Even Ireland’s weakest bank can raise money in bond market

The first Irish lender to sell Europe’s riskiest type of bank bond is also the nation’s weakest.

Permanent TSB, which failed European financial stress tests last year, is selling €125 million of so-called additional Tier 1, or AT1, bonds this week.

The undated securities convert into shares should capital drop below a certain threshold and carry coupons that issuers can just decide not to pay.

The sale will nonetheless "will go down extraordinary well," said Liam Dunne, a fixed-income trader at Merrion Capital in Dublin. "The world has changed. There is huge demand for Irish assets at the moment."

Coming less than the six years after Irish banks started to impose losses on junior bondholders as the financial system flirted with collapse, the sale demonstrates the renewed appetite for debt across the euro region.

The market for the riskiest bank debt has swollen to about $80 billion in Europe since Banco Bilbao Vizcaya Argentaria sold the first AT1 note two years ago.

"There is a massive hunt for yield at the moment," said John Cronin, an analyst with Investec. "This instrument will play into that."

Higher Yield

The bank is set to price the bond today to yield around 9 per cent, according to a person familiar with the matter who is not authorised to speak publicly and asked not to be named.

Mr Cronin had expected the security to price at “a shade below” 10 per cent.

The yield on Irish 10-year bonds has plunged to 0.7 per cent from a peak of 14.2 per cent in July 2011, when investors shunned the debt on concern about the mounting cost of bailing out the banking system. To cut that cost, Irish banks inflicted about €15 billion of losses on junior bondholders.

In 2011, struggling with surging mortgage arrears, PTSB bought back subordinate debt at 20 cents in the euro. Four years on, the bank is selling the bonds as part of a plan to raise €525 million of capital, after being the only Irish bank to fail the European Central Bank’s stress test in October.

PTSB, which needed a net €2.7 billion bailout, is alone among the four largest consumer lenders in Ireland not to return to underlying profit last year. The securities automatically convert into equity if the bank’s common equity Tier 1 capital ratio, a gauge of financial strength, falls below 7 per cent, according to the bank.

Risks Remain

"As we go through our business plan we would anticipate that we would hold a very significant level of capital" above that threshold, Stephen Goarke, PTSB'S head of group finance, said on call with investors last week.

PTSB had a €1.1 billion capital buffer above the 7 per cent trigger at the end of December. The bank did warn in its 132-page investor document, obtained by Bloomberg News last week, that it may have to cut mortgage interest rates amid growing political and regulatory pressure on the country's banks to lower home-loan costs.

PTSB also said that its funding costs would be “materially adversely” impacted by the UK leaving the EU.

This week's sale may set a benchmark for other Irish lenders. Bank of Ireland and AIB, both said last year they plan to sell AT1 securities to buttress their capital.

In 2014, Bank of Ireland, the nation’s biggest lender by assets, sold €750 million of Tier 2 capital with a coupon of 4.25 per cent. The security now yields 3.61 per cent.

The PTSB “issuance will be helpful for the other banks, Bank of Ireland and AIB, as they launch AT1 sales in the future,” said Mr Cronin.

“Certainly, PTSB’s will be the most expensive out there, given that it is behind the other two in terms of its recovery,” he added.

Bloomberg