The Irish securitisation market has been slow to get off the ground, with just a few transactions parcelling up home loans to have emerged. But increasing competition for retail funds, and burgeoning lending portfolios may speed the development of a domestic market, especially after the Irish currency becomes part of the euro.
WITH A POPULATION OF JUST 3.5M AND relatively small pools of
assets, Ireland is unlikely ever to figure in the centre of
international asset backed buyers' radar screens.
But with a vibrant economy, a roster of good quality and increasingly sophisticated originators and developed systems, the few asset backed securities to emerge from the country can provide investors with interesting diversification plays, particularly for those buyers starved of UK mortgage backed paper.
And making that step will soon become a lot easier for most potential buyers when Ireland joins the first wave of the single currency; the difficulty of funding in the Irish pound has until now limited the number of buyers for securitisations from the country.
In May 1998 the market took a significant step forward with the launch of Celtic Residential Irish Mortgage Securitisation, a I£200m mortgage backed security from the First National Building Society.
Until then just two bond market securitisations had emerged from Ireland: a I£100m FRN from Irish Life Homeloans in November 1995 and a I£140m packaging of local authority mortgages organised by the country's National Treasury Management Agency.
The Celtic deal parcelled up just under 5,700 loans underwritten by one of Ireland's leading home loans providers, and as such provided a template for any future Irish mortgage backed securities.
The bonds were divided into two tranches: a I£190 senior tranche rated Aaa by Moody's Investors Service, and a I£10m subordinated tranche rate A3.
The bond was structured as a secured loan to avoid membership issues - the First National will only convert into a bank later this year - but there is no reason why future Irish securitisations will not be on a true sale basis.
The Celtic deal carried a discounted margin of 22bp over Dibor - a couple of basis points over comparable mortgage backed structures from more exposed jurisdictions. Add that novelty premium to the slightly higher rates that the underlying Irish bond market yields over core European markets, and forthcoming Irish securitisations are likely to find a ready audience.
Potential investors will need to understand the dynamics of the Irish economy - with a growth rate averaging almost 9% over the last four years one of the fastest expanding economies in Europe.
That meteoric rate of growth has been accompanied by a boom in asset pools - mortgage lending expanding particularly quickly. Although Irish lenders are still largely liquid, prudential freeing up of balance sheet capacity may drive further issuance.
Irish lenders such as First National and the Bank of Ireland are already familiar with the technique, having already used securitisation to fund mortgage advances in the United Kingdom. Fierce competition for retail deposits has made that funding source more expensive as well as more unreliable.
But the same rate of growth that may drive securitisation domestically has already led to fears about rising inflation and deteriorating asset quality. Property prices rose by 30% during 1997, according to a new First National Building Society index - having doubled since 1994 - leading to worries that the Irish housing market might be headed for the same type of crash as hit the UK market in the late 1980s.
But while all concerned are keeping a watching brief, most participants believe those worries to be overplayed. "We believe that Ireland is less exposed than the United Kingdom was in the 1980s," said Dominic Swan, vice president and senior credit officer at Moody's.
"Even though housing affordability and rapid credit growth are significant issues, the market has not exhibited the same explosion of new originators or riskier product types such as non-status lending."
Michael Osborne, group treasurer at First National, points out that Irish lenders had the advantage of having witnessed the UK housing market's boom-and-bust at close quarters; whatever the competitive pressures of the Irish market, few lenders will be willing to repeat that experience.
THE MORTGAGES UNDERPINNING FIRST National's Celtic securitisation had an average loan-to-value ratio of 66.6%.
But macroeconomic concerns impinge upon Irish securitisation in another way: as a small and open economy with strong remaining links to the UK, Ireland would be particularly vulnerable to the economic after-effects of any break-up in Emu. Whipsawing interest rates in the aftermath of currency volatility could be particularly damaging.
To cover against that, however unlikely, possibility, the support for the senior notes on the Celtic transaction was structured to withstand nine months of interest rates at 15%.