Bank of Ireland is in Beijing today meeting potential investors for its upcoming inaugural triple A rated covered bond deal. The bank has already visited Japan, Korea, Taiwan and Hong Kong and will finish the week in Singapore. A concurrent roadshow is also traveling through Europe.
Bank of Ireland is the latest European bank to issue covered bonds, although it is the first Irish bank to do so under Ireland's Asset Covered Securities (ACS) law. "This issue is very important for us as it will fund our mortgage growth for the next few years," says Denis Donovan, chief executive of Bank of Ireland's wholesale financial services group.
A covered bond is one where specific assets that remain on the balance sheet cover the credit. In this way they are different from securitizations as the assets are not hived off into a special purpose vehicle. The European covered bond market is one of the fastest growing markets in the world, with E90 billion of new issuance this year alone.
Bank of Ireland is having over eighty meetings with potential investors seeking the market's view of how its bond should be structured in terms of size and price. The bank is looking at a size of around E1.5 billion to E2 billion, while the initial market feedback is suggesting a tenor of between five and seven years.
According to Michael Sweeney, chief executive of Bank of Ireland Global Markets, the exercise should see the bank raising much cheaper funds than it gets from its current MTN programme in which the bank is paying around 10bp over Libor for five-year paper.
The nearest comparable is Depfa ACS banks, which is the German-owned, Irish headquartered institution whose bonds are backed by public sector loans. It trades at around 1bp under swaps.
The credit backing Bank of Ireland's bond is based very much on the legislation that underpins the Irish ACS market. Under this law, Bank of Ireland has had to set up a special, designated bank, which is called Bank of Ireland Mortgage Bank. Into this, E9 billion of Irish mortgage assets have been transferred, which will be the basis for the issuance programme.
Of these assets some E2.1 billion have been specially put into a pool on which the new bond issue will be secured. Creditors will thus have a 105% overcollateralized secure claim on those assets, before senior claims on the assets of Bank of Ireland Mortgage Bank and then Bank of Ireland.
Furthermore, a quasi regulator called the covered asset monitor, which will report to the main Irish regulator, will oversee the issuing vehicle. Other risk mitigants include the quality of the assets in the pool, which have an average loan to value ratio of 31%. All market risk and currency risk has also been taken out of the pool.
The main issue in selling to Asian investors will be their traditional lack of appetite for Euros. But according to Ted Lord, a managing director a Barclays Capital in Frankfurt, this is changing. He says Asian central banks are building up their reserves of euros, watching how it has strengthened against the US dollar. Moreover, many Asian corporates are building up pools of Euros from their increasing operations in Europe.
According to Lord, this issue is targeting 10% of its distribution to end up in Asian hands, quite a high figure for a euro denominated deal, although for dollar denominated bonds, that figure can be as high as 70%.
Barclays Capital along with Citigoup and Deutsche Bank are joint bookrunners for the deal. Co-lead managers are ABN AMRO, CDC IXIS, CSFB, Dresdner and Morgan Stanley.
"This is a chance for investors to diversify into the fastest growing economy in Western Europe," says Sweeney. "It also will give us a diversity of product as we already have active MTN, CP and CD programmes. Over time we expect to have a credit curve in the covered bond market from five to ten years. We expect to issue up to E10 billion in total through this product."
Sweeney adds that the bonds will be quoted on the Euro MTS system. Pricing for the deal is expected in the second half of September.