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IRELAND IN THE CAPITAL MARKETSSMOOTH RECOVERY ENTERS NEW PHASE

June 2014

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2 FOREWORD BY THE MINISTER FOR FINANCE Return to full market access

3 MACROECONOMIC OVERVIEW Hard work ahead to keep impressive recovery on track

5 NATIONAL TREASURY MANAGEMENT AGENCY ROUNDTABLE

Move over Belgium: Ireland targets semi-core status

15 BANKING SECTOR Ireland’s banking sector: back in business

20 NATIONAL ASSET MANAGEMENT AGENCY PROFILE Nama: ahead of the curve

21 PENSION REFORM Pension reform: breeding invention

22 IRISH SECURITIZATION Financing the deleveraging of Ireland’s banks

24 FOREIGN DIRECT INVESTMENT On the lookout for the next big thing to keep FDI rolling in

FOREWORD BY THE MINISTER FOR FINANCE

2 | June 2014 | Ireland in the Capital Markets

This special report on Ireland by GlobalCapital marks a period of great improvement in Ireland’s circum-stances. The country has achieved full debt market access at record low government bond yields and the

economy continues to gain momentum. Credit rating agen-cies have reacted positively: Ireland is now rated at A- (posi-tive outlook) by Standard & Poor’s, Baa1 (stable outlook) by Moody’s and BBB+ (stable outlook) by Fitch Ratings.

Ireland did not apply for a precautionary credit line as its EU/IMF programme ended last year and this was well received by the debt market. In January 2014 the National Treasury Management Agency (NTMA) raised €3.75bn from the sale of a new 10 year benchmark bond — its first capital market transaction since the end of the EU/IMF programme. In March 2014, it completed its full return to the market by resuming regular bond auctions. Ireland is fully funded for 2014 and has raised €6.5bn of its planned issuance of €8bn by way of pre-funding for 2015. The NTMA maintains cash reserves consist-ent with its stated aim of having sufficient resources to cover 12-15 months of exchequer financing needs.

The NTMA’s intensive investor relations programme that began in 2011 has helped to generate renewed interest among institutional investors in Irish government bonds. It has con-ducted a regular series of investor roadshows in the US, conti-nental Europe, the UK, Ireland, Asia and the Middle East.

The general government debt to GDP ratio peaked at close to 124% at the end of 2013, and is now on a firm downward trajectory. It is important to highlight that this is a gross debt figure. Net public indebtedness — which takes into account the value of the cash reserves already mentioned and other assets built up by the state (but does not give credit for equity instruments such as state ownership of banks) — amounted to just under 100% of GDP in 2013, well below the gross figure. From a financing perspective, it is also worth pointing out that funding requirements over the short and medium term have been reduced significantly on foot of the maturity extension to official EU loans agreed in 2013 and the promissory note deal. These initiatives have reduced the funding requirement by some €40bn over the next decade.

Provisional figures show that GDP fell slightly during 2013 due to the negative impact of expiring patents in the phar-maceutical chemicals sector, which depressed output and exports, and rising imports of royalties in the IT services sec-tor without an associated rise in exports. By contrast, domes-tic demand bottomed in the second quarter of 2013 and returned to growth in the latter half of the year. The recovery in domestic demand also helps explain the very strong labour market performance in 2013 where employment growth out-performed expectations. Employment grew by almost 2.5% in 2013 and this is a much more reliable guide to the economic recovery. The unemployment rate has fallen from its peak above 15% to below 12%.

Activity has strengthened in the UK, one of Ireland’s key

export markets, which should support exports of agriculture, tourism and manufacturing in particular. A broad range of high frequency indicators, including the PMIs and consumer confidence, have climbed to pre-recession highs. Although patent expiry will continue to weigh on exports in 2014, avail-able evidence suggests that the impact will not be as large as was the case in 2013. On the domestic front, the investment cycle has clearly turned, while employment growth allied with improving confidence should support an increase in personal spending. Against this general background, the volume of GDP is projected to increase by 2.1% in 2014 (GNP by 2.7% after 3.4% growth in 2013).

The general government deficit for 2013 was estimated at 7.2% of GDP which is well within the effective deficit proce-dure (EDP) ceiling of 7.5% of GDP. Growth in tax revenues and expenditure restraint were the key contributors in achieving the target. The 2014 Budget projected a deficit of 4.8% of GDP for this year and while some minor offsetting composition-al changes have been incorporated this projection remains unchanged. For 2015, a deficit of below 3% is forecast, in line with commitments under the EDP.

The Irish banking sector has been overhauled and is returning to profitability. The next target is the euro area-wide stress tests in late 2014 from which no negative surprise is expected. Asset quality is improving and mortgage arrears have fallen from their peak. Deposits have stabilised and drawings from the ECB have fallen significantly. This is a work in progress and is under constant review.

The National Asset Management Agency (Nama), which was set up to deal with the excessive property lending by the Irish banking sector, paid down 2%, or €7.5bn, of its senior bonds by the end of 2013. This progress has continued into 2014 and Nama is confident that it will complete its work ear-lier than the 2020 date originally envisaged. Subject to the out-come of portfolio and asset sales currently underway, it aims to have as much as half of its senior bonds repaid by the end of 2014 — a full two years ahead of schedule.

The National Pensions Reserve Fund is being reconstituted as the Ireland Strategic Investment Fund. It has €6.8bn at its disposal (excluding co-investment from third party investors) to lend on a commercial basis to support economic activity and employment. It will invest within Ireland in areas such as infrastructure, SME financing, private equity and venture capital, providing a further fillip to the recovering economy.

Ireland continues to be a key destination for foreign direct investment. Forbes magazine, as part of a survey, recently ranked Ireland at the top its list of the best countries in which to do business. It stated that Ireland maintains an extremely pro-business environment that has attracted investments by some of the world’s biggest companies over the past decade.

Ireland has recovered from a serious financial crisis. Mar-kets have recognised the major fiscal consolidation, banking reform and economic recovery. s

Return to full market access by Michael Noonan, TD, Minister for Finance

MACROECONOMIC OVERVIEW


FREE OF ITS troika bail-out since December, with government yields below the rest of the periphery for over a year and employment rising by 2.5% in 2013, Ireland certainly has reasons to be cheerful. But not every figure points to a revitalised Celtic Tiger — preliminary numbers from the country’s Central Statistics Office suggest GDP dropped 2.3% quarter-on-quarter in the final three months of 2013, dragging down the figure for the whole year to minus 0.3%.

However, the European Commission expects Ireland’s economy to grow by 1.7% in 2014 — and economists back this figure.

“Ireland has no parallels in the eurozone because it has such a large multinational sector,” says Rossa White, chief economist at the Irish National Treasury Management Agency in Dublin. “A large number of patents expired in the pharmaceuticals sector last year so that ended a long stream of high value added exports in that sector. In the IT services sector companies had very strong exports but paid greater profits to their US parent companies, so the bottom line took a hit because imports of royalties rose.

“Pharmaceuticals will be a drag this year but less so than the last few years. There was also a big spike in car sales in first quarter of this year but as there are no car manufacturers

here, the imports happened in the fourth quarter but consumer spending will only be booked in the first quarter of this year. It’s going to be pretty strong first quarter number to compensate for the last one.”

Small but crucialBut there are worries that credit is not getting to the major driver of employment growth — SMEs.

“SMEs provide about 70% of Irish employment,” says Colin Bermingham, a macroeconomist at BNP Paribas in London. “Employment growth has been concentrated in professional

services, agricultural, a little bit of construction and the hotel sector. These industries are all dominated by SMEs, where value added is anything from 74% to 90%.

“Over the crisis period, SMEs in Ireland fared worse than SMEs in the eurozone generally in terms of accessing finance. But there is also a demand side element. Recent central bank research found a third of SMEs have no debt whatsoever, and 85% have debt that is less than a third of turnover. It’s not

like all SMEs are in a bad situation financially and not in a position to borrow.”

The government has taken steps to improve the flow of credit to those small businesses that want it. In May, it announced plans to create a new entity — the Strategic Banking Corporation of Ireland — that will provide €500m of credit to the sector.

“The new fund has the potential to be important because gross new credit to SMEs last year was about €1.9bn,” says Bermingham. “Increase that by €500m and it opens the door for new lending that firms can take advantage of, even if it’s just changing the terms of an existing loan for a lower rate or longer term.”

But despite welcoming the new

agency, many analysts want a shift away from debt.

“I’d be very encouraged to start to see policy solutions that promote equity as a bigger part of the funding mix for SME and corporations,” says Laura Sarlo, senior sovereign analyst at fund manager Loomis, Sayles & Company in Boston.

Sarlo believes the new agency can help the SME sector in the near term, but that it needs to forerun a return of private cash.

“The common thread among these SME financing agencies across the periphery is KfW’s participation,” she says. “These agencies are trying to buddy up and share best practices, with KfW providing funding to help that flow of credit get to the real economy. That SMEs will be able to access credit nearer to core eurozone interest rates is a positive. But private capital allocations are probably most efficiently done by the private sector so hopefully after the policy banks jump-start things it will transfer back.”

Bank backing back?Such lending could provide the additional boon of helping Ireland’s beleaguered banking system, suggests Antonio Garcia Pascual, chief euro area economist at Barclays in London.

“New net lending to the private sector is good because Irish banks have excess exposure to real estate and not so much to SMEs and households other than mortgages,” he says. “It will make sense over the medium term for banks to expand their portfolios in those areas.”

Credit supply is also likely to receive a boost from the European Central Bank’s decision in June to lower interest rates — despite that meaning a hit on returns from the tracker mortgages that still form a large part of banks’ balance sheets — along with

Held up by many commentators as the poster boy of the eurozone periphery recovery, there are plenty of signs that Ireland’s revival is maturing. But with growth still low, debt high and a lack of credit for its crucial small to medium sized enterprise sector, there are still growing pains ahead. Craig McGlashan reports.

Hard work ahead to keep impressive recovery on track

“Ireland is very clear — they won’t

touch the 12.5% corporation tax rate”

Antonio Garcia Pascual, Barclays

MACROECONOMIC OVERVIEW


additional measures to provide credit in the form of targeted long term refinancing operations, €400bn of four year loans to banks that can be on-lent to the real economy.

“The ECB’s measures will have a positive impact fundamentally on periphery economies with Ireland and Spain benefitting more than others,” says Pascual. “That’s because of the very long term refinancing operation. It is fundamental to keeping lending rates low for an extended period of time, which is positive for households and firms that need to deleverage and would otherwise face higher interest rates and they’d have difficulty repaying, which would hit the banking system.”

But despite Irish banks returning to profitability — albeit weak profitability — there is still much work needed to clear up the mess left after the financial crisis that began in 2008 and the eurozone sovereign debt crisis that followed it.

“It’s very important that the banking system clean-up continues as it has been so far,” says Matthew Williams, finance analyst at asset manager Carmignac Gestion in Paris.

“It’s likely that both the large banks will be profitable this year so that’s a major step forward. Both have done a lot of work on restoring their capital structures and cleaning up their legacy non-performing asset portfolios. The international banks, Danske, KBC and Royal Bank of Scotland, are also improving their balance sheets, so it’s putting them in a position that they are going to be much more willing to provide capital to the SME sector.”

When ECB president Mario Draghi showed his hand in June, he was keen to point out that the TLTRO could not be used to fund residential mortgages — something that may be important for Ireland, where property prices are on the rise and arguably in no need of a push.

“House price data for Dublin was rather eye popping in late May,” says Sarlo at Loomis, Sayles & Company. “However, I am reasonably comfortable with the improvement that we’re seeing and the news stories about different commercial

property deals are encouraging. The Irish government has talked about a policy that’s a bit like Help to Buy in the UK, providing assistance for first time buyers. For a housing market that’s recovering that’s adding fuel to that fire. Hopefully in its implementation it will be as conservative as possible.”

