Irish Banks Shut Out of Market as Sovereign Returns: Euro Credit
As Ireland edges back into bond markets, the banks that tipped the country into bankruptcy remain reliant on aid as bad mortgages mount.
The yield on Ireland’s benchmark 2020 bond this week fell below 6 percent for the first time since the country’s 2010 bailout. Bank of Ireland Plc’s state-guaranteed bond maturing in 2015 yielded about 300 basis points more than the equivalent government security because of concern about unpaid home loans.
“The mortgage issue erodes confidence in the banks,” said Stephen Lyons, an analyst at Davy, Ireland’s biggest securities firm. “It erodes their own confidence to lend and erodes the confidence of investors to lend to Irish banks.”
Ireland is home to the euro region’s biggest banking crisis to date, with the country’s financial industry needing about 120 billion euros ($151 billion) of central bank funding following the bursting of the real estate bubble in 2008. With the depth of the losses on loans still emerging, banks are finding it tough to follow the government in convincing investors it’s safe enough to lend them money again.
The national debt agency sold 500 million euros of Treasury bills and 4 billion euros of bonds due for repayment in 2017 and 2020 last month. Yesterday, it sold 1.02 billion euros of amortizing bonds, which are used to meet pension liabilities. The weighted average yield was 5.91 percent.
“There is probably a rough timetable, bills, then new sovereign issuance and then once that is at a level, it will be banks,” said Liam Dunne, an analyst at Merrion Stockbrokers. “Clarity definitely is needed on the mortgage book.”
In the second quarter, 16 percent of home loans were in trouble, the central bank said yesterday. Mortgage losses will exceed the 9 billion euros assumed in the adverse case scenario used in last year’s stress tests on banks, Davy estimates.
Bank of Ireland’s government-guaranteed senior unsecured notes due January 2015 yield 6.42 percent, according to data compiled by Bloomberg. Similar notes from the former Irish Life & Permanent Plc yield 6.65 percent. Those of Allied Irish Banks Plc’s senior unsecured notes due March 2015 yield 5.75 percent.
A comparable Irish government bond, maturing in February 2015, yields 3.39 percent. Irish bonds have delivered the best returns in the 17-nation euro region during the past 12 months as optimism grew that the economy is stabilizing, facilitating the government’s return to the markets.
Bank of Ireland, the only large domestic bank to stay out of state control, last sold debt publicly in late 2010. While Allied Irish Banks sold 395 million pounds ($624 million) of debt in May, it was secured on prime U.K. residential mortgages rather than on loans in Ireland.
Irish-based banks borrowed 80.2 billion euros from the European Central Bank as of July 27. In addition, the Irish central bank had 41.6 billion euros of “other claims on euro- area credit institutions.” This category is predominantly made up of its so-called extraordinary liquidity assistance for banks, according to a central bank spokesman.
“Banks need to issue wholesale funding over the medium- term to achieve stable-funding ratio targets and this will most likely be met through secured funding,” said Lyons at Davy in Dublin. “But it is unlikely that Irish banks will be able to use their Irish mortgage assets to achieve this until they work through their arrears challenges.”
That task has been complicated by new insolvency laws in Ireland that makes it easier for people to write off debt.
The proposals cut the bankruptcy term to three years from 12 years, and set up a system for talks between banks and home owners on their debts. The legislation risks encouraging homeowners to stop repaying their loans in the hope of achieving partial debt forgiveness, Fitch Ratings said on Aug. 14.
“The solvency bill is weighing on investor sentiment,” said Dunne at Merrion in the Irish capital. “But once there is clarity then you run proper default recovery assumptions on the Irish mortgage book.”
To be sure, yields on bank bonds have dropped. The summer rally in Irish government bonds, with the yield on the 2015 maturity falling 376 basis points since May 25, has also been reflected in lower yields for the nation’s bank bonds.
Bank of Ireland’s January 2015 bond yield has fallen 285 basis points over the same period with Irish Permanent’s 2015 maturity down 430 basis points and Allied Irish Banks’ 2015 bond down 345 basis points.
“It’s very possible that we’ll see some issue of bank debt over the next six months to a year,” said Colm Ryan, co-head of fixed income at Goodbody Stockbrokers in Dublin. “An issuance of debt would be a stepping stone, but I don’t think you could declare victory until the banks were back into both the short- term and long-term money markets.”
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