02 Jul 2019

Bank of Ireland Group: 5yr HoldCo senior bond issued at a 0.836% yield

Bank of Ireland (BIRG) issued €600m in five-year senior unsecured HoldCo debt yesterday, amid very high demand from investors. 

The Group issued a five-year bond (callable after four years) with a 0.75% coupon, pricing at a re-offer yield of 0.836% and equivalent to mid-swaps plus 115bps. This was a significant tightening of pricing versus initial pricing thoughts of MS+145bps and revised price guidance of MS+125bps earlier in the day, as order books of €2.7bn allowed BIRG to squeeze the issue spread significantly. Yesterday’s bond issue takes total HoldCo issuance to date to c.€1.8bn, approximately 40-50% of the expected group HoldCo issuance required by 2021. 


While HoldCo debt will act as a slight headwind to NIM, pricing at yesterday’s levels is fully included within consensus NIM expectations and the high demand is a positive for future issuance plans. 


Irish Economy: NTMA comments on issuance

The NTMA’s printers were kept busy yesterday, as the agency released its 2019 mid-year update and 2018 Annual Report, along with providing details of its issuance plans for Q319. 


The agency notes the positive contribution that the funding environment has made to the State’s running costs, with annual debt servicing bill likely to come in at around €4.5bn in 2020, €3bn lower than the 2014 peak. The NTMA hasn’t just been benefiting from a favourable Eurozone funding tide, however, with the agency having undertaken a number of innovations (green bonds, century bonds etc.) in the past number of years that have served to broaden the constituency of potential investors in Irish Sovereign debt. 


In terms of near-term issuance, subject to market conditions, the agency will hold bond auctions on 11 July and 12 September, while it will auction T-bills on 18 July and 19 September. Details of these sales will be released on the Monday prior to each auction. 


The agency is understandably nervous about a number of near-term issues, including Brexit, changes to the global corporation tax regime, and Italy. With the stock of general government debt standing about €200bn, Ireland remains vulnerable to the possibility of increased debt service costs in the medium term, while the country’s reliance on overseas investors for c. 90% of funding needs is a risk factor.


During H119 the NTMA raised €10.25bn from the sale of benchmark bonds, bringing it more than half-way to meeting its full-year funding target of €14-18bn. Given the recent sharp move in yields, the agency will be able to lock in extremely cheap long-term funding which, when combined with the current fiscal surpluses, will permit the refinancing of expensive legacy debt at low rates.


RBA cuts rates

The Reserve Bank of Australia (RBA) opted to cut the cash rate by 25bps to 1.00%, in line with consensus expectations.


The statement from the RBA expressed the view discussed by RBA Governor Lowe lately that the “Australian economy can sustain lower rates of unemployment and underemployment” whilst also pointing to subdued inflation readings across much of the economy. A further factor that also appears to have underpinned today’s decision to reduce rates was the global backdrop, where the slowdown in global growth was mentioned with risks described as tilted to the downside. By way of guidance on whether we can expect further moves, the RBA has now left things open. The statement says that the Board will “continue to monitor developments in the labour market closely and adjust monetary policy if needed." The “if needed” appears to be a pointer to the RBA sitting back for a time and waiting for further evidence before pressing on with any more easing. 


Our own view is that we will see one further 25bp reduction in the cash rate in Q4 of this year. Note that for further clues on the RBA’s next policy steps, Governor Lowe’s speech at 10.30am Irish time may provide a few more details. 


UK manufacturing PMI

The PMI pointed to a steeper pace of contraction in the UK manufacturing sector. 


It fell to 48.0 in June from 49.4 in May, with 48.0 representing the lowest level since February 2013. Consensus expectations had been for 49.5 and our forecast was 49.4. The weak PMI reflects the continued impact of pre-Brexit stock building effects, as firms built inventories in the run up to the initial 29 March Brexit date. Indeed, the survey compiler IHS Markit reported that “high stock levels….led to a scaling back of output and new order intakes”. 


Additionally, demand from foreign markets was also reported as having weakened, with specific mentions of reduced intakes of new work from the US, mainland Europe and Australia, amidst worries over the global backdrop.


Pound swings on Brexit headlines

As expected, Brexit headlines continue to exert pressure the pound, as GBP lost, then gained by 0.50% against the euro over the course of the day.


The drop came early in the morning, coinciding with Tory leadership hopeful Jeremy Hunt, releasing his 10-point plan to deal with Brexit negotiations. The plan was a clear attempt to sway Brexit favouring Tory party members away from Boris Johnson, as the plan focused significantly on a no-deal preparation, with 7 of the 10 points focused on protecting the UK from a no-deal outcome. Most significantly, Hunt promised that he would cease all negotiations beyond 30th September if he felt there was no change of a deal being agreed or ratified, spending the last month of the extension solely on preparing for a hard exit from the EU.


The second shift in EUR/GBP came late in the afternoon, as the amendment tabled by pro-Remain MP’s including the Tory party’s most vocal Brexit rebel Dominic Grieve failed to get approval to be brought forward for a vote. The amendment, which attempted to curtail the government’s spending powers in the case of a no-deal Brexit unless they achieved parliamentary approval was rejected by speaker John Bercow. The amendment, which achieved support from MP’s in the Labour, Tory, Change UK and Plaid Cymru parties had raised concern even amongst some remainers as being too extreme, as it could potentially leave government departments in funding limbo in the case of a no-deal Brexit. The pounds reaction reflects this, as GBP breathed a sigh of relief yesterday afternoon rebounding by almost 1% against the Euro.  


With this volatility likely to continue in GBP crosses until the leadership contest is completed (and probably further until 31/Oct), market orders are a useful tool to take advantage of swings in currencies which is so prone to newspaper headlines and shifting sentiment.


Economic Releases 

09.30  UK      Construction PMI

09.30  EC      ECB’s Knot, Vasiliaukas speaking

11.35  US      Feds’ Williams speaking

15.05  UK      BoE’s Carney speaking

16.00  US      Fed’s Mester speaking