Celtic exportIreland’s exports to GDP are by far the largest in the eurozone, says Barclays Pascual. That means the ECB’s efforts to weaken the euro — another target of its June measures — will be welcomed.

But there are also efforts to foster relations outside of Ireland’s main trading partners — the eurozone, UK and US. Asia Business Week took place in early June in an effort to grow links between Irish businesses and their Asian counterparts.

“It’s not easy for an SME to enter into an export market right away,” says BNP Paribas’ Bermingham. “If you have experience of doing that in one market first it makes it easier to get into other markets. The government is trying to widen its investor base which is a good move. There is already a lot of government support in place for firms that want to get involved in export and there’s always been a bias in industrial policy to the export sector than companies with a domestic focus, because the revenues tend to be less cyclical and more reliable.”

Ireland has also had to deal with reputational risk on the international stage from foreign companies — most recently from the US — operating in the country and reducing their tax bill via its low corporate tax rate. But none of the economists GlobalCapital

spoke to believe the government will immediately shift its position.

“Ireland is very clear — they won’t touch the 12.5% rate,” says Barclays’ Pascual. “Ireland does have a favourable corporate income tax rate relative to others. But in countries with much higher rates of 25% or 30%, the effective tax rate is nearly as low as Ireland’s when taking tax breaks and so on into consideration. That’s not spoken about much.”

However, BNP Paribas’ Bermingham can see changes on a longer timescale.

“There are probably elements of the Irish tax code that will be reviewed,” he says, “such as royalty payments for intangibles like international intellectual property rights and also residency issues. These can result in double non-taxation, for both Ireland and abroad. We’re going to see a policy of international co-ordination on tax rates, which is going to be slow. If it results in taxes being levied more closely to where sales and income is raised, that could be a positive for Ireland as it has a transparent system and ranks well as a place to do business.”

Austerity no more?Former Taoiseach John Bruton said in May that Ireland faces 10 more years of austerity. But economists argue that that may be far from the case.

“Last year the deficit was still over 7% of GDP but the markets did not take issue with that — Irish sovereign bond spreads were the tightest of the periphery sovereigns,” says Barclays’ Pascual. “The government designed a slow pace of consolidation but has stuck to the target. That was the right strategy and it’s paying off.”

The NTMA’s White argues that austerity is too strong a word even in the near term.

“We won’t have to implement more cuts in 2016, 2017 or 2018 to achieve budget balance under EU rules according to official forecasts,” he says. “In real terms there might be a decline in expenditure because of some inflation but it’s keeping neutral in nominal terms. There will be five to 10 years of very disciplined fiscal policy.” s

340,000

360,000

380,000

400,000

420,000

440,000

460,000

480,000

0

1

2

3

4

5

6

7

8

Jan 12

Mar 1

2

May 12

Jul 12

Sep 12

Nov 12

Jan 13

Mar 1

3

May 13

Jul 13

Sep 13

Nov 13

Jan 14

Mar 1

4

May 14

10 year yield at month end

People claiming unemployment benefits

Source: Markit

Falling government bond yields and unemployment

Source: Markit

Ireland in the Capital Markets 5

National Treasury Management Agency Roundtable

: Ireland attracted €14bn of orders to a benchmark bond in January, exited its bail-out programme without a credit line, and has resumed auctions. Have you proved market access or is there work left to do?

Oliver Whelan, NTMA: Our view of market access was the ability to schedule a series of auctions, as opposed to what we used to term more opportunistic funding, when the occasion allowed in previous years. We began with the more opportunistic benchmark issuance in 2012 and 2013 and worked from there. With the successful syndication in January, the announcement and successful execution of the three auctions, we have definitely achieved market access and normalised our market access. It is now the same as for any other small eurozone sovereign.

We have a little bit to do for the remainder of this year, about €1.5bn. We envisage having two or three

more auctions — probably two fairly small auctions in the second half of the year to complete that programme.

Like many small countries, we will probably begin looking at a syndicated issue early next year, and then schedule bond auctions which we would announce to the market in advance. At the moment, we’ve been announcing our issuance plans at the beginning of each quarter, telling investors what we plan for that quarter. Bond and treasury bill issuance will be included in that update of our auction schedule. We are confident that we can deliver on that without any difficulty, thanks to our primary dealers, which are around the table with us here. It’s beyond doubt that we’re back with full market access — we don’t get questions about that anymore.

David Warren, Zurich Life Assurance: Investor access has been very relevant in the last few years.

Participants in the roundtable were:

Susan Barron, managing director, SSAR origination, Barclays

Fabianna del Canto, managing director, European syndicate, Barclays

Derek Kehoe, head of fixed income, Ireland, BNP Paribas

Anthony Linehan, deputy director, funding and debt management, National Treasury Management Agency

Frank O’Connor, director designate, funding and debt management, National Treasury Management Agency

Andrew Salvoni, SSA syndicate, Morgan Stanley

Jamie Stirling, global co-head of SSA DCM, BNP Paribas

David Warren, chief investment officer, Ireland, Zurich Life Assurance

Oliver Whelan, director, funding and debt management, National Treasury Management Agency

Rossa White, chief economist, deputy director, National Treasury Management Agency

Tessa Wilkie, moderator, SSA markets editor, GlobalCapital

Move over Belgium: Ireland targets semi-core status

Ireland — lauded among peripheral sovereigns for the way in which it has set itself on the path to recovery — exited an EU/IMF bail-out package in November. Since then the National Treasury Management Agency (NTMA) has been working on a return to capital markets normality through benchmark issuance and the resumption of an auction schedule.The sovereign has been successful enough to begin to position itself as a semi-core European issuer — next to Belgium — and away from the periphery.But issues remain, such as the levels of private debt in Ireland’s economy. Plus the big question of what will happen to the European sovereign debt markets when the European Central Bank decided to turn the liquidity taps off. GlobalCapital met with members of the NTMA at their offices in Dublin, together with key bankers and investors, to discuss what is next in Ireland’s path towards the eurozone’s core.


6 Ireland in the Capital Markets

The funding team remains very much engaged and listening to investors. During the crisis, the NTMA talked about developing new instruments, such as the Irish Amortising Bonds for example. They are very open to feedback from investors about designing instruments appropriately to meet demand. Access and debating with investors directly is very important.

: Has that been key to the speed of Ireland’s return to full market access?

Warren, Zurich: Transparency in communication is very important: saying clearly what you can do and what you can’t do. The NTMA’s message at the start of this crisis was that Ireland was going to focus on what it could control itself, not the whims of investors and policy developments outside of that.

By focusing on that message it made their strategy very clear for investors and when the NTMA got engaged, they could engage on that basis. It was healthy that there was that level of honesty and transparency.

Andrew Salvoni, Morgan Stanley: The dialogue with the wider investor base has moved far beyond whether Ireland has market access and it’s now a case of what new investors are either entering into Ireland bonds for the first time, or re-entering Ireland after a prolonged period of absence during the height of the crisis. We are seeing new geographies emerge and more high quality investors start to come into Irish bonds and treat them more like a rates product, rather than a peripheral or a credit product.

Susan Barron, Barclays: Recent credit ratings are opening up the investor base for Ireland with several traditional investors that Ireland saw before the crisis returning. The key is proving market access, but also sustainability.

Ireland has been very good at going out to investors and saying: “this is the plan, this is what we have fulfilled thus far, and this is what we’re going to do next.”

Providing guidance on their plans and strategy to investors and market participants regularly was employed very well both during the crisis and as Ireland emerged. All of this work and strategy has cemented Ireland in its strong position today. Jamie Stirling, BNP Paribas: From the banks’ perspective, the only frustration is that Ireland doesn’t have a slightly larger bond programme as there’s a very large amount of demand.

One of the talking points this year — similar to some of the other peripheral sovereigns like Spain with its ultra-long deals — is whether Ireland could solidify its position by issuing longer than 10 years.

But clearly they haven’t had the need, which they have explained to investors in subsequent quarters, and have explained the expectations for following quarters. . Whelan, NTMA: We’re looking at the development of the market and our funding needs. They are modest and will be for a good number of years.

We’ve been helped by the fact that the maturity of the EU’s portion of the programme of assistance has been extended by seven years. The liquidation of the

Irish Bank Resolution Corporation in February of last year together with the EU programme loan extensions has relieved us of about €40bn of funding over the next decade. The downside — and it’s a good downside — is the lack of issuance potential there.

What we’re looking at for the next four years or so is issuance of around €8bn-€10bn next year, much like this year. Following that, we’re looking at about €12bn a year, so it’s pretty small for the next four years.

Our next big bond redemption is April 2016 and our plan in the second half of this year is to offer investors the opportunity to switch terms, perhaps through a combination of switching and buy-backs. So that €10.2bn redemption could be reduced by €2bn-€3bn or maybe more.

Issuance from 2015 out to 2018 should be around €12bn a year.

We would look at going further out the curve when we launch our programme for next year. We typically look at doing a syndicated issue early in the year and we would certainly have on the agenda a longer dated bond than the 10 year that we’ve issued so far. Coming out of the bail-out programme we were cautious not to make any false moves — that dictated issuing at the standard benchmark 10 year spot, where we were pretty assured of getting a very successful deal away.

It’s far too early to be able to give any detail on what kind of bond we might issue next year, but we certainly have a longer dated bond on the agenda for next year.

The upgrade from Standard & Poor’s to A- with a positive outlook in June was very timely. Real money investors are coming back to our bonds and we expect that to continue but we will also be looking to Asia as the next big bid on our bonds. When we were sub-investment grade, many investors there weren’t able to seriously engage with Irish bonds. That’s opening up now. We are seeing that in the secondary market already.

Within Europe there are also pockets of investors — I’m thinking particularly of insurance companies in Germany and some of the Dutch funds — which would be much more willing to engage in Ireland, particularly with the A- rating from S&P.

Looking a bit further ahead we will be looking for Middle Eastern funds to come in later on. We think there are good prospects for the Irish bond market, small though the issuance will be for the next number

Oliver Whelan, NATIONAL TREASURY MANAGEMENT AGENCY



of years. We expect the broadening of the investor base to continue as what we used to call fast money investors move out of our bonds and more real money accounts enter the market.

Derek Kehoe, BNP Paribas: As Ireland progresses, the profile of the investor type that’s going to be involved in the market is going to change as well. We’re seeing a shift from the emerging market investor profile of three years ago to crossover investors — which is typically the fast money — through to the real money higher grade investors.

If you believe Europe will be in an ultra-low yield environment for the foreseeable future then Ireland offers substantial value, and is actually trading more as a semi-core name than a peripheral.

Different investors have different mandates: the investor type you would target for a market like Ireland is the high grade and, ultimately, the ultra-high grade investors that make up the main investor base.

: So, would you say Ireland is now definitely not considered a peripheral sovereign?

Kehoe, BNP Paribas: It certainly doesn’t trade like one. The numbers tell the story. It trades much more like a semi-core sovereign. It’s closer to Belgium than it is to Greece or Portugal.

Salvoni, Morgan Stanley: As Oliver mentioned, we’re starting to see flows in the secondary market from Asia. It is a slow process, and the ratings upgrades and further positive rating action will be one of the drivers to bring more investors in.

There will be a domino effect, where investors will follow each other into a market that they feel more comfortable with. We’re starting to see the beginning of that.

Asia is going to be crucial — particularly in the re-branding from peripheral to semi-core to eventually ultra-high grade or core.

The investor base in Asia will drive spreads to tighten further. Part of being more comfortable with the credit means that in an environment where underlying rates are so low, investors will be able to go further out the curve and look at longer dated assets.

: Is liquidity something that you’re hearing investors taking issue with at all or are they more concerned with yield?

Rossa White, NTMA: We haven’t particularly changed our investor relations strategy. We’ve fine-tuned it over the last year to 18 months.

