AIB attracts €3.6bn in orders for junior bond offering

Rival Bank of Ireland postponed less risky deal last month

The deal was priced to carry a coupon, or interest rate, of 5.25 per cent.  Photograph: Bloomberg

The deal was priced to carry a coupon, or interest rate, of 5.25 per cent. Photograph: Bloomberg

 

AIB secured more than €3.6 billion of orders on Wednesday from investors for junior bonds that face losses in the event of the bank running into financial trouble, as it looked beyond an abortive attempt by rival Bank of Ireland to sell less risky notes last month.

The level of demand was for more than seven times the €500 million of so-called additional Tier 1 (AT1) notes that AIB was selling, according to market sources. The deal was priced to carry a coupon, or interest rate, of 5.25 per cent, some 0.5 percentage points lower than originally envisaged when order books opened as European trading got underway.

The rate compares with a 7.38 per cent coupon attached to similar perpetual bonds issued by AIB in 2015, but which the bank is permitted to redeem next year.

The Iseq financials stock index, dominated by AIB, Bank of Ireland and Permanent TSB, was languishing at seven-year lows – having fallen 48 per cent over the space of 12 months – when Bank of Ireland launched the sale of €300 million of subordinated Tier 2 bonds on September 3rd.

Such bonds rank higher up the capital structure of a bank than the AT1 notes AIB has sold, meaning that investors are at less of a risk of suffering losses in the event of a financial crisis. Bondholders face writedowns on their investments if AIB’s common equity Tier 1 capital ratio, a gauge of financial strength, falls below 7 per cent. It stood at 17.3 per cent at the end of June.

Bank of Ireland

The Bank of Ireland deal secured only €340 million of orders on a day of heightened political drama in London over Brexit, and as investors speculated on what moves the European Central Bank (ECB) would make to reboot euro zone inflation and the wider economy. Bank of Ireland decided to postpone the transaction, concerned by how the bonds would trade afterwards.

The ECB has since cut its deposit rate to -0.5 per cent and flagged a restart of its multi-trillion-euro quantitative easing bond-buying programme, which will keep bond rates depressed, in November.

The Iseq financials index has since rallied almost 10 per cent, indicating that the market nervousness has eased slightly.

“This is a very strong endorsement for the Irish banking sector, notwithstanding the fact that we are going into a difficult period with Brexit,” AIB chief financial officer Donal Galvin said of Wednesday’s transaction.

Bank of America Merrill Lynch, Barclays, Goodbody Stockbrokers, JP Morgan, Goldman Sachs and Morgan Stanley managed the deal.

Market sources said that because the AIB deal was considered a so-called benchmark transaction, with €500 million of notes on offer, it attracted a category of investors that ignore smaller issuances.

There is speculation in the market that Bank of Ireland may return to the bond investment community in the coming weeks with its postponed deal. PTSB also tapped the debt markets on September 20th, selling €300 million of senior bonds.