Permanent tsb puts Irish mortgages back on investor menu

Thu Nov 21, 2013 10:16am EST

Related Topics

* AIB and permanent tsb raised 1 bln euros of debt this week

* Permanent tsb says could follow AIB with an unsecured bond

* Sees further mortgage-backed bonds

By Owen Sanderson and Padraic Halpin

LONDON/DUBLIN, Nov 21 (IFR/Reuters) - Permanent tsb re-opened the market in mortgage-backed securities this week with the first public issue of bonds backed purely by residential loans since a housing crash six years ago brought the country close to financial collapse.

The sale, which raised 500 million euros for the state-owned bank, marks another funding avenue for Irish lenders, slowly recovering their access to public debt markets after imposing losses on junior bondholders in 2011 to help finance the sector's rescue.

"The RMBS (residential mortgage backed securities) market has been opened up now by permanent tsb. It opens up another funding vehicle for AIB and Bank of Ireland if they chose to go down that road," said Fergal O'Leary of Glas Securities.

"Investors are getting more comfortable with Ireland. If Irish banks wanted to issue more debt between now and year-end, there certainly seems to be sufficient demand from investors."

Irish banks' access to debt markets has been steadily improving as the country moves closer to exiting a 67.5 billion euro EU/IMF bailout at the end of this year, the first euro zone country to do so.

Before the crisis, 21 billion euros of Irish RMBS were placed with investors between 2000 and 2007, according to figures from Barclays, with 10 billion of these sales in 2006.

So far this year, Irish banks have raised 6 billion euros in capital markets, including 1 billion this week from the permanent tsb deal and an unsecured 3-year bond issued by Allied Irish Bank (AIB), its first move beyond asset-backed debt since the crisis.

Permanent tsb could follow with an unsecured issue in 2014.

"RMBS will be a very natural route for us to go down in future, but after the AIB deal yesterday, senior is definitely a real option too," said Declan Dolan of the bank's treasury team.

Investors have been attracted by the high yields on Irish bank debt, with more than 300 investors placing 3.2 billion euros of orders for AIB's 500 million euro issue, which was priced at 235 basis points (bps) over mid-swaps, a bond pricing mechanism, far higher than for banks outside of Europe's debt-scarred periphery.

Asia-focused Standard Chartered, for example, paid 65 bps over mid-swaps for a five-year senior bond last week.

Investors, nearly 60 percent of them from the UK and a third from the euro zone, put in 1 billion euros of orders for the permanent tsb deal.

Buying has continued in the secondary market, with the bonds issued at 100 and shown bid at 100.2 on Thursday.

CHERRY-PICKED

While AIB and Bank of Ireland returned to public debt markets with cheaper, double-secured "covered bonds", permanent tsb's ability to issue such debt is complicated while it awaits approval from the European Commission for a restructuring plan.

Instead, the bank opted for the more expensive mortgage-backed bonds.

Issuing a bond solely backed by residential mortgages does have regulatory benefits, however, since a bank can simply walk away from the structure without this being a default, leaving bondholders to be paid back by the underlying mortgages.

The transaction, dubbed Fastnet 9, carried a coupon of 165 bps over three-month European interbank rates, while Bank of Ireland's covered bond, priced at the beginning of November in a similar maturity, was trading around 128 bps over mid-swaps.

Weighed down by a large stock of loss-making mortgages, permanent tsb made sure to offer the cream of its portfolio.

"This is definitely a cherry-picked portfolio, but we have plenty of assets left to support further issuance," said Dolan.

The home loans in Fastnet 9 had a loan to value ratio when they were written in April 2007 of 61.5 percent, meaning that the borrower had paid a deposit of nearly 40 percent.

Overall, the average loan to value ratio of permanent tsb's residential mortgage book was 115 percent at the end of June. For loans on buy-to-let properties, the LTV was 140 percent.

None of the mortgages backing the bond have been in arrears of more than 30 days, nor have they had payment holidays, restructurings or moratoriums for the previous two years.

By comparison, some 15 percent of permanent tsb's residential mortgages are in arrears for more than 90 days.

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