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