Finance Ireland refinances mortgages with low level of payment breaks

Non-bank lenders can question and seek more proof for payment holidays, S&P says

Finance Ireland, the largest non-bank lender in the State, refinanced a portfolio of €295 million worth of mortgages on the international bond market last week, becoming the first Irish lender to carry out such a deal since Covid-19 erupted earlier this year.

Debt ratings firm Standard & Poor’s highlighted in a report that 5.95 per cent of the loans were subject to coronavirus pandemic payment breaks as of the end of July, well below the average 10 per cent rate seen among mainstream banks.

The level of Finance Ireland mortgage payment breaks “is considered low in the context of the Irish market”, S&P said. “As a smaller, non-bank lender, Finance Ireland has the ability to implement more rigorous questioning and burden of proof when approving payment holidays and extensions (while remaining in line with the guidelines).”

S&P added: “Given the trend of borrowers rolling off their payment holidays, the expectation is that the proportion will reduce in the coming months.”

Finance Ireland, led by former head of Irish Permanent, Billy Kane, launched its own home loans products in March of last year, having entered this segment of the market at the end of 2018 with its purchase of €200 million of home loans from KKR-owned Pepper Money, which was exiting this line of business.

Investor appetite

US investment giant Pimco and the State's Ireland Strategic Investment Fund each own 31 per cent of the company. Mr Kane had been working on a plan to float Finance Ireland on the stock market earlier this year, but put it on ice as Covid-19 hit investor appetite for lenders.

The mortgage book bond market refinancing – known as a residential mortgage-backed securitisation, or RMBS, transaction – saw investors agree to buy bonds where interest payments are backed by interest income from the loan portfolio. This is a typical way for non-bank lenders to raise money to fund further lending. Finance Ireland carried out an initial RMBS deal last year.

Donal Doran, managing director of residential mortgages with Finance Ireland, said the pricing of the new bonds last week "shows a high degree of investor confidence in the Irish mortgage market regardless of the very short-term Covid impact".

Self-employed borrowers

The loans in the new transaction – known as Finance Ireland RMBS No 2 DAC – comprise both owner-occupier and buy-to-let mortgages that were issued by both the company and Pepper Money between 2016 and this year.

Only 1.1 per cent of the loans are classified as being more than one month behind in payments. Self-employed borrowers make up almost 24 per cent of the loan book. “We consider that loans to these borrowers are more likely to exhibit a higher historical default probability than otherwise similar loans,” S&P said.

The bond deal was managed by Bank of America, BNP Paribas, Citigroup and Standard Chartered Bank.

This is the first Irish RMBS transaction to be carried out on bond markets since the Covid-19 crisis started in March. AIB packaged €3.46 billion of RMBS bonds earlier this year against mortgages that were issued under its EBS and Haven brands. However, this deal was put together to provide EBS with eligible collateral for Central Bank funding rather than market financing.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times