Bank of Ireland Mortgage Bank was warmly received by investors today (Tuesday) when it sold a benchmark covered bond for the first time since September 2009 to reopen the non-government guaranteed Irish FIG market via a well oversubscribed Eu1bn three year issue.

Bank of Ireland head office, Dublin

The deal is the first benchmark covered bond from an Irish issuer since Bank of Ireland sold a Eu1.5bn five year mortgage asset covered security (ACS) on 9 September 2009, which at the time also reopened the market for unguaranteed Irish issuance after it had been closed since the collapse of Lehman Brothers. Today’s issue is understood to be the first non-government guaranteed debt capital markets new issue from any Irish financial institution since September 2009.

Covered bond bankers said that the development does not necessarily come as a surprise, however, in light of recent developments in peripheral financial institutions’ market access.

“Portugal’s Banco Espírito Santo doing a deal in senior clearly points to the fact that the Irish can do something in covered bonds,” said a syndicate official away from the leads.

BES sold a Eu750m three year senior unsecured deal on 31 October.

The Irish government returned to the long term debt markets in July for the first time in two years. Meanwhile, the financing arm of Irish state-owned utility Electricity Supply Board (ESB Finance) yesterday (Monday) sold a Eu500m seven year corporate bond at 320bp over mid-swaps.

Citi, Morgan Stanley, Nomura, RBS and UBS built an order book of around Eu2.5bn for Bank of Ireland’s new three year deal, which will be sized at Eu1bn, after a Eu500m plus deal was marketed.

The re-offer spread has been fixed at 270bp over mid-swaps, the tight end of guidance of the 275bp over area that followed initial price thoughts of the high 200s when the leads gathered indications of interest this morning.

“I’m impressed,” said a lead syndicate official. “It’s Ireland and it’s the first one out so there is always going to be a bit of apprehension and markets, although not bearish, were not exuberant either this morning.

“One yard at 270bp over is beyond what I thought would have happened, although we had the comfort of indications so knew a deal was on the cards and that there would be interest.”

He said that the “usual suspects” participated in the deal, with perhaps a slightly stronger involvement from hedge fund type accounts than is typically the case, but that details about the breakdown of investors would emerge after reconciliation.

The mandate hit the screens yesterday afternoon, with the deal launched after a conference call with investors this morning.

Florian Eichert, senior covered bond analyst at Crédit Agricole, said that, according to the investor conference call, the issuer is aiming to replace central bank funding with market funding, keeping the amount of outstanding mortgage asset covered securities (ACS) stable, at Eu11.9bn, a trend that could emerge in Spain as well next year.

“As opposed to many other sectors in 2013, the major focus of the bank’s wholesale funding will be on covered bonds,” he said. “Senior would be nice but they don’t count on it.”

Market participants said the deal offered an attractive pick-up over Irish government bonds, in particular given that many other peripheral covered bonds trade through their sovereign. February 2015 and April 2016 Irish government bonds are in the low 100s and low 200s over mid-swaps mid, respectively, according to a syndicate official away from the deal. A rough calculation based on the interpolated Irish government bond curve would put Bank of Ireland’s new issue at around 100bp wide of the sovereign, he said.

“This is attractive versus Italy, Portugal or Spain,” he said. “There is an argument that the Irish financial system has gone through a lot of the pain and may be on its way out, and that it is not so clear this is the case with other regions that may still have some pain to come.”

He said that a spread of the high 200s over mid-swaps looked like a fair starting point, coming roughly flat to mid-market. He put a 3.25% June 2015 issue, a 10 year that was launched in 2005, at around 275bp over mid and said that flat to that seemed fair given large bid-offer spreads of up to 40bp.

“This paper trades in small clips,” he added, “and the leads will be more focussed on the guys that can take Eu100m sizes than on those guys that are dominating secondary levels in Eu1-Eu2m clips.”

A lead syndicate banker said that pricing took into account where the June 2015s were trading — at around 265bp over — and incorporated a 100bp pick-up over the Irish government curve, which pointed to 270bp over mid-swaps on the basis of the interpolated sovereign curve.

Another market participant away from the deal said the spread on offer relative to Irish government bond levels should have been enough to guarantee that the deal would be a blow-out.

However, he said that the Irish sovereign level is “out of whack” with other peripheral government bond markets, with Portugal, for example, trading much wider despite there arguably not being any material difference from a rating or prospects perspective.

“So Bank of Ireland is either incredibly expensive relative to Portugal,” he said, “or incredibly cheap versus their own govvies.”

An investor said that the spread was attractive versus other covered bond markets given how dramatically spreads have compressed there, and that it probably offered good value, but that he has extremely limited risk appetite for anything peripheral and so would not be participating.

The covered bonds are rated Baa3 by Moody’s and A (low) by DBRS.