UPDATE 2-State nears Bank of Ireland CoCo exit

Wed Jan 9, 2013 9:16am EST

Related Topics

* Leads set size of the CoCo sale at EUR1bn

* Price range points to possible profit for state

* BoI stakeholders among broad range of investors (Adds details on investor demand)

By Aimee Donnellan and Natalie Harrison

LONDON, Jan 9 (IFR) - The Irish government was flooded with almost EUR5bn of orders for the Bank of Ireland EUR1bn Convertible Contingent Capital (CoCo) that will allow the bank to repay some of the capital it received from the state in 2011.

Davy, Deutsche Bank and UBS have set the size of the BoI Tier 2 CoCo, maturing in 2016, at EUR1bn after marketing the deal to various investors including hedge funds, asset managers and some retail investors.

The lead managers, which initially targeted a size of at least EUR500m, have closed books and are expected to price the security later on Wednesday in a range of 100-101, a source close to the transaction said. Demand pre-reconciliation was EUR4.8bn.

It remains to be seen whether the state will secure a profit on the securities, which pay a 10% coupon, in a deal that marks the first time a European bank bailout tool has been marketed to investors.

"The theme is that governments are exiting their stakes in banks. We have already seen this in the U.S., where the government made a tidy profit, and we're now starting to see the first wave of this in Europe," said one observer.

Belgian banking and insurance group KBC, for example, is also planning to issue EUR750m worth of non-dilutive contingent capital in the first quarter of 2013, as it seeks to pay back a significant portion of the EUR7bn aid it received from the Belgian and Flemish governments.

According to a source at Bank of Ireland, the CoCo is part of the group's ongoing plans to divest itself from state ownership.

"This transaction reflects the progress made by the Bank and by the State, resulting in improved market sentiment towards Irish credit risk and increased international demand for securities with significant exposure to the Irish economy," he said.

Price talk is yet to emerge on the deal, but banking sources close to the situation said that the Bank of Ireland's existing EUR250m 10-year Tier 2 bond that was sold in December will be used for pricing comparables.

The Tier 2 bond, which priced at par, is currently bid at a cash price of 109/110 to yield around 8.5%. The CoCo will have a fixed coupon of 10% and will likely offer a premium to par, the source added.

BROAD INTEREST

Investor interest has picked up in Irish assets after the BoI Tier 2 bond last month. The strong performance of that deal, coupled with growing momentum in Ireland's recovery story, has led to a strong start to the bookbuilding process, the banker added.

A source said that the bank's key stakeholders could be buyers of the CoCo - which will offer a greater return than the stock.

Ireland returned to the syndicated bond market on Tuesday for the first time since its bailout in 2010. It drew more than EUR7bn of demand for a EUR2.5bn tap of its 5.5% October 2017 bond.

"The whole problem in this financial crisis has been the nexus between banks and sovereigns. This shows that the two can decouple," said another banker close to the deal.

Investor response to the announcement was mixed. Some portfolio managers cautiously welcomed the chance to obtain a high yield on a CoCo instrument, while others were more wary. "The performance of the Tier 2 deal, investors hunt for yield and the way the credit markets have opened this year are making this kind of transaction more likely to happen," said Andrew Fraser, Investment Director, Fixed Income at Standard Life Investments.

"BOI only came back to the capital markets in November with a covered bond, so the prospect of a high trigger and risky instrument, when the economy is still very fragile, is likely to make certain accounts uncomfortable."

Another investor said that Ireland still has a lot of work to do in its recovery and the high trigger - 8.25% - is proving to be a red flag.

"This is an instrument that converts to equity at 8.25%. It is definitely not something we want to get involved in."

Although this is a high trigger, it is somewhat offset by BoI's Core Tier 1 ratio which stood at 13.9% in November 2012. The strong capital base reflects the likelihood that the lender will be hit by losses, but these are running below projections. (Reporting by Aimee Donnellan, Natalie Harrison, IFR Markets; editing by Alex Chambers)

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