The investor base was different three years ago — emerging markets-type funds that didn’t look at Ireland six or seven years ago invested back in 2011 — and we are moving towards the real money investors over time.

We had more intensive roadshows back then, more than we’ve done in the last year.

We’re certainly still keen to meet all of the main centres at least once a year: probably twice a year within Europe, and then going further afield to North America and Asia once a year. We expect the Asian investor base to come back over time. We’ve done the

groundwork there already. It’s not a case of suddenly ratings go up and we’ve got to go to Asia. We’ve been meeting investors and rebuilding relationships in Asia for some time.

As Andrew says, it takes time for demand to come back. They have to put the processes in place, within their own risk departments. It’s not a switch that you flick overnight but we expect to see that demand come through.

Transparency has been part of the Irish product for the last few years. We wanted to be more transparent with information through our website and through communications directly with investors. But the troika, when they were here, were very keen on that too and that has probably improved the general transparency of the Irish economy. I hope that won’t slip over the next few years, because if Ireland continues to gain an edge in that area, it would be very helpful for us.

Frank O’Connor, NTMA: Adding to the liquidity debate: we have concentrated on building our European benchmark curve. Given the amount of official sector debt from the troika programme the market has been starved of the liquid benchmark bonds.

Back in the summer of 2012, despite strong investor appetite for a dollar issue we came back to markets in euros with a new five year benchmark and a tap of an existing eight year bond, our focus being to come back with European benchmark issuance. Investors have asked in the past why we haven’t had a bigger treasury bill programme, but again our focus has been on the benchmark curve and returning to a series of auctions.With a limited issuance programme, that has again been the focus this year, and will remain the case into next year as well.

Fabianna del Canto, Barclays: The granularity of the order book in the most recent syndication really does speak to the fact that the investors are not concerned about the liquidity of a programme. The issue has the depth of distribution and also the minimum size that investors find liquid.

Investors are just frustrated that there aren’t more opportunities to buy Irish debt, but the particular deal sizes have been managed in a way that Ireland has delivered on the minimum liquidity considerations

Rossa White, NATIONAL TREASURY MANAGEMENT AGENCY



per issue. The book speaks for itself: the NTMA has managed to balance the size of the programme vis à vis market standards and expectations.

Anthony Linehan, NTMA: Pre-crisis, primary dealers and banks had much bigger balance sheets, and you could rely much more on the primary dealers to distribute your bonds. That is why it’s so important now that we get involved with investors themselves.

We’ve also made technical changes. When we do an auction now, it’s a single price auction, which is much friendlier to investors than the previous method, which was much more competitive and investors weren’t quite sure where to bid. Investors are much more comfortable bidding into single price auctions. We saw that development in the market over the last few years, and we changed our own systems to adjust.

Salvoni, Morgan Stanley: This is a topic where liability management exercises like exchange offers can take some of the debt stock that is stuck in older off-the-run issues that are hard to get hold of, hard to trade, and move that out towards parts of the curve where investors want to get involved and build up liquidity in the more on-the-run issues.

Del Canto, Barclays: And Ireland has been successful in managing that.

Warren, Zurich: Ireland offered investors active buy-backs, switching and consolidation programmes even pre-euro. Those operations infer a lot of engagement with investors at that time. Hearing Oliver talking about plans for that continuing is very encouraging from an investor’s point of view.

There’s only so much that a debt agency of a modestly sized country issuing bonds can do, in terms of primary market access, and delivering primary market operations to investors in an efficient, transparent way.

Secondary market liquidity is really outside the control of any debt agency. In a country of Ireland’s size, we’re just not going to have the same liquidity as the Treasury market. There is a point at which investors need to exercise judgment.

As an investor, the volume of information we receive from countries like Ireland is on a different plane compared to what it was previously. That’s a structural

change in the central bank, the NTMA and the Department of Finance. No investor can say they don’t have the information available upon which to make a good decision at this stage. It’s all there.

Del Canto, Barclays: Ireland and the NTMA have outperformed in the way they communicate. Ireland is outperforming in terms of the metrics they’ve set themselves and how they’ve delivered.

Warren, Zurich: If I were in Rossa’s job, I would certainly be pushing comparisons with Belgium.

Whelan, NTMA: He has!

White, NTMA: And it’s working.

Warren, Zurich: There is a slight caveat here from my point of view. Looking at the public debt situation there are a lot of similarities there, but the picture with private debt is substantially different.

The separation between bank debt and sovereign debt is not complete by any means, although there have been developments. That’s a consideration that I might bring to bear in my analysis or interpretation.

White, NTMA: We have had a longstanding internal target to move towards the core countries over time and Belgium has been what you could call the cheapest of the core countries. But David has brought up the one negative, a negative that we outline ourselves when making that comparison, which is that private debt is no doubt higher in Ireland than Belgium.

On the other hand, we think we’ve some positives in our favour. Ireland’s potential growth in the longer term looks more favourable than a country like Belgium, for example, but also other countries in the euro area.

The ageing question used to be important when looking at debt sustainability but it stopped being such an issue during the crisis. Ireland would score probably the best of all the euro countries in that respect. In public debt we’re moving towards where Belgium is.Belgium has had a track record of running primary surpluses for long periods. We’re getting back towards a primary surplus but it looks like gross debt and net debt will peak at similar levels.

There are certainly some negatives in terms of private debt, but potentially in terms of growth Ireland looks better, so it’s still a reasonable expectation that we could close that gap with Belgium — maybe not fully but we would like to close a lot more of that gap. It would be interesting to get the banks’ thoughts on that.

Stirling, BNP Paribas: There was a little blip in the sovereign market in mid-May because investors thought spread compression was perhaps slightly overdone and took profits. The announcement from the ECB meeting in June means that there is room for further spread performance. There is no reason to think that this is as far as Ireland can go.

Kehoe, BNP Paribas: Absolutely right. We are going to see further spread compression. Investors are trading Ireland against Belgium, and they’re trading

Fabianna del Canto, BARCLAYS



Ireland and Belgium against Germany. The safe spread compression trade in Europe over the remainder of this year is to buy Ireland over Germany or Belgium.

That gap with Belgium may not go to zero — there may be liquidity reasons why it won’t go to zero — but it will get close, I’m sure of that.

Barron, Barclays: I agree. It was interesting to see how well Ireland’s bonds stood up to the recent volatility in peripheral European sovereign debt trading in May. That is testament to the fact that Ireland is now considered more of a semi-core than peripheral name.

Investors look at the overall credit metrics. The upward trajectory of the ratings is affording Ireland an opportunity to attract a much broader investor base, and that could further aid spread compression but also opportunities to issue maybe in the longer end.

Del Canto, Barclays: What has been supporting the spread compression, as Susan says, is new investors coming in and other investors not selling. The investors that supported Ireland over the last few years have held on to that paper, for the most part. If anything they would like to go further out the curve to find a bit more yield but they are happy with their exposure.

That’s a testament to the investor relation work that the NTMA has done along with improvements in Ireland’s economic fundamentals. Ireland has retained the investor base that it has built over the last two years, and is just adding to it. Spreads have further to go.

Salvoni, Morgan Stanley: We can’t underestimate the impact of the ECB’s actions in early June and how investors are going to operate in this persistently low rates environment. A lot of investors are looking at the landscape of European sovereigns now, looking at where they can outperform the various metrics and to do so without having to make the jump from the core to a credit like Greece, for instance. Ireland definitely provides one of those opportunities, and those opportunities are getting few and far between.

White, NTMA: The incredibly loose monetary policy around the world has benefited all sovereigns and certainly those that were in difficulty. We have to be happy with that, it has helped us get our funding costs

down, alongside all the credit progress we’ve made. We have to be grateful for that.

I’d like to hear David’s view on how he views the euro landscape after the ECB announcement.

Warren, Zurich: The ECB has missed a substantial trick here. I’m concerned about its definitions of disinflation and deflation. The way it characterises deflation doesn’t work for me. They say they will pick up evidence of deflationary expectations in rising savings ratios — people postponing purchases because they feel prices are going to fall. But the lessons of Japan, which are very relevant, are that you can’t afford to wait for that to happen.

Persistent low inflation does support low, long term interest rates, but it’s a significant issue for many countries in the eurozone. It’s just as big an issue as abnormally high or accelerating inflation. The ECB has been dragged reluctantly into action.

I don’t share the popular characterisation of June’s policy move: it seems to me slightly more pea shooter than bazooka.

The best has to be yet to come from the ECB because there needs to be a substantial counter to the very low nominal levels of growth and falling inflation expectations in the eurozone.

: What would you like to see them doing?

Warren, Zurich: It’s inevitable that the ECB introduces some sort of quantitative easing programme involving direct asset purchases. Equity markets remain at good levels in the eurozone despite the disappointing amount of ECB action, which implies that investors expect further action. So the ECB will be dragged into further policy action. The longer the European authorities leave it, the more substantially they might have to act in the end.

The US authorities acted faster to cleanse banks’ balance sheets and support asset prices. European authorities have been slower for philosophical and practical reasons. But the net result has been that we’ve been slower in cleaning up our system. That’s a drag on activity, it’s a depressant to inflation and that’s not what we want at this stage.

In an isolated sense, Ireland having low inflation versus competitors is a good thing from a competitiveness point of view, but if everybody around the world is in that situation, it’s much harder to gain competitiveness, so we would have to do it through more painful activities internally.

Linehan, NTMA: Very low bond yields are an issue for pension funds and for long term savers — especially for people buying annuities. The Irish position is probably better as we have a younger age profile. But across Europe I expect those problems for savers and for retirees to cause big issues in coming years. That is a theme that will develop over the next few years.

: How will banking union in Europe affect Ireland and its banks?

Kehoe, BNP Paribas: Banking union is only to be welcomed, and we would be very much in favour of

Susan Barron, BARCLAYS



it. It’s long overdue. It will be good for Ireland’s banks because having a single monetary area, with a large number of different banking regulators not always in tune, cannot be a good thing. Transparency is just as important for banking regulation as it is for a sovereign issuer.

White, NTMA: From a sovereign perspective the link between banks and the sovereign has been pernicious in certain countries including Ireland in the past. One of the key goals of banking union, aside from the supervisory element of making sure that banks don’t get themselves into trouble, was to break this link in some sense.

It’s fair to say momentum on that has been lost over the last couple of years since the declaration at the end of June 2012. If we found ourselves back in crisis again, maybe that momentum would restart. Key areas would include deposit insurance and a wider safety net for the euro area, as well as a centralised bank recapitalisation tool.

If the stress tests later this year bring some problems to light, it would be interesting to see if that momentum comes back, because the link between the sovereign and the banking system hasn’t been fully dealt with.

Certain countries’ banks have already bought a lot of sovereign debt. And we can see that because of the Targeted Long Term Refinancing Operations and the cheap funding that’s in place banks are probably going to buy a lot more sovereign debt in the next few years.

: When you say it has lost momentum, do you mean the regulations not coming through fast enough, or that when it does come through it’s not going to have any teeth?

White, NTMA: You don’t want the sovereign to be burdened by problems in the banks. Clearly Ireland was and there is a question over whether that is old news or whether it could throw up problems in future. We want to make sure the same thing doesn’t happen again. Are the structures really in place to make sure it doesn’t? The work is far from complete at this stage.

Stirling, BNP Paribas: It would be interesting to hear the NTMA’s views about the outcome of the European elections. Clearly there has been a lot of noise across Europe about the strong right-wing vote in numerous countries — is this a concern in Ireland? Is the decent performance of the minority Irish parties a problem or is it just a general malaise across Europe feeding into the country?

Whelan, NTMA: Investors are certainly aware of what’s happening across Europe but there’s no particular problem about Ireland compared to any other country. Many investors have noted that there hasn’t been a specifically anti-European tone to the elections in Ireland. Certainly, people aren’t happy with austerity — that has come through — but you don’t have a sharp edge of the anti-EU, anti-euro tone in Ireland that you had in certain countries.

