Banco BPI RMBS tender offer falls short

LONDON, Jan 20 (IFR) - Banco BPI closed its tender offer on Monday, but the exercise initially flagged as providing holders of the relatively illiquid bonds an exit strategy fell short of expectations. From a potential target of EUR2.17bn from 10 tranches of Douro Mortgages 1, 2 and 3, only EUR149m - less than 7% - was bought back.

The announcement itself took the market by surprise as no Portuguese bank has called an RMBS at the first redemption date and the general health of Portuguese institutions made its decision to find EUR2bn of cash to buy back bonds surprising.

An official at Banco BPI sought to clarify the situation, saying that investors just did not want to incur a loss.

"Some of them had the bonds registered in accounting terms as held to maturity so they were not able to sell below par, and others invested in the bonds at the beginning and were happy with the risk of credit and were not willing to take a loss," he said.

Douro 1 was the most seasoned deal in the offer and only EUR9.85m was bought back. This could imply that some holders were satisfied with the performance to-date and therefore did not feel pressured to dump the bonds at the first opportunity, but also suggests the meagre pick-up of fixed prices advertised (five to seven points at the time of announcement) were not high enough to convince them to sell.

Banco BPI was prepared to buy all of the bonds back, but does not necessarily have more than EUR2bn sitting idly by with which to fund the tender. The solution, the official explained, was to pledge eligible assets with the ECB to participate in the LTRO as a solution to its problem.

These responses go some way to responding to hypotheses from sources away from the process. Market participants pondered a number of reasons why the deal underwhelmed, including investors holding out for better prices, a dislike of the fixed price structure of the tender (minimums were shown in the Celtic and Brunel/Kildare buybacks) and that the bonds were already pledged in repo agreements elsewhere.

UNCERTAINTY

These views all contributed to uncertainty in the marketplace, partly because securitisation tender offers have not always been straightforward processes. Some people take a view on what an originator's objectives are while issuers can be cagey too.

For instance, during Ulster Bank Ireland's Celtic tender offer bonds were bid higher than the tender levels in the secondary market as some desks took the view that the tender increased the likelihood of a call. Prices moved lower after the process.

Another example is Northern Rock Asset Management with Provide Graphite. NRAM said in June that its "current intention" was to not call the bonds at par and so some investors sold bonds back at a discount in July, only to discover the very next morning that NRAM would call the bonds at full value after all.

NRAM exercised the call because buying back enough bonds below par changed the economics of calling the residual amount to work in its favour. And going back further still, to 2009, UCI launched successive tender offers at progressively higher prices. So Douro Mortgages investors had these deals among a number of precedents, but each with very different results.

FINDING THE RIGHT BALANCE

Another source involved in the buyback said that an assessment of the offer required digging deeper into the detail of the results. "BPI did not want to overpay, but the breakdown shows that participation was quite high for some classes of bonds such as the 1Cs1Ds. You have to get the balance right between funding and price," he said.

The advantages to an originator of buying back a significant amount of bonds below par are that it boosts its capital ratio, while for investors it offers the ability to sell bonds straight back to the originator rather than risk sending out a bid list that might not trade. Satisfying both groups at the same time, however, is never easy.