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Bank of Ireland bond marks peripheral decoupling

* Bailed-out bank attracts EUR 2.3bn of orders for seven-year bond

* Country's banks move from peripheral to 'semi-core' status

By Aimee Donnellan

LONDON, Sept 27 (IFR) - Bank of Ireland (Other OTC: IRLD - news) 's seven-year bond - the longest maturity bond issue from an Irish bank since the financial crisis - has raised hopes that the country's lenders can stage a full recovery and decouple from their peers in the rest of the ailing eurozone periphery.

It was not just the maturity of the deal but the strength of investor demand for the EUR500m covered bond that was notable.

Bank of Ireland has in the past year issued two covered bonds and a senior unsecured offering, and its government-owned contingent capital notes were successfully remarketed to private investors earlier this year.

Irish lenders are in the process of being weaned off ECB liquidity, but until now public market access has been limited to three-year and five-year maturities.

"Bank of Ireland provided a real test of investor sentiment for longer-dated debt from the country's banks," said Alexandra MacMahon, head of EMEA FIG DCM at Citigroup (NYSE: C - news) , which led the deal along with Danske Bank (Other OTC: DNSKY - news) , Deutsche Bank (LSE: 0H7D.L - news) , Nomura and RBS (LSE: RBS.L - news) .

"Looking at the results, it's clear to see that they are willing to buy into seven-year bonds provided the price is right."

The price was mid-swaps plus 195bp, with a 3.625% coupon, which saw more than 150 investors scramble to take part, a far cry from the days when the country's banks' bonds yielded more than 12%. The bonds are rated Baa3 by Moody's and A (low) by DBRS.

"The economic data are showing that Ireland is decoupling from the rest of the periphery, which is giving investors a lot more confidence in the credit," said one investor.

"Looking at the EUR2.3bn order book and the fact that it managed to print below mid-swaps plus 200bp is a great result."


Other investors say they are similarly encouraged by Ireland's handling of its financial crisis and are now elevating it above other peripheral countries.

According to syndicate officials, a Portuguese bank attempting a similar deal would have to pay over 100bp more than Bank of Ireland did, while many second-tier Spanish and Italian credits would struggle to issue at reasonable levels.

"Not all of the second-tier peripheral banks can issue seven-year debt. Now it looks like AIB and Bank of Ireland are the peripheral champions," said a syndicate banker.

Allied Irish Banks has also successfully priced three-year and five-year covered bonds over the past year, though it still has some way to go to catch up with Bank of Ireland. It sold a five-year deal earlier this month, but struggled to win significant support from investors.

Any concerns that Bank of Ireland would find it similarly difficult to attract asset managers and insurance companies to take part in its deal were dispelled by the huge order book.

"Ireland's banks are pushing the peripheral boundaries and are now getting to a stage where it wouldn't be surprising to see a 10-year covered from either bank," said Chris Agathangelou, a FIG syndicate at Nomura.


The turnaround is largely the result of strong economic data. But there are also hopes that, after the country's budget in October, Moody's could raise Ireland's Ba1 rating one notch - taking it back into investment-grade. S&P and Fitch rate the country at BBB+.

The ECB is still financing the Irish banking sector, but in August, total ECB borrowing declined to about EUR43.3bn - the lowest level since September 2008, according to the Irish finance ministry.

"This transaction is further evidence of the progress we are making and will be a useful reference benchmark  for future funding transactions," said Darach O'Leary, head of wholesale funding at Bank of Ireland.

Bank of Ireland is considering another covered bond before year-end, and intends to issue a balance of secured and unsecured bonds in 2014.

Bank of Ireland and AIB also want the government to remarket preference shares to private investors, because of a 25% step-up on the principal next year if they are not placed in private hands.

The National Pension Reserve Fund bought the preference shares in the two Irish banks as part of bank bailouts. An exit would underline the progress that both banks have made since those days.