Warren, Zurich: The macroeconomic consequences are limited at this stage. We wouldn’t be concerned at

the broader macro level because the fiscal compact gives one comfort that there can’t be macro upheaval, regardless of the political landscape. That said we have some concerns about the voices thrown up in these elections, and the potential longer term impact on policy.

: We’ve talked about Ireland attracting, and looking to attract, new investors in different geographies. Are investors that aren’t based in Europe concerned about anti-EU parties making a strong showing?

Salvoni, Morgan Stanley: As an American living in London I’m no great expert on the political side, but from the point of view of the markets, there haven’t been any ill effects at this stage. If we’d had this vote a year ago, or two years ago, then maybe things would have been a little bit different.

I suspect there’s a little bit of lag between the general public’s sentiment and what’s actually happening with the economies in Europe. I expect over time the views of the general public to improve — so perhaps this won’t be a topic next year. The questions we’re getting from investors are about potential ratings upgrades, and the fundamentals of the economy, rather than political questions.

Barron, Barclays: Investors are looking at the big picture — the credit metrics of the individual sovereigns as well as monetary policy across the globe.But investors globally were also aware of the European elections and the results but there has been limited market effect as investors note that there has been no notable fiscal impact.

Stirling, BNP Paribas: A few years ago the concern was whether there would be a Europe. But that has totally changed. As Susan says, our discussions with investors centre on macro situations, not about a break up.

Del Canto, Barclays: After a period of reform and austerity measures throughout Europe, it’s to be expected that some of the population will voice a sense of displeasure. Market participants fully expected that and were prepared for that.

The point at which it could impact markets will be

David Warren, ZURICH LIFE ASSURANCE



if it starts impeding the progress of policy. We saw that in Washington. When there was political gridlock that started to impede policy — that’s when investors started to focus more on those issues. In Europe, even though you have a lot more disparate jurisdictions and a lot of different forces acting on policy, it has not reached the point where investors are so worried that they are not buying.

Kehoe, BNP Paribas: Given how acute the fiscal adjustment was in Ireland over the course of the last four years, the level of social unrest relative to other European countries was virtually non-existent.

The citizens of Ireland have taken it on the chin. In terms of their political leanings, nobody has been pushed to the same degree as might have been seen in some other European jurisdictions. Domestically, people accepted that the reforms were needed.

Whelan, NTMA: We have met a good number of investors since the election and we have heard none reassessing whether they would want to be in Ireland.What we are hearing in our visits to investors is that some that bought Irish bonds early have locked in a good profit and are thinking about crystallising it. There are other investors waiting to pick those bonds up and there has been no disruption due to investor rotation.

A number of high profile investors over the last six months or so have said publicly that they have sold some of their holdings in Irish bonds. But you wouldn’t know, looking at the price action of Irish bonds, when that occurred.

White, NTMA: Given that the improvement in Irish yields has been more or less in a straight line this year, there hasn’t been much opportunity for investors looking to pick up bonds after a bit of a sell-off to buy Irish debt.

Perhaps a wider question is, looking at Asian investments in France in particular, what would it take for those investors to rotate into smaller sovereigns where there is a bit of a pick-up over France?

Stirling, BNP Paribas: If yields go too low that doesn’t mean there are no buyers out there. Because conversely when yields get low Asian investors tend to get more comfortable.

Salvoni, Morgan Stanley: Reassuringly expensive.

Stirling, BNP Paribas: Exactly. The only thing they require is some level of stability. Rossa mentioned a straight line of performance, if that straight line were to level out a bit, you might see those Asian investors coming in — attracted to the yield stability. We’re already seeing Asian participation in the secondary markets, so that has begun.

Salvoni, Morgan Stanley: There are still some structural longs among the EM-type funds and the high yield funds. They still feel that there is some positive price action to be taken advantage of here. The transfer between the different types of investors hasn’t come to completion yet because many of the investors that bought several years ago feel that there’s a compression trade to be held on to. I’m sure when they do start to exit those positions it will be smooth.

Stirling BNP Paribas: What we’ve seen with some of the semi-core sovereigns with larger borrowing programmes over the last few years is that those yield-focused investors haven’t sold completely. They have got the performance in the five or 10 year part of the curve and have crystallised it. They still want to own the credit, but want a higher yield for it, so they’re willing to buy further out the curve.

Warren, Zurich: When you’ve got very low absolute bond yields even modest spreads can be attractive from a roll down or carry point of view.

I’d like to pick up on the point about banking union and progress. We can all agree that wherever we are now is not an equilibrium point. If you take an optimistic view, it’s a work in progress.

Policymakers have interpreted spread compression as a credit to them. In some ways that has allowed them to ease off on other measures. The architecture is incomplete if we want to embrace a currency union, a banking union, a mutualisation of debt, cross-zone deposit protection. These issues seem to have been eased off the table as everybody has breathed a sigh of relief because of the spread compression.

The architecture as it is, is not probably compatible with a self-sustaining long term currency union. The architects of a currency union would agree with that. How quickly we get there, and in what circumstances, is still open. The progress to banking union has been in baby steps so far. At some point we may need bold measures. With spreads very narrow and some structural issues unresolved there are system-wide risks out there. We have to feel that they will come back on to the agenda at some time.

Linehan, NTMA: A few years ago market participants were questioning the ability of the European community to step up to the plate in a crisis. More and more we’ve seen that maybe Europe works best in a crisis. When we get to a crisis, then we can all sit around the table and sort it out fairly quickly. Europe doesn’t really like to work in the abstract.

Market participants accept that if we were to have further crises, the policymakers would act and there is that commitment there to the European Union.

Now that Irish debt is performing as a semi-core Jamie Stirling, BNP PARIBAS



sovereign where there isn’t a great run to be had in Irish yields anymore, what investors are looking for is transparency, consistency and no big shocks, one way or the other.

What we have shown over the last year is consistency: we do what we say we will do. The government has done what it said it would do. At the yields Ireland is trading at now, volatility isn’t helpful for investors as they do not have the same yield enhancement as before, so we want low volatility and for that to happen we need to be transparent.

White, NTMA: We can’t become complacent. We have to avoid unforced errors.

Since OMT, which was the game changer in Europe, a lot of those unforeseen risks have been dampened down or hidden — whether it be slow burn political risk if societies lose faith in reform because unemployment rates aren’t coming down, or whether it’s the pace of structural reform for longer term growth. For now these issues aren’t on investors’ radar. But — and the effect of the OMT and the commitment of central banks to keep spreads low may never wear off — there is always the chance that there is a blip at some stage and one of these things will come back to bite you. We have to be conscious that this sweet spot that we’re in may not last forever.

: I’d like to move on to other debt issuance strategies. Belgium has come up quite a lot in this roundtable, and that is a sovereign borrower which has a smaller requirement, but it has done some innovative MTNs to go right out the curve in small size. Is that something that you would look to do, in response to investor demand, or would you prefer to do it through a benchmark, or syndicated format?

Whelan, NTMA: We would like to support the liquidity of the bonds on the curve — the benchmark bonds — and given our limited fire power, we will concentrate on that.

Frank mentioned earlier that we could have done a dollar issuance at the end of 2012. But we wanted to make a statement that the euro is our natural funding currency, and that it is there that we need prove ourselves.

When the bail-out programme becomes a distant

memory and we’re back to more normal debt issuance then we may look to use other methods of issuance. But that may be in a number of years’ time when our funding requirement will have grown. It’s an idea to keep on the backburner. We have done a lot of work in preparing for different kinds of issuance.

For instance, we did a lot of work to prepare for index-linked bonds but the demand didn’t materialise in a way that would justify launching that kind of bond. We are quite flexible in having new instruments. We have a whole range of long term floating rate debt which was issued at the time of the Irish Bank Resolution Corporation liquidation. We have all the usual short term programmes ready as well. We have several which we can put out at any stage.

O’Connor, NTMA: We wouldn’t rule out any of these instruments but they’re another product or supporting measure that we can have in reserve.

We’ve had quite a lot of demand for treasury bills and Euro-commercial paper, and there are two reasons we haven’t done more. First our concentration on benchmark issuance already mentioned and second as we came out of the programme we wouldn’t count three month treasury bill funding as part of our core cash buffer. As our debt performance has normalised and as it continues to normalise, I would see short dated paper — longer than three month duration — becoming part of our cash buffer. We do want to develop that market in a greater size and it is why we continue to issue treasury bills as we want to have a presence there. It’s quite limited for now, which can be disappointing for investors, but it’s with an eye to having a short term book of bigger size. This is a target for the latter half of next year and into 2016.

Linehan, NTMA: It’s worth noting as well that we’ve diversified by increasing our retail offering here. Some 10% of our debt is largely domestic based through retail products.

Salvoni, Morgan Stanley: Flexibility is a key aspect. Looking at MTNs and smaller issues when you have a smaller annual funding requirement can be tricky, because you have to balance that with injecting liquidity into on-the-run issues.

From time to time there can be very attractive opportunities at the long end — whether it’s a German

Anthony Linehan, NATIONAL TREASURY MANAGEMENT AGENCY

Frank O’Connor, NATIONAL TREASURY MANAGEMENT AGENCY



pension fund or a Dutch insurance company — where you might say it makes a lot of sense to look at something. So having flexibility will benefit Ireland. But primary use of an MTN programme would be a challenge.

Barron, Barclays: Sustainability and reducing volatility remain key. Ireland has always been very clear about and remained committed to its strategy in achieving both.

Having different products in the toolbox is useful. The ability to issue ECP or even in US dollars or MTNs is helpful, but Ireland’s commitment to its benchmark curve, and the sustainable re-entry into treasury bills and auctions is appreciated by investors.

: I want to move on to a journalist’s favourite question, which is what is everyone worried about?

Del Canto, Barclays: So much of market confidence is based on the ECB. We saw how there was a sell-off when the Federal Reserve first floated the idea of tapering its quantitative easing programme. They’ve managed that, since, very well, but my concern is that at some point we’re going to have to steer the ship the other way in Europe. How is the market going to respond to that?

The crisis has brought a better depth to the market, because the global investor base is much more educated about Europe. That should balance the effects to a degree, but we don’t know what the impact will be until we’re there.

Stirling, BNP Paribas: The handling of the exit is absolutely key. Depending on how you view the performances of the Federal Reserve versus the ECB, the concern would be that it’s not an easy ship to turn around in Europe.

White, NTMA: We haven’t been here before, and the ECB is clearly going to go slowly after last year and the reaction to the Federal Reserve will be instructive next year. But you have to ask where asset pricing would be in pretty much every financial market without the Fed’s largesse, and to what extent can the euro area and the loose policy of the Bank of Japan compensate as the Fed withdraws? Nobody knows. From our point of view, there are financial market risks but there are also macro risks as the US withdraws.

The other concerns are those in Ireland. It’s so different from three years ago, where I could have named five or six potential shocks domestically: whether it be the banks, contingent liabilities, the economy wasn’t growing again or political risk and so on.

None of those have entirely disappeared, but they’re pretty low probability risks at this stage. So we are looking externally and we just don’t know what the shock might be. We’ve had some help from the UK recovery in the last couple of years. But is that the right kind of growth and how sustainable is it?

Ukraine hasn’t mattered so far, but if that develops and spreads wider into, say, the Middle East, is that a shock that could hurt us?

One domestic risk, which is low probability but which we can’t dismiss — we have a lot of private debt. Let’s say the euro area recovers at a time when

Ireland, for whatever reason, is struggling. If rates go up in the euro area and we haven’t reduced that private debt level, then that could cause problems. You can see debt servicing is at a low level in Ireland versus three to four years ago, but it’s still one of the most exposed countries. In fact it is the next most exposed after the Netherlands in the euro area. That’s something that you can’t dismiss as a risk, but it’s not going to worry the market in the short term.

