LONDON, May 30 (IFR) - Bank of Ireland's senior unsecured comeback raised hopes that the country's banks could once again fund across the whole capital structure, but an underperformance in the secondary market is tainting the deal's success.
The sale of the EUR500m three-year bond - the first of its kind from an Irish bank since the crisis - was seen as the next logical step for the institution.
The bank, the only one in Ireland to have avoided full state ownership, has already issued covered bonds, and confidence in its credit has improved to such a degree that the state was able to exit its holding of a EUR1bn three-year CoCo in January.
"Issuing senior unsecured bonds is a significant milestone for the bank," said Darach O'Leary, head of wholesale funding at Bank of Ireland.
"This issuance provides further evidence of the progress made by the group, especially considering the significant support from investors in the book building process."
And for this very reason, lead managers BNP Paribas, Deutsche Bank, Morgan Stanley and RBS announced the mandate on Tuesday afternoon and then carefully tested interest for the bond on Wednesday morning at mid-swaps plus 225bp area.
The pricing was clearly attractive, as some 120 accounts combined to build a well subscribed EUR1.25bn book from a wide variety of investors.
But following pricing, the bond widened in secondary trading by 15bp, underperforming the broader market.
"It's very disappointing considering Bank of Ireland is one of the few banks in Europe to issue covered bonds and placed CoCos with investors," said one.
"The unsecured nature of the transaction meant that if ever there was need for a new issue premium, this was it."
Lead managers, as well as Bank of Ireland's O'Leary, conceded that market volatility meant that the deal had lost support since pricing.
"Bank of Ireland had the most successful bookbuild of the day in terms of subscription levels, but by the end of Wednesday's trading it was coming under pressure," said one lead manager.
While a number of bankers claimed the pricing was too tight, lead managers explained that calculating relative value was no easy task given the bank had been absent from the senior space since 2008.
There were two outstanding BKIR covered bonds to look to, however - a three-year that was sold last November and a five-year sold in March.
Those deals gave lead managers a vague guide on how to position an unsecured trade, but with no fresh senior paper from the country, bankers decided to look elsewhere for assistance.
"We first looked to the differential between senior and covered bonds in Spain and Italy, which was calculated as anywhere between 80bp and 130bp," said a banker.
"Then we looked to Bank of Ireland's outstanding three- and five-year covered bonds and on an interpolated basis saw fair value at around 125bp."
The senior/covered differential was added to that 125bp, along with a new issue premium, to get the initial guidance of 225bp area.
And although some may think the pricing was not ideal, O'Leary said the bond achieved everything the bank was hoping for.
"Given the quality of the orderbook and allocations, we are confident that this bond will provide investors with solid performance given the fundamentals of Bank of Ireland," he said.
In terms of the distribution, asset managers proved most receptive, taking 73% of the bonds. Banks took 12%, pension funds and insurance companies 8%, private banks 6%, and others 1%.
By geography, Germany took 18%, Italy 17%, the UK 15%, France 15%, Iberia 10%, the Nordics 9%, Switzerland 8%, Ireland 3% and others 5%.