Bank of Ireland long-fingers problem mortgages sale amid Covid-19 crisis

Bank of Ireland has long-fingered plans to sell hundreds of millions of euro of problem mortgages until the second half of this year, as the appetite among international investors for such assets has been hit by the Covid-19 pandemic.

The bank, led by chief executive Francesca McDonagh, said in late February that it was looking to sell a portfolio of mainly non-performing owner-occupier loans in 2020, following the leads of Ulster Bank and Permanent TSB in recent years.

Expectation

While there had been an expectation in the market that Bank of Ireland would progress a loan disposal, through a bond market refinancing known as securitisation, in the first half of this year, it is now understood that the bank is targeting a transaction later this year. A spokesman for the company declined to comment.

The Irish Times reported on March 19th that AIB had postponed indefinitely its first sale of a deeply distressed owner-occupied mortgages portfolio, dubbed Project Oak, where the loans had an original value of €1.3 billion. Final bids had been set for the middle of this month, with distressed debt firms Lone Star and Cerberus said to have been among parties circling the assets.

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"Given the current economic uncertainties it won't come as a surprise that there is a pause in NPE activity," said Diarmaid Sheridan, an analyst with Davy, referring to portfolio sales of what regulators call non-performing exposures.

“Firstly, banks will be focusing on ensuring solutions and supports are in place for customers who are now experiencing difficulties due to the containment measures being put in place and, secondly, the buyers of NPE loans or securitisations will naturally pause until there is greater visibility on the economic landscape post the lifting of the measures.”

A mortgage portfolio securitisation deal involves a lender pooling a portfolio of mortgages in a special purpose vehicle, and selling bonds to investors where interest, or coupon, payments are covered by income from the underlying mortgages.

Securities

The equity portion of a residential mortgage-backed securities (RMBS) deal is typically acquired by an international asset manager in order for the bank to be able to remove the loans from its balance sheet. In many cases, the loans continue to be serviced by the bank that issued the loans in the first place.

Bank of Ireland shifted €600 million of soured buy-to-let mortgages last year through RMBS deals, helping to drive the group’s level of non-performing loans (NPLs) down by €1.5 billion to €3.5 billion.

The State’s five mainstream banks and a host of non-bank lenders and firms that service Irish NPLs for overseas investment funds and securitisation vehicles agreed two weeks’ ago to offer up to three-month payment breaks for borrowers affected by the Covid-19 emergency.

The fear among investors and analysts, however, is that an extended period of economic contraction will lead to a fresh surge in defaults and a further deterioration in portfolios that are already classified as NPLs.