Kehoe, BNP Paribas: Ireland is a small open economy. It has done everything in its power to steer the ship in the right direction, but the risk on a wider scale is complacency. If there is complacency at the European level the risk of outright deflation in Europe — given the high stock of Irish debt at the sovereign and private-sector levels — would be a great concern. If Europe doesn’t respond with a large programme of quantitative easing, this would be a concern as well.

A small, trading economy such as Ireland benefits from a weaker euro. We’ve been helped to some extent, as Rossa said, by sterling strengthening over the last few years. But there is also a risk of complacency on the domestic front and a risk of some fiscal slippage. That would take us away from the path we’ve been on for the last three to four years. But all of the things that are within our control have been done. It’s would be something exogenous that would cause the greatest concern.

Salvoni, Morgan Stanley: I agree. Ireland has done what it needed to do and what it said it would do, and is rebranding from periphery to semi-core.

From the ECB side, it seems at this stage that Draghi

has built up enough political capital and perhaps we can learn from the US lessons as well, so that when the time comes to reverse the ship — whether it’s later this year or next year — that that won’t affect Ireland directly.

For me the big worry is more of a potential macro issue, a Ukraine-style or Greece-style problem that affects the whole of Europe.

Kehoe, BNP Paribas: The Goldilocks scenario really is something like what happened in the 1990s, where Ireland benefited from very low European rates for a prolonged period of time, but had the benefit of Anglo-

Andrew Salvoni, MORGAN STANLEY



Saxon type growth rates. In terms of addressing the total stock of debt in Ireland, that’s the ideal scenario: where we have a situation where European rates stay very low, but as a trading country we benefit from the fact that our large trading partners — the UK and the US — are growing at significantly better levels.

Del Canto, Barclays: That’s where currency union and banking union become more complicated and political. You touched on the fact that sustainable growth is really export driven, and for that we need a weaker euro. But there are other factors impeding the weakening of the euro. So the political question becomes more difficult to understand in terms of forward implications on growth.

Warren, Zurich: Taking the focus away from Ireland, implied measures of volatility in financial markets are at worrying levels. Volatility in excess is detrimental, but if it’s too low, it’s also detrimental. Volatility — that fluctuation — is meant to be part of the shock absorber of financial markets and is one of the strengths of free financial markets.

Investors have a lousy track record as forecasters. I can rattle off a whole list of things that potentially could happen, but I’m sure all my predictions would be wrong. But one thing I am sure about is that a prolonged period of very low volatility is sowing the seed for something to come down the tracks at us. Whether it’s this month or next year, I don’t know.

Coming back to Ireland, smaller countries need insurance premia, whether it’s that they have the best investor relations team for the debt agency, the best transparency of economic statistics, flexibility in institutions to react and so on — Ireland needs an insurance premium, regardless of market perception. We need a buffer as a smaller country.

O’Connor, NTMA: Looking at market conditions you could argue for a smaller cash buffer, and you will be aware that at the end of this year we expect to be funded for all of 2015 with currently over 80% of this year’s funding already done. While we may reduce the level of the cash buffer in the next couple of years, we don’t intend to drop back to just one or two months worth of prefunding.

White, NTMA: The contrarian view would be to lock in some of these lower rates and pick up some long term funding.

Kehoe, BNP Paribas: Being able to issue a 30 year at levels which will probably be better than where the 2016s were issued would be a phenomenal statement to be able to make.

Whelan, NTMA: Yes, but we are cautious about the cost of carry associated with that — tempting though it may be.

Kehoe, BNP Paribas: The cost of carry is just really the price of the insurance — the price of your option for an unexpected spot of volatility.

: One thing that has been a fairly consistent concern in the SSA market over the past

several years is regulation, both on the bank side and the investor side. Is this raft of new regulation everyone is getting used to having an impact on Ireland in the debt markets?

Barron, Barclays: The developments around regulation and Solvency II are not new, but there are still many unknowns. Everyone is monitoring the impact of regulation but it is not having a negative effect on Ireland. If you look at the secondary performance of Ireland’s debt, the performance of this year’s syndication, the size of the order books — all are signals that there has been no impact.

One challenge could be the different regulatory environments across regions but Ireland has the benefit of a defined broad group of primary dealers, which is an additional advantage.

: If one primary dealer dropped out because of very punitive regulation, for example, you’ve got others that can come in and support?

Whelan, NTMA: It’s a very broad field. We have 18 primary dealers and the bulk of them are major international banks. That gives a great comfort. Certainly to date we haven’t witnessed any adverse developments there.

We are conscious of regulations and the constraints that are on the primary dealers and their balance sheets and their ability to warehouse bonds. But they have responded nimbly to that. It certainly hasn’t affected our performance in going to the primary market. We’re keeping a keen eye on it but nothing to worry there. Derek?

Kehoe, BNP Paribas: Things haven’t changed to any great degree at this point in time. Balance sheet has always been a scarce resource. You always have to fight for balance sheet within the bank. Irrespective of what the total size of a bank’s balance sheet is, you have to justify using it.

We haven’t seen any adverse impact from the ever increasing regulation as it applies to Ireland. It has had an impact on other areas, particularly in the corporate credit market we’ve seen a shrinkage right across the street, in terms of the amount of corporate bonds that banks trade. That has had an impact on liquidity, but at the sovereign level, we’re pretty comfortable. s

Derek Kehoe, BNP PARIBAS

BANKING SECTOR


IT’S EASY TO forget how far Ireland has come. Five years ago, its banking sector was in crisis, overleveraged and virtually bankrupt. Domestic lenders, shattered by the financial crisis, were bailed out or absorbed by the state. Many foreign banks fled an economy shredded by a disastrous decision by the Irish government to wed its fortunes to the solvency of its banking and property sectors. A few lingered, staying loyal to a country suddenly cluttered with foreclosure signs. Bright young minds fled the Emerald Isle in search of a brighter future. History, it appeared, had repeated itself in a country burdened by a dark, sad history of emigration.

Except — the future wasn’t that bleak after all. Rather than bemoan its ill fortune, Ireland decided to man up and focus its attention on righting wrongs. At the sovereign level, it dealt with debts resulting from a monumental collapse in property prices by accepting an €85bn bail-out in November 2010 from a clutch of sovereign and multilateral investors including the International Monetary Fund. Within just three years, Ireland had exited the programme. “The era of the bail-out will be no more,” pledged Fine Gail leader Enda Kenny in December 2013. Fragile

times remained ahead, but for now, insisted the Irish premier, the “economic emergency” was over.

Then there are the banks themselves. On June 8, 2014, finance minister Michael Noonan said that Anglo Irish Bank, the lender that nearly bankrupted the state in 2008, had “finally been consigned to history”, with liquidators preparing to pay its outstanding debt. The remaining twin pillars of Ireland’s financial services sector, Bank of Ireland (BOI) and Allied Irish Banks (AIB), are expected to return to full profitability in 2014, having posted losses every year since 2007. In December 2013, BOI raised €580m as part of a transaction designed

to fully reimburse the state for emergency funds received at the height of the financial crisis.

Out of the state’s shadowIrish lenders, says Niamh Staunton, executive director, EMEA DCM at Morgan Stanley in London, have come “a very long way very quickly. The two main banks are now profitable and generating capital internally. While some legacy capital instruments remain, both are

now looking to the future and gearing up to build out their CRD IV compliant capital structure through new-style capital instruments.”

Both are also renewing their relationship with the debt capital markets. Since December 2012, BOI alone has issued more than $5.3bn worth of fresh bonds, a blend of covered bonds, senior unsecured notes and convertible contingent capital instruments (CoCos). In early June 2014, the lender, which barely avoided being nationalised, priced a €750m 10 year bond with a coupon of just 4.25%, less than half the price it paid for a 10 year bullet

18 months ago. Allied Irish, which has a more

patchy credit profile due to its legacy portfolio of non-performing mortgages, and which, unlike BOI, accepted a €20bn bail-out during the crisis, has been a slightly less frequent visitor to the debt markets. In April 2014, it sold €500m of five year senior unsecured notes with a coupon of 2.75%, a deal underwritten by Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs, Morgan Stanley, and Nomura. Irish financial services firms issued $3.8bn equivalent of debt instruments in the first five months of 2014, according to Dealogic, against $1.97bn in the same period a year ago, and none at all in 2011 or 2012.

Back to prosperityThe turnaround has been remarkably, even dizzyingly quick, with every major player — regulator, politician, bank chief, external financial adviser — having a significant role in reversing the country’s fortunes. “Within the space of 18 months, Ireland has gone from a banking system with no access to capital markets at all, to a banking sector that has now issued most available capital market instruments,” says Cecile Hillary, co-head of FICM FIG coverage at Morgan Stanley in London. “No other country in the eurozone periphery has done this.” She depicts Ireland and its banking sector, not unreasonably, as “trailblazers”, setting a compelling example for struggling regional sovereigns.

So what makes Ireland special, a model sovereign citizen in the eyes of the troika, the European Commission-led tripartite commission vested with bailing out other, distressed outlying eurozone

A few short years ago, it was hard to imagine Ireland’s economy returning to anything resembling full health. The greatest property boom in the country’s history had created a crash that seemed all but irretrievable. Yet Ireland’s banks are again buzzing around the markets, selling an array of debt instruments and paying back government debt. Elliot Wilson reports.

Ireland’s banking sector: back in business

“The recent sales of Irish banking

shares by investors specialising in

distressed assets, such as Wilbur Ross,

demonstrates how far the sector

has come”

Niamh Staunton, Morgan Stanley

BANKING SECTOR


states? How did it succeed in first accepting a bail-out with such insouciance, then in repaying it rapidly and with minimum fuss? And why has economic growth returned with such force to Ireland, while it continues to flag in the likes of Spain, Portugal, and Greece? In June 2014, Standard & Poor’s revised upward its 2014-16 average gross domestic product projections for Ireland to 2.7% from 2%. In a May 2014 research note, Ireland: playing by the rules, BNP Paribas predicted real GDP growth of 1.8% in 2014 and 2.4% in 2015, with exports benefiting from a recovery in Ireland’s main trading partners, consumption ticking up, and tax-take stabilising.

One simple reason behind Ireland’s ability to buck the trend in the region’s troubled periphery is the hard-headed nature of its response to the financial crisis. Consider the travails of, say, Portugal, whose supreme court has blocked the imposition of austerity measures at every turn; or Greece, a hollowed-out and politically divided country lacking a cohesive, co-ordinated route back to prosperity.

In stark contrast, Ireland has proven itself to be the archetypal, pragmatic, free-market economy.

Its banks, notes Morgan Stanley’s Hillary, have “succeeded better than any other eurozone banking system in deleveraging, and ridding themselves of bad and non-core assets”. Its flexible labour market — a dynamic it shares with the likes of Britain, the US and, in many ways, Germany — helped provide strong foundations for the economic recovery. It’s also easy to overlook the government’s leading role, first in accepting the inevitability of a massive bail-out, then in crafting and delivering a precisely calibrated turnaround story to investors and disaffected Irish voters.

Investment driveThis point is critical. Even as Ireland wobbled on the edge of the precipice in late 2008, business boosters continued to troll the world on its behalf. They whispered in the ears of major foreign corporates, particularly in the US, the source of most foreign direct investment, extolling the strength and permanence of the country’s business story. It worked. Ireland secured $46bn of inward FDI in 2013, second only in Europe to the UK, according to data from Unctad.

Forbes, in 2013, and a global study led by Netherlands-based

Investment Consulting Associates, in 2014, both ranked Ireland the best place in western Europe to locate a business and generate returns. All of which benefits the broader economy.

