AIB and BoI mull Government bonds move after Davy exit

AIB looking to get back into market as part of planned repurchase of Goodbodys – sources

AIB and Bank of Ireland are looking into the prospect of becoming primary dealers in Government bonds, as Davy's exit from this business in the wake of a trade scandal has left the State with no domestic financial house that is approved to be involved in the sale of debt for the State.

AIB, which was among a group of initial primary dealers when the National Treasury Management Agency (NTMA) was established in 1990 before resigning in 2005 as the level of government debt issuance slumped during the boom years, is looking to get back into this market as part of its planned repurchase of Goodbody Stockbrokers, according to sources.

Goodbody has a small two-man bond desk. Primary dealers typically break even at best handling regular auctions, but stand to make considerable amounts in fees in managing larger bond sales, or what are known as syndicated bond deals.

Davy, which was essentially fired as a primary dealer by the NTMA last month, would have made about €4.5 million in fees from being one of six managers of such deals in three major bond sales since the start of 2020, through which the NTMA raised almost €16 billion, driven by the Government's need for funds to deal with the spiralling costs of the Covid-19 pandemic.

An initial assessment by Goodbody for AIB, led by chief executive Colin Hunt, has concluded that it is imperative that the brokerage become a primary dealer in order to develop a credible bond, or fixed-income, offering for companies. It estimates that the firm would need to build up a small debt capital markets team to complement its equities business.

‘Serious consideration’ by BoI

Bank of Ireland, which lost its role in the primary dealership market with the sale of its former unit Davy back in 2006 to the brokerage’s management staff, has looked at a number of occasions over the past decade at getting into this market.

Sources say that the bank, led by CEO Francesca McDonagh, is giving the issue more serious consideration in the wake of Davy's authorisation being withdrawn by the NTMA after the firm received a Central Bank fine and rebuke over a breach of market rules in a 2014 bond deal surrounding a junior Anglo Irish Bank bond. This prompted Davy to close its entire bond desk.

Davy was the only Irish-owned firm among the 15 primary dealers of Government bonds recognised by the NTMA.

Some industry observers say that Bank of Ireland’s move to assess the possibility of becoming a primary dealer may be part of the group’s plan to acquire Davy, which was put up for sale last month in the wake of the Anglo bond debacle.

Potential buyers

Meanwhile, Business Post reported on Sunday that Davy has told potential buyers that it made almost €70 million of profits last year, as its capital markets business benefitted from handling equity raises by companies such as Ryanair, Flutter Entertainment and Smurfit Kappa.

The firm said in promotional material for its sale that its wealth management business grew assets under management by €3 billion in recent years to €16.5 billion, according to the report.

The company pays about 40 per cent of its profits to staff by way of bonuses. This would equate to a more than €25 million pot to be divided among 700 staff last year, it said.