was the first public borrowing by an Irish bank since October 2010, the month before the bailout of the country, and the first unguaranteed public issue of debt in more than three years.

Minister for Finance Michael Noonan said it was “an important milestone on the path to full independence for our banks” and more evidence of banks returning to normal.

“It is a step towards their full return to the wholesale markets, independent of State support,” he said.

Investors lending €1 billion in unguaranteed loans to an Irish bank was “important in decoupling” the State from the banks, said the Minister.

The bank said the debt issue was “a significant vote of confidence by international bond investors” and “an important step” towards a more sustainable funding position.

200 investors

Close to 200 investors provided the debt. Lenders from Germany and Austria made up 37 per cent, followed by investors from the UK, Asia and France. Irish investors accounted for just 2 per cent of the lenders.

More than half the investors were managed funds, while insurance companies made up 14 per cent, central banks or official institutions 11 per cent and banks 10 per cent.

“To not only return to the market and do a deal but to do a deal at a good and good size is fantastic,” said analyst Stephen Lyons at stockbroker Davy, which helped to raise the debt. “They would have been happy to raise just €500 million.”

The only State-rescued bank to avoid effective nationalisation said that its net interest margin, the difference between what it pays and charges for money, had started to widen. The margin was “positively impacted” by the bank’s moves to reduce the cost of deposits and other funding, and to raise loan rates “where commercially appropriate and possible.”

The €1 billion will further reduce the bank’s borrowings at the European Central Bank, which had fallen to €21 billion from €28 billion last June.

The public bond will in effect swap debt borrowed from the ECB using assets in Bank of Ireland’s covered-bond bank as collateral with the new debt raised from the investors.

The bank, which is 15 per cent State-owned following a €4 billion bailout, said in a trading update that deposits and other funding covered by the Eligible Liabilities Guarantee, the extended bank guarantee introduced in 2009, fell to €28 billion from €36 billion in June.

This arose from a €8 billion reduction in wholesale funding to €44 billion from asset disposals, moving loans to the lender’s UK bank and the growth in non-guaranteed deposits.

“We have prepared for and are ready for the expiry of the ELG,” said the bank, which spent €221 million on guarantee fees in the first half of 2012, almost a quarter of the bank’s total income for the six months.

Deposits have risen to €74 billion from €71.7 billion at the end of the bank’s half-year. Impairments for bad loans are still expected to reduce from the elevated levels in 2011, the bank said, though this depends on the performance of its Irish residential mortgages and commercial property markets.