Again, it helps that Ireland was willing to take the hits hard and early, forming a bad bank to house $98bn worth of failed property development loans, a decision that almost certainly aided the broader economic turnaround, and accelerated the revival of a much maligned banking sector. Created in 2009, the National Asset Management Agency (Nama) has proven remarkably decisive and nimble footed, divesting timely tranches of soured loans to distressed asset investors. In April 2014, Nama sold loans with a face value of $7.5bn to affiliates of New York-based buyout firm Cerberus Capital Management. That marked the agency’s biggest deal to date, amid growing demand for Irish assets, the previous largest transaction being the sale of a loan portfolio to a group led by Connecticut-based Starwood Capital Group for €195m.

The first A rating upgradeSo what happens next? Bankers

Issuer Deal Pricing Amount Coupon Years Type Bookrunner Parent Date €mBank of Ireland Mortgage Bank 13-Nov-12 1,000 3.13 3 Covered Bond Citi, MS, Nomura, RBS, UBSAIB Mortgage Bank 28-Nov-12 500 3.13 3 Covered Bond DB, HSBC, JP Morgan, UBSBank of Ireland 12-Dec-12 250 10.00 10 Tier 2 Deutsche BankBank of Ireland 09-Jan-13 1,000 10.00 3 Placement of DB, UBS, Davy Stockbrokers

Govt Tier 2 CoCoAIB Mortgage Bank 22-Jan-13 500 2.63 3 Covered Bond Barclays, DB, MS, UBSBank of Ireland Mortgage Bank 15-Mar-13 500 2.75 5 Covered Bond DB, MS Natixis, RBSBank of Ireland 29-May-13 500 2.75 3 Senior BNPP; DB, MS, RBSAIB Mortgage Bank 05-Sep-13 500 3.13 5 Covered Bond BNP Paribas, DB, JP Morgan, RBSBank of Ireland Mortgage Bank 27-Sep-13 500 3.63 7 Covered Bond Citi, Danske, DB, Nomura, RBSBank of Ireland Mortgage Bank 06-Nov-13 1,000 1.88 3 Covered Bond CS, HSBC, Lloyds, Natixis, UBSAllied Irish Banks plc 20-Nov-13 500 2.88 3 Senior DB, GS, JPM, MS, NomuraPermanent TSB (Fastnet Securities 9) 22-Nov-13 500 3m€+165 Irish RMBS Morgan StanleyBank of Ireland (Baggot Securities) 04-Dec-13 1,300 10.24 Perp Placement of CS, DB, UBS, BofA ML, Davy

Govt Pref SharesBank of Ireland 08-Jan-14 750 3.25 5 Senior Citi, DB, MS, Nomura, RBSBank of Ireland Mortgage Bank 11-Mar-14 750 1.75 5 Covered Bond BNPP, HSBC, MS, Nomura, UBSAIB Mortgage Bank 19-Mar-14 500 2.25 7 Covered Bond Barclays, Commerz,

Danske, HSBC, SGAllied Irish Banks plc 09-Apr-14 500 2.75 5 Senior BofAML, DB, GS, MS, NomuraBank of Ireland 30-Apr-14 750 2.00 3 Senior BNPP, DB, HSBC, MS, NomuraBank of Ireland 04-Jun-14 750 4.25 10NC5 Tier 2 BNPP, Davy, DB, MS, UBS

Irish bank deals since returning to the market

Source: Morgan Stanley

BANKING SECTOR


believe Ireland has passed a tipping point. Its ability during the dark days of the financial crisis to adapt quickly and willingly to a harsh new world places it, many believe, in the agreeable position of being equated not with the wheezy club of embattled peripheral nations but with better-run, clearer-lunged core eurozone states. “Ireland is in many ways returning to a normalised state of market access, whereas other eurozone states are still working their way through earlier stages of restructuring,” says Ben Davey, co-head of financial institutions group, EMEA, at Barclays in London.

That view appears to be born out by S&P’s decision on June 10 to raise Ireland’s sovereign credit rating by a single notch, to A-, from BBB+, with a positive outlook — the country’s first A rating since the

normalisation of Ireland’s return to the bond markets. The rating agency cited an “improved outlook for growth” and “more signs of recovery in the domestic economy”. Irish borrowing costs, in turn, fell to a record low of 2.39%. Another event of note in June was the decision by distressed debt investor Wilbur Ross to sell his remaining block of shares in Bank of Ireland after tripling his initial investment in just three years. Ross sold 1.8bn shares for 26.5 euro cents each at a 7% discount to the previous day’s close, generating €477m. “Investors who believed in Ireland’s recovery have been vindicated, and the recent sales of Irish banking shares by investors specialising in distressed assets, such as Wilbur Ross, demonstrates how far the sector has come,” notes Morgan Stanley’s Staunton.

Tightening spreads and the timely exit of investment specialists such as Ross point to a sea change

in how investors view both the Irish sovereign and its lenders. As recently as 18 months ago — or around the time Bank of Ireland was making a cagey return to the debt markets — Irish bonds were a risky bet, based on some good if incomplete structural work at the sovereign level, and scattered signs of economic recovery. Not any more. Investors no longer buy BOI or AIB debt for its scarcity value or chunky yields; rather, they seek them out for being sanctuaries in a risk-strewn world. “The type of investor who buys Irish debt now is generally more conservative and as a result willing to accept tighter spreads,” notes Morgan Stanley’s Staunton.

Rising investor demandTake two of Bank of Ireland’s most recently debt sales. The difference

between the pair is chasmic in so many ways. Print one, from May 2013, saw the lender issue €500m of fresh bonds. The deal was historic, marking its first sale of senior unsecured notes since 2008, and impressive-but-not-awe-inspiring, dragging in a little more than €1.25bn of orders. Reasonable demand allowed the issuer to lower the price on the three year debt sale a fraction, to mid-swaps plus 220bp.

Now consider print two, completed in June 2014. The sale of €750m of five year notes proved to be five times subscribed, dragging in €3.75bn of orders, another sign that investors were returning to Irish debt in force. “Looking at pricing on that deal, it showed how much of a transformation has occurred within the Irish banking sector over the past four years,” notes Derek Kehoe, head of fixed income, Ireland, at BNP Paribas in Dublin, whose employer, a major player in Ireland’s commercial banking sector, was lead manager on the deal. BOI itself was quick to highlight the importance of its latest foray into the debt markets, noting that the rising level of investor demand “strongly underlines the group’s ongoing ability to access funding from international capital markets at improving prices”.

Moreover, the second sale was far more diverse, involving a greater number of pension funds,

insurers, and asset managers — long term investors, in other words, rather than risk-loving hedge funds searching for higher yields from struggling assets. “Each consecutive Irish debt sale over the past 18 months has seen a higher proportion of real money involvement,” said Morgan Stanley’s Staunton. “If we look at the composition of recent order books, it indicates that investors have moved from looking at Ireland as a means of capitalising on compression trades to institutions investing in the economy’s strong long term fundamentals.”

Notes Duncan McCredie, head of bank coverage, Ireland, at Barclays in London: “Banks have done most of what they need to establish themselves as independent propositions. AIB has laid out quite clearly what they feel they need to do from a profitability perspective before they come back to the equity markets, and sustainable profitability is the next focal point. People expect that soon.”

Having issued the full gamut of CoCos, covered bonds, and senior unsecured notes, Irish lenders are expected to issue tier one capital next. Tier two capital is, of course, the natural place to start for lenders looking to re-enter a once hostile market, but in order to become CRD IV compliant, both BOI and Allied Irish will be forced to print additional tier one capital. “When it comes to tier one issuance, investors are typically looking at the business models of banks — at flashpoints and triggers and at their ability to grow and retain earnings,” says Morgan Stanley’s Hillary. “Ireland’s leading banks have done everything necessary to put themselves in the position to issue tier one capital, notably by proving they have regular and seamless access to debt markets.”

Neither lender, believes Ruth Price, vice president, debt capital markets, at Barclays in London, should now struggle to convince investors to buy tier one debt instruments. “From a demand perspective,” she notes, “there is little stopping BOI or AIB from issuing additional tier one capital.” The only hitches in the short term may be uncertainty relating

“Ireland is in many ways returning to a normalised state of

market access”

Ben Davey, Barclays

BANKING SECTOR


to unresolved tax deductibility issues, and the lingering question of when the Irish state will divest its stock of shares in both lenders. “What is paramount when it comes to Ireland’s banks issuing tier one capital is building a roadmap charting exactly how lenders are going to exit government ownership, and to get back into the public domain, says Morgan Stanley’s Hillary.

Investors were heartened in early June to hear rumours that Bank of Ireland was considering heading to the US to raise money through a dollar denominated Yankee bond issuance, another first in post-bail-out Ireland.

Still work to doNo one should be under any illusions, of course, that the job is more than half done, or that Ireland’s recovery is still anything more than a work in progress. The Irish government isn’t expected to dissolve Nama by 2020, and while the mountain of soured property development loans is much reduced, it is still there, a lingering drain on state coffers. Last year, Deutsche Bank shocked the market after issuing a research report suggesting that Bank of Ireland needed to raise up to €300m to shore up its capital position.

Moreover, while BOI and AIB both posted a profit in the first quarter of 2014, it is easy to overlook the fact that the post-crisis banking sector is shrunken and weakened. The retreat by Copenhagen-based Danske Bank and ACC Bank from the retail banking market in 2013 left Ireland, once saddled with an overbanked industry, with six lenders offering current accounts — AIB, KBC Bank, Bank of Ireland, EBS Building Society, Permanent TSB and the RBS-owned Ulster Bank.

Even the latter’s future is uncertain. Despite divesting many of its prime global banking assets over the past six years, RBS, still majority controlled by the UK government, has remained consistently loyal to the Irish banking market. In November, RBS chief executive Ross McEwan described Ulster Bank as an “important business for the whole island of Ireland”. Yet every

asset has its price. Ulster returned to profitability in the first three months of 2014, posting earnings of £17m on turnover of £206m, its first quarterly profit since 2009, with net interest margins rising to 2.36%, from 1.85%.

But having tarted up one of its prime remaining assets — Ulster Bank swallowed a £1bn loss in the final quarter of 2013, following the creation of an internal bad bank — RBS, which has spent £15.3bn bailing out its operations in the country over the past six years, is now considering a full or partial sale of the unit. McEwan, who believes the unit is “too small” to be a viable long term rival for BOI and Allied Irish — is believed to have sounded out the finance ministry, with a view to merging Ulster with KBC or Permanent TSB. Another option being considered is a partial sale of the lender’s southern operations to private equity investors.

Improving attitudesBankers embedded in the industry view such news as the dark before the dawn. Barclays’ Davey sees foreign banks’ attitude toward the country improving as the economic recovery continues to gain momentum. “Ireland has a very open economy; it is well positioned as a gateway both to the UK and continental Europe,” he notes.

BNP Paribas’ Kehoe emphasises that his Paris-based employers remain committed players to the banking sector. “We have been in Ireland for more than 40 years, and we have had a very happy experience here. The past four years have been difficult but we see tremendous opportunities here.”

Kehoe expects to see a greater number foreign lenders competing for market share and traction in the domestic retail banking sector in the years to come. “It’s a very wealthy European nation that is growing at a healthy lick again,” he notes.

That confidence chimes with the sale by Danske Bank in May 2014 of impaired mortgages on 680 properties dotted around Dublin. A year or more back, that sale would have garnered little buyer interest; this time, however, it attracted at least one notable buyer, in the shape of Deutsche Bank.

For Ireland to return to full economic normality, however, it needs to instil impetus among its legion of small and medium-sized enterprises. Across the eurozone, SMEs, the lifeblood of any economy, have been slow to recover from the deepest recession in 80 years. In May 2014, more than €500m of additional credit was made available to domestic SMEs through the creation of the Strategic Banking Corporation of Ireland, a new body co-funded by Germany’s KfW Bank and the European Investment Bank.

