State opens new avenue to raise money ahead of €29bn refinancing

The State’s debt agency has opened a fresh avenue to raise money as it prepares to refinance more than €29 billion of government bonds over the next three years.

The National Treasury Management Agency (NTMA) said on Thursday it had raised €609.5 million through the launch of its first-ever inflation-linked bond, where interest payments and principle repayments are linked to movements in Irish consumer prices, excluding tobacco.

Speaking on a conference call with reporters, the agency’s director of funding and debt management, Frank O’Connor, said that the bonds were bought by between five and 10 Irish insurance and pension funds. He declined to identify them by name.

“This is a significant event for us, in line with our stated intention to diversify our issuance over the long term,” said Mr O’Connor. “The transaction is less about the money that was raised and more about opening a new channel.”

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The transaction was executed through Davy on the back of inquiries by the insurance and pension investors, who themselves have payout demands to investors and retirees that are linked to inflation. Mr O’Connor indicated that the NTMA may also look at issuing inflation-linked bonds to overseas investors, linked to wider European consumer prices.

The debt office has now sold almost €8.35 billion of bonds so far in 2017 of a full-year targeted range of between €9 billion and €13 billion, leaving it well positioned ahead of potential market volatility in advance of elections in France, the UK and Germany this year. Frances takes to the polls this weekend in the first of two rounds of votes to choose the next president, with the latest polls indicating that the race remains tight between the top four candidates, including Marine Le Pen of the far right and Jean-Luc Melenchon of the far left.

The interest rate on the NTMA’s new 23-year, inflation-linked bond has been set at 0.25 percentage points over the rate of inflation.

“We have long been aware of the latent demand for this category of Irish fixed-income option amongst our institutional client base, and this has clearly been evident by the strength of revealed demand when these bonds were finally offered,” said Donal O’Mahony, global strategist in Davy’s capital markets division.

Meanwhile, Mr O’Connor said that the NTMA has “no current plans” to issue fresh 10-year bonds. This means that financial analysts and traders, who keep a close eye on 10-year bond yields to assess the market’s view of a government or company’s creditworthiness, must rely on the agency’s bonds that are due to be repaid in nine years’ time as a benchmark, making comparisons with other countries less accurate.

While the Government is on track to have a balanced budget for the first time since the beginning of the financial crisis in 2008, the NTMA will remain very active in the debt markets over the coming years as it seeks to refinance debt as it falls due.

Some €48.6 billion – or 38 per cent – of Irish government bonds are due to mature within the next five years. Of this, €29.2 billion must be repaid within three years.