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| Vincent Digby |
Bank of Ireland is planning to issue the first Irish mortgage-backed covered bond in the second half of the year and Irish Life and Permanent may be close behind, according to officials at the banks. They would join Westdeutsche Landesbank and DEPFA ACS Bank, which have sold the only two previous Irish covered bonds. However, those were public sector-covered bonds, while the pending deals would be the first backed by mortgages originated on the Emerald Isle. At the same time, the growth of the market may be constrained by the size of available mortgages, with market pros noting that a key question is whether the pool of Irish mortgages is large enough to support more issuers. The entire Irish mortgage market amounts to about E55 billion--compared to the E150 billion mortgage balance sheet of HBOS, which became the first U.K. bank to sell a covered bond last year. And, given the overhead costs associated with issuing a covered bond, banks needs to have sufficient qualifying collateral to make it worthwhile.
On the back of its E10 billion in collateral, BoI plans to issue a E2 billion bond, according to Vincent Digby, head of funding in Dublin. For future transactions, BoI is likely to collateralize the approximately E30 billion worth of U.K. mortgages held by its affiliate to the east, Bristol & West Building Society, which would substantially increase the size of BoI's covered bond program.
Irish Life and Permanent, meanwhile, is planning to come to market after the BofI transaction in the second half, according to Niall Boles, head trader in Dublin.
The banks want to sell covered bonds now to diversify their investor base and fund along the curve. Digby notes, "Central banks, fund mangers and pension mangers in Asia and Europe are all very enthusiastic about the prospect of a triple-A rated bond from the Bank of Ireland."
Banks with smaller pools may not be able to follow suit. And, even if such a bank did go ahead, it is unlikely that the investor base--largely continental European and Far Eastern--would take the time to evaluate a small-sized issue. BoI is the largest mortgage issuer in Ireland with a 20% share of outstanding mortgages.
Any technical impact on the securitization market is likely to be limited since Irish banks typically do not use securitization as a funding vehicle because of their well-capitalized balance sheets and due to the residential market's high level of prepayments.