More deleveraging neededExperts, though, remain conflicted over whether this approach — hoping to kickstart small business lending simply by making capital available — will work. Banks, many argue, having long been willing to lend, both in Ireland and elsewhere in Europe. The problem, rather, is with corporates, many of which are either large, cash-rich, and reticent, notes Barclays’ Davey, about “taking more debt on to their balance sheets” or smaller, and hesitant about borrowing capital in the event of a new, future crisis.

“Companies in Ireland and elsewhere now see that leverage doesn’t pay, that it isn’t a guaranteed route to success,” says an Ireland-focused debt markets banker. “Before the crisis, companies and people were overleveraged, and no one wants to return to that place.” Bankers in general believe the capital is in place for companies seeking to borrow, but warn that more deleveraging is needed in the private sector before a full lending economic cycle kicks in again.

Given the depth of the darkness from which Ireland has emerged, there are “plenty of reasons to be optimistic”, believes BNP Paribas’ Kehoe. “Ireland’s fiscal position has stabilised, unemployment is falling again, the country has successfully exited the bail-out programme, and some semblance of normality is returning to the banking system.”

Even investors are believers again, snapping up bonds as borrowing costs fall to record lows. Ireland’s banking sector, and the country that it nearly bankrupted, are back in business. s

NATIONAL ASSET MANAGEMENT AGENCY PROFILE


THERE ARE PLENTY of plaudits around for the National Asset Management Agency (Nama) after the agency recorded a €211m profit in 2013 and sold its entire Northern Ireland portfolio for a value thought to be around €1.6bn in April, its largest sale so far.

And with the Irish and UK property markets performing strongly — too strongly in the UK, warn bubble watchers — Nama chairman Frank Daly even felt confident enough to suggest work could be completed ahead of the scheduled 2020 finish date.

“Because there’s a bit of a boom in the property market here and in the UK,” says Colin Bermingham, macroeconomist at BNP Paribas in London, “and it’s basically those markets that provide the collateral for the vast majority of Nama’s loans, it has been a big boost. Nama has managed to sell those loans and meet the target valuation. It has also been able to pay dividends to some domestic banks and it didn’t need to do that unless it was doing well. There is talk it could wind up in 2018 rather than 2020.”

Nama’s next project lies in the Dublin docklands area. In early June, it invited proposals to buy long leasehold interests in a 2.35 hectare site, which the agency says could hold 500,000 square feet of office and retail space, along with 160 new houses. The project accounts for 15% of undeveloped land linked to Nama in the docklands area, which Nama expects to provide up to €1bn of development funding for in the next few years.

Nama has redeemed €21.575bn of senior bonds since March 2011 — but still has €21.543bn outstanding, along with €1.593bn of subordinated debt. Meeting future redemptions in the medium term could prove tricky, if analysts’ estimates are correct and the supportive current of rising property price starts to weaken.

Standard & Poor’s predicted in January that Irish house prices will increase by 3.5% this year — but that could fall back to just 2% in 2015 because of tight lending conditions and high mortgage arrears. That means returning to the values before the collapse are a long way off — S&P says prices were 50% below their 2007 peak as of June 2013, when prices started to rise again.

Of course, no one expects a return to the precrisis house price peak anytime soon and its asset sales so far suggest that those involved got their numbers right.

“Nama asset sales are proceeding well — maybe over the medium term it can make some money,” says Antonio Garcia Pascual, chief euro area economist at Barclays in London. “That limits future downside risks for the sovereign. This shows that the haircuts imposed on distressed real estate assets transferred from banks were set at prudent levels.”

What’s left?But it is not just the threat of a slowdown in the property market that could hinder Nama’s progress. Some investors would like to know more about what remains on Nama’s books. While it releases the par value of the asset transfers — €4.5bn in the case of the Northern Ireland loan portfolio — it does not disclose the amount of money that actually changes hands, meaning the €1.6bn estimate for the Northern Ireland book is just that — an estimate.

That could mean that the assets already sold are the pick of the crop and that the rate of winddown may slow.

“Nama is doing better than expected and is repaying its bonds ahead of schedule,” says Matthew Williams, finance analyst at asset manager Carmignac Gestion in Paris.

“It lurks in the background because it’s an offbalance sheet gov

ernment liability, but most people adjust for it in their thinking about the quality of the fiscal outlook. It’s definitely a positive that they’re ahead of schedule. The stabilisation of asset classes has been probably the most important issue and there is more interest from private capital in Irish assets. What we need to know is the degree to which they’ve been able to clear the better properties and assets first and whether there’s going to be a long tail of poorer properties that will slow the pace.”

Just 28% of Nama’s loans were performing at the end of 2013 when using the agency’s valuations, while the figure falls to 18% when using their par value, according to its annual report for the year.

However, Nama officials remain positive. In late May, chief executive Brendan McDonagh told the Irish public accounts committee that by the end of the year taxpayers will be on the hook for €15bn of liabilities relating to Nama. That is down from liabilities of €43bn last year, made up of €30bn of senior bond issuance in 20102011 and €12.9bn of senior bonds in 2013.

Proceeds from the latter were used to buy the floating charge of the Irish Bank Resolution Corporation — created from the merger of stateowned banks Anglo Irish Bank and Irish Nationwide Building Society — from the Central Bank of Ireland.

Nama declined to be interviewed for this article. s

The National Asset Management Agency is ahead of schedule on its tricky task of winding down the toxic assets it took from Ireland’s banks as the sector teetered on the edge of collapse. However, there is still much winding down ahead and some investors would like to know more about what is lurking in the background. Craig McGlashan reports.

Nama: ahead of the curve

“There is talk Nama could wind up in 2018 rather than

2020”

Colin Bermingham, BNP Paribas

PENSION REFORM


CREATED IN 2001 as a classic long term fund with a mandate to help meet the cost of welfare and public service payments from 2025 to 2055 and a sim-ple objective to maximise return while reducing risk by diversifying assets globally, the future of the National Pen-sions Reserve Fund (NPRF) could not be any more different.

The 2008-09 financial crisis shook the NPRF’s set-up to the core — much as it did to many Irish institutions — and that necessity has bred a changed focus and a different name: Isif, the Ireland Strategic Investment Fund. Under the new model — which will be born after legislation is set to be passed this year — all of its invest-ments will be in Ireland.

“The phrase we use for our man-date is that we have a double bot-tom line,” says Eugene O’Callaghan, investment director at the NPRF in Dublin. “We’ve got to invest for finan-cial return and to generate economic impact. Finding investments that can offer a risk-adjusted return and deliv-er an economic impact is going to be quite difficult. There is already €1.3bn invested in Ireland within the limited mandate of the NPRF, so it’s not start-ing from a blank piece of paper but that is the limit of the NPRF mandate for investing in Ireland.”

Risk managers may wince at the thought of concentrating risk in one country — particularly as the NPRF was much better protected through

its international allocations when the crisis hit than had it been filled with Irish assets — but analysts believe the approach is sound.

“Letting Isif invest partly outside of Ireland would give more flexibil-ity,” says Matthew Williams, finance analyst at asset manager Carmignac Gestion in Paris. “But if investment opportunities in Ireland serve them best because that’s what’s best for the Irish people then that’s what they should be encouraged to do.”

Trend setterWhile generating economic impact might look simple on paper, putting it into practice will be tricky — particu-larly as there are no real forerunners

in the international markets.“There is no fund exactly like

ours,” says O’Callaghan, “but there are maybe 10 to 20 funds around the world that have elements of similarity in terms of having a dou-ble bottom line. The phrase that’s come into common usage is, rather than sovereign wealth fund, sover-eign development fund. Sometimes they are tied to a social, rather than economic, impact. But all the funds are quite recent so there is no text-book way to do it and we are all

finding our way.”While Isif’s investment focus will be

on Ireland, it will, “to the maximum extent possible”, seek co-investors, including from outside the country, he adds. That is already happening, including in January when the NPRF and the China Investment Corpora-tion created the China Ireland Tech-nology Growth Capital Fund, which will invest in fast growing Irish tech-nology companies.

In terms of meeting returns, the draft legislation forbids any money to be paid out before 2025, after which a dividend policy of up to 4% a year kicks in. To meet that, Isif’s risk adjusted return can be anywhere on the capital structure, from safe, short

dated assets with a low return to early stage venture capital with juicy prof-its.

“The overall portfolio target is to exceed the cost of Irish government debt,” says O’Callaghan, “otherwise we’re not justifying our existence. By how much we seek to exceed that will be determined by our equity and debt mix. At the moment we’ve been using roughly 50/50. What we’re seeing in the near term are better opportuni-ties for near term economic impact in debt rather than equity.”

The fund has already provided pre-start-up funding to new business Irish Water, which took control of all the water and wastewater services of Ire-land’s 34 local authorities.

The fund’s team has been busy talk-ing to external consultants to devel-op an economic impact framework. While it cannot be precise about the economic activity and employment impacts in advance, it is able to iden-tify sectors that are expected to have a higher impact.

“We intend to put the majority of capital, maybe 80%, into those with high impact things that add to GDP, like exports of internationally traded products,” says O’Callaghan. “Then the rest would go into those with lower impact — where there might be displacement by investing in one business in the domestic market whose success will be to the detriment of another — but that might help accelerate the normalisation of capital markets in Ireland.”

Despite having the bulk of its hold-ings stripped during the crisis when the government took €7bn from the fund to bail out the country’s troubled big two banks — Allied Irish Banks and Bank of Ireland — in 2009, a fur-ther €3.7bn for AIB in 2010 and then another €10bn in 2011 as part of the European Union/International Mon-etary Fund support programme for Ireland, it still has around €6.9bn to invest. s

Ireland’s National Pensions Reserve Fund is set for the biggest shake-up in its history. The fund will morph into the Ireland Strategic Investment Fund, with its focus shifting from international assets to domestic. But crucially — and uniquely, according to the fund — it will hold a dual mandate of delivering returns and an economic impact. Craig McGlashan investigates this bold new model.

Pension reform: breeding invention

“The overall portfolio target is to exceed

the cost of Irish government debt,

otherwise we’re not justifying our

existence”

Eugene O’Callaghan,

NPRF

IRISH SECURITIZATION


A HEDGE fund manager leans back in his seat in a London restaurant. “I’m thinking of buying a house in Dublin” he says. “I’m there nearly every week, and every time I fly, it’s always the same — the plane is full of private equity guys, property guys, other funds. It’s a regular commute.”

In the last year or so, Irish bank deleveraging has turned from a trick-le into a torrent. Pricewaterhouse-Coopers’ loan portfolio advisory unit estimated in March this year that more than €26bn of Irish loan books would trade this year, with €8.5bn of commercial real estate deals and €2.5bn of corporate loans already completed, and another €16bn of portfolio sales in progress.

Big property books are trading to the top US private equity funds — Apollo, Cerberus, Kennedy Wilson, TPG, Carlyle, Blackstone — leav-ing smaller investors to hunt below the radar, trying to pick up bargains beneath the notice of the big players.

Bargain huntersAssets on sale span the spectrum. A high profile bidding war erupted for some of the top trophy commercial properties in Dublin, as Kennedy Wil-son and Northwood Investors fought to unwind a failed Commerzbank securitization, Opera (CMH) last year. But car parks, development loans, half built estates, mortgages per-forming and non-performing, are all on offer, with opportunities up and down the capital stack and in hard assets as well.

Some investment banks are joining in to. Goldman Sachs, Bank of Ameri-ca Merrill Lynch, and Deutsche Bank go toe-to-toe with private equity in bidding for Irish assets on their own account, as well as providing lever-age against the portfolios that private equity firms do win.

Other institutions are less likely to join the bidding, but remain happy to

offer loans to the funds that do. These loans, in turn, are often in securiti-zation format, or use the skills banks have honed in their real estate origi-nation or commercial real estate capi-tal markets departments.

