Payback time: Bank of Ireland CoCo kicks off state repayments

Fri Jan 11, 2013 4:54am EST

Related Topics

* Ireland receives EUR4.8bn of orders for high risk debt instrument

* Belgium's KBC seeks to follow in BOI's footsteps with EUR750m CoCo

* Irish state achieves around EUR10m profit on remarketed deal

By Aimee Donnellan and Natalie Harrison

LONDON, Jan 11 (IFR) - Ireland achieved vindication, of sorts, for its bank bailouts in 2011, after remarketing a EUR1bn Bank of Ireland convertible contingent capital instrument (CoCo) to private investors, thus reducing its exposure to the bank.

The state was flooded with nearly EUR5bn of orders for the three-year instrument, which was sold to hedge funds, asset managers and some retail investors.

Disappointing allocations as a result of the hefty oversubscription saw the bond jump to 104.875 by Friday, having priced at 101.

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

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

Lead managers Davy, Deutsche Bank and UBS initially targeted a size of at least EUR500m for the Bank of Ireland trade, and sold the upsized EUR1bn offering on Wednesday at 101. Demand pre-reconciliation was EUR4.8bn.

Compared with the original par issue price, the state secured around a EUR10m 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.

"This is another positive step for Europe's periphery," said a DCM banker.

"We are now seeing a decoupling of Ireland from the rest of the troubled eurozone countries as they pull ahead at a different speed in their recovery."

According to an official at Bank of Ireland, the CoCo is part of the group's plans to free itself from the State.

"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.

BROAD INTEREST

Investor interest in Irish assets has picked up following the Bank of Ireland's shock Tier 2 bond in December - a EUR250m 10-year with a 10% coupon. That had rallied from par to a cash price of 109/110 to yield around 8.5% on Wednesday.

The strong performance of that deal, coupled with the growing momentum of Ireland's recovery story, meant a rapid bookbuilding process for the CoCo.

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

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

"It's very positive how investors have been prepared to come back to the periphery and that they're willing to look at CoCos from more challenging names," said a hybrid DCM banker.

"That said, it's also the yield that they're interested in. I don't think we'd want the CoCo asset class yielding 10%. But it's encouraging, and it's in euros as well, not dollars."

Some portfolio managers 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.

It has been a rapid turnaround for Bank of Ireland, which only returned to the capital markets in November with a covered bond. The CoCo is riskier than other similar deals as it is triggered at a higher capital ratio. For instance, the trigger on Barclays' offering was set at 7%.

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

Although this is a high-trigger bond, it is somewhat offset by BoI's current 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.

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