Morgan Stanley, for example, offers financing to the large funds, but not buying for its own account — this typically requires lots of extra infra-structure, such as a loan-servicing platform. Morgan Stanley decided to spin out Morgan Stanley Mort-gage Servicing, selling it this year to Mount Street.

Sometimes buyers or their financi-ers distribute the portfolio risk, but more often, they keep it. Only a few trades, such as Deutsche Bank’s Con-sumer Auto Receivables Finance Lim-ited auto deal, ever come out in rated note format.

“There is a huge demand for senior financing risk in Ireland and few dif-ficulties syndicating risk originated in the country,” said Niall O’Rourke, head of the deleveraging and lending group in Europe at Morgan Stanley in London.

O’Rourke declined to comment on the extent to which Morgan Stanley distributes the risk of its Ireland port-folio financings.

Private equity buyers may also pre-fer to keep their financing on bal-ance sheet to ease the work-out pro-cess, even if investors would like to see some higher yielding Irish assets

come out in bond form.“The assets being sold are most-

ly the ones with a bit of hair. There’s potential for a public ABS takeout at some point but the bank facilities give them time to manage and stabi-lise the portfolio,” says Pat Connors, head of European ABS Finance at Deutsche Bank in London.

Less urgencyAs Ireland stabilises (and once big dis-counts for performing assets are off the table) the pattern of sales is chang-ing. “There’s still a lot of demand from private equity and hedge funds for Irish assets, but the question is how many deals will close,” says Boudewi-jn Dierick, head of flow ABS and cov-ered bond structuring at BNP Paribas in London. “Lots of the banks now have access to funding, and no need to sell assets at a big discount. These funds have high return targets, and if the haircut on a portfolio goes for example from 20% to 10%, it’s much harder to achieve that even when lev-erage is also cheaper.”

But as domestic banks have slowed down their sales process, the for-eign banks in the Irish market have stepped up. RBS, KBC, Lloyds and Danske are still pulling back from the market and selling assets.

“I don’t think there’s going to be a slowdown in the way these trades are getting closed. Domestic banks have sold a lot of what they want to do, but

foreign banks withdrawing from the market have plenty left,” says O’Rourke. “For those banks, AQR and strategic imperatives are more important. Even though they have the funding, they still want to cut their Ireland exposure.”

Though the private market is more lively and lucrative, tradition-al bank sponsored securitization, with public, rated notes and broad syndication, is showing green shoots.

Pre-crisis, Irish securitization was all about financing bank expansion. RMBS notes were a way for international investors to fund Ireland’s extraordinary property bubble, mediated by the bank originators that today are largely in state hands. Post-crisis, the same technology has worked in reverse. Today, securitization is largely being used to finance not the expansion of the banks, but their deleveraging, writes Owen Sanderson.

Financing the deleveraging of Ireland’s banks

“There is a huge demand for senior

financing risk in Ireland and few difficulties

syndicating risk originated in the

country”

Niall O’Rourke, Morgan Stanley

IRISH SECURITIZATION


Only one publicly sold Irish RMBS has been placed since the crisis, Permanent TSB’s Fast-net 9, but the market undoubtedly exists for more.

When Fastnet 9 was issued, last November, price was uncertain. Syn-dicate managers away from the deal expect-ed it to just creep inside a 200bp margin; over-whelming demand took it down to 165bp.

The bonds are now trad-ing around 101.4, from pricing at par. As in other markets, securitiza-tion investors in Europe have been searching for yield, moving out of their post-crisis comfort zones of UK and Dutch RMBS into peripheral assets (where they can be found).

The biggest threat to this emergent market comes not from Irish weak-ness, but from strength — a function of the market’s faith in the Irish sov-ereign.

“Irish banks have very competi-tive financing sources in senior and covered bonds,” says Connors. “ABS is there at a competitive level but it is only one of a number of options.”

Irish banks are now funding at lev-els of 80bp for five year senior unse-cured (Allied Irish was the last issuer in the market in April, though even this bond is now bid over 102), and have ready access to subordinated debt as well. If they are willing to tie up collateral, covered bond funding is available below 50bp.

“Spreads now are at levels that are interesting for issuers to fund via RMBS or ABS, but it takes time to set up deals and place them,” says Dierick. “It’s true that until recent-ly though, covered bonds have seen a lot more volume as that market opened up earlier.”

Permanent TSB, the only issuer to come to the RMBS market so far, does not have an existing covered bond programme, unlike the other large Irish banks.

In structuring its new deal, Perma-nent TSB had to pledge some of its best mortgages to the securitization SPV — loans which had never been delinquent, or which had exhibited such exemplary performance through the crushing Irish property bust it

was hard to imagine how they could lose a cent in any realistic future.

It also added a replenishment fea-ture to deal with “extend and pre-tend” mortgages. Once mortgages are three months behind on their payments, the deal records a paper loss — which can then be cured by the deal cashflows. Without such fea-tures, non-performing mortgages can simply be extended indefinite-ly, or the arrears can be capitalised, increasing the nominal size of the asset pool even as the asset perfor-mance deteriorates.

Doing the deal also tied up a large volume of collateral. Fastnet 9 issued €500m of ‘A1’ notes to the market, supported by €520.4m of mezza-nine and subordinated notes, which it retained — an advance rate of less than 50%.

Why, then, would another bank go through this if it can get covered bonds at 52bp and senior unsecured at 80bp? Diversifying investors is one reason; regulatory treatment (secu-ritizations offer asset and liability matched funding) is another.

Funding non-mortgage assets can be a reason, but deals may not reach the capital markets. Deutsche Bank and Bank of America Merrill Lynch arranged a €500m credit card secu-ritization for Allied Irish Banks late last year, but AIB described it as a “two year floating rate bilateral term funding transaction”, because it remained with the two arrangers.

An easier and cheaper option than setting up a new securitization pro-gramme is remarketing a retained deal, which has been a popular option for Italian banks returning to the secu-ritization market. These deals would have been structured to present to the

ECB for repo, but can be turned into public trades in some cases.

“Ireland has a small-er retained market than some peripheral coun-tries, as it was one of the first countries to be downgraded and RMBS needed AAA ratings at the ECB at the time,” says Dierick. “But it still might be an interesting option for some issuers which have outstanding deals with performing pools.”

Future of funding The future of Irish securitization, like the future of most capital markets, depends on the European Central Bank. Investors have appetite to buy, issuers have access to markets and assets need funding. But the rules of the game are being changed.

At the beginning of June, the ECB came right out with what it had been hinting for months — it would look at purchasing ABS. The details of the scheme are yet to be published, but it is a safe bet that it will focus on real economy lending backed by super-clean homogeneous asset pools.

The ECB could even mean buy-ing untranched ABS — French banks already have a scheme to funnel their SME loans into unrated, untranched, but repo-eligible securities, and the ECB is said to be looking at rolling it out in other eurozone countries — but it will certainly be disruptive to the market as it stands today.

“In general the ECB’s announce-ment that it would look at buy-ing ABS was positive for the mar-ket spreads, but the TLTROs could reduce issuance given the cheap pric-ing. It’s to be determined at present,” says Connors.

So even after the ECB’s big reveal, there is still every reason to keep watching the central bank.

Irish securitization is pulled in two directions from Frankfurt. Banks will continue selling assets, cleaning their portfolios (and offering tempting opportunities to private equity firms) as they jostle to get ready for the asset quality review and for supervision under the ECB. But the fresh tide of cheap money could easily drown the public Irish securitization funding market after only a single issue. s

Source: BofA Merrill Lynch Global Research

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1400bp

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10

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10

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10

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11

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Sov CDS Bank CDS Sov Debt

Covered Bonds RMBS AAA

Spreads of Irish funding products

Source: Bank of America Merrill Lynch


FOREIGN DIRECT INVESTMENT

FOREIGN DIRECT investment (FDI) has played a key role in bolster-ing the Irish economy — one of the worst hit by the global financial cri-sis that has plagued Europe for the past five years.

For Ireland, the recession hit in 2008 — GDP growth dipped into negative territory, government debt as a percentage of GDP surged by 20.8 percentage points to 49.2% and the unemployment rate stood at 6.4% — a marked increase on the previous year’s 4.7% unemployment rate. In 2010, with the government debt as a percentage of GDP at 87.3% (up from 70.1% in 2009), Ireland was forced to accept an €85bn bail-out package from the troika.

Throughout this time, however, FDI continued to flow in, encour-aged by the attractive 12.5% corpo-rate tax rate.

Figures from IDA Ireland, the agency responsible for attracting and developing overseas investment into the country, show that multi-nationals contribute nearly half of all Ireland’s corporate tax revenues, make up 30% of gross added value in the economy and account for €19bn of the country’s total spend.

In 2013 alone, FDI inflows into Ire-land reached in excess of €26bn, or 16% of GDP, according to IDA Ireland.

Brendan McDonagh, director of business intelligence at IDA Ire-land in Dublin, explains that the country’s sell-ing point centres on tal-ent, track record and technology.

“We have an abun-dance of skills, a ready-made workforce and a good place to attract a combination of Irish and multinational talent. We have over 1,000 compa-nies with operations in Ireland and we have a long history in the mar-kets that we target.”

The US is the largest source of direct investment into Ireland with more than 500 US corporations employing in excess of 100,000 peo-ple in the country. These companies, according to IDA Ireland figures, account for more than 70% of total inward investment employment.

Rating agency Standard & Poor’s highlighted FDI as a driver behind its recent upgrade of Ireland’s cred-it rating from BBB+ to A-, noting that it expected FDI “to boost the nation’s economic growth between 2014 and 2016”.

“Attracting FDI has been key to the country,” says Barry O’Neill, found-er and managing partner of Clear-Treasury, a boutique treasury and risk management company based in London. “Ireland is open for busi-ness and keen to grow its economy and that really has come to the fore at a time when the whole country was struggling.”

More than just the taxHaving such a low tax rate hasn’t come without its criticism. Concerns have been expressed on the interna-tional stage that companies are opt-ing to do business in Ireland as a way of reducing their tax bill.

But BNP Paribas’ eurozone econ-omist Colin Bermingham argues

that there are number of different things that have attracted companies through the years.

“The one thing to bear in mind with Ireland is that there has been quite a determined effort to attract FDI for decades — going back to the late 1950s and early 1960s,” he says. “As a result, Ireland has managed to build up an official infrastructure, which is very good in attracting FDI.”

Bermingham also points out that the low corporate tax rate plays only a small part in what is attract-ing corporations to the country. “The regulatory environment is very favourable, it is quite easy to set up a company in Ireland, even as an out-side entity. The ease of doing busi-ness has been something that Ire-land has always been ranked fairly highly on and it is also an area that the government has been quite active on,” he says. “Ireland is also the only English speaking economy in the eurozone.”

Antonio Garcia Pascual, chief euro area economist at Barclays in London, adds: “The low corporate income tax helps, but also the sta-ble legal environment and an effi-cient labour market. Other periphery countries are improving their com-petitiveness and attractiveness to FDI inflows, including through plans

to cut corporate income taxes, but I don’t see them as an immediate chal-lenge [to Ireland].”

He says that, in order to remain competitive, the government needs to continue to invest in its skilled workforce. The IDA and Enterprise Ire-land have been work-ing closely with colleg-es, dedicated technology centres and companies to make sure that the coun-try’s labour force has the right expertise in place when companies come knocking. s

As multinational corporations like Google, Intel, Pfizer and Apple increasingly opt for Ireland as home for their European headquarters, the country is under pressure to remain competitive, writes Jenny Lowe.

On the lookout for the next big thing to keep FDI rolling in

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2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 Outflows of foreign direct investment Inflows of foreign direct investment

France Germany Ireland Italy Greece Portugal Spain United Kingdom $ bn

Outflows and inflows of foreign direct investment

Source: OECD Factbook 2014

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