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Noonan, Bank of Ireland and the Markets - good deal?


Howya

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Irish Times has reported that the Government has sold off its €1billion capital notes that it holds in Bank of Ireland
State sells €1 billion of BoI notes - The Irish Times - Wed, Jan 09, 2013

Is this another deal where the "Markets" have taken advantage?

The loan notes pay 10% annual interest. It is a pretty safe bet for a new investor knowing that if BoI got into trouble down the road that the Government woud step in to shore up the capital base. So in effect the markets have bought (in all but name) a government backed bond at 10%. Why would the government sell now when the markers are open for funding?
 

BrightDay

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On an article relating to this on the RTE website Michael Noonan was trumpething the fact that this money was making a generous 10% per annum since it was invested in July 2011. If the return was so good why was it decided to sell it? Does the new buyer make 10% per annum? Nice return if you can get it.
 

meriwether

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On an article relating to this on the RTE website Michael Noonan was trumpething the fact that this money was making a generous 10% per annum since it was invested in July 2011. If the return was so good why was it decided to sell it? Does the new buyer make 10% per annum? Nice return if you can get it.
Because it was the time to sell?
 

hammer

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Amazing, we should have left the money in Bank of Ireland !!!!

You cant keep everyone happy :)
 

Trainwreck

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Why would the government sell now when the markers are open for funding?
Because government should not be investing in banks with our money? If I want to invest in a bank I will do it myself.
 

Taxi Driver

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Irish Times has reported that the Government has sold off its €1billion capital notes that it holds in Bank of Ireland
State sells €1 billion of BoI notes - The Irish Times - Wed, Jan 09, 2013

Is this another deal where the "Markets" have taken advantage?

The loan notes pay 10% annual interest. It is a pretty safe bet for a new investor knowing that if BoI got into trouble down the road that the Government woud step in to shore up the capital base. So in effect the markets have bought (in all but name) a government backed bond at 10%. Why would the government sell now when the markers are open for funding?
It's a subordinated bond. If BOI gets back into trouble the holders of this will get wiped out. While holding the bond the State had that risk, now some private investors are carrying the risk.

The bond yields 10% which is pretty big but it comes with the risk of being wiped out. The state should not be investing in such risky assets so while the State won't be earning €100 million of interest we now we have a €1 billion of cash and a big reduction in risk.

It is only a guess but I would think that Moody's would look at the government's balance sheet and see a couple of billion of these subordinated bonds on board and say "you want us to raise the sovereign rating above 'junk' when you are holding this risky stuff. Get rid of that stuff and come back to us."
 

Howya

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And BoI tapped the markets for a €1bn back in Nov '12 at an interest rate of just over 3% for a 3 year note - at that yield the loan note just sold should be worth well over a €1bn
 

Howya

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Because government should not be investing in banks with our money? If I want to invest in a bank I will do it myself.
Agreed - but once that money is in, then better getting a decent return than taking the money out.
 

Howya

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It's a subordinated bond. If BOI gets back into trouble the holders of this will get wiped out. While holding the bond the State had that risk, now some private investors are carrying the risk.

The bond yields 10% which is pretty big but it comes with the risk of being wiped out. The state should not be investing in such risky assets so while the State won't be earning €100 million of interest we now we have a €1 billion of cash and a big reduction in risk.

It is only a guess but I would think that Moody's would look at the government's balance sheet and see a couple of billion of these subordinated bonds on board and say "you want us to raise the sovereign rating above 'junk' when you are holding this risky stuff. Get rid of that stuff and come back to us."
It was noted that it was Tier 2 capital with equity conversion rights - I don't know if that is the same thing as a subordinated bond?
 

Watcher2

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It's a subordinated bond. If BOI gets back into trouble the holders of this will get wiped out. While holding the bond the State had that risk, now some private investors are carrying the risk.

The bond yields 10% which is pretty big but it comes with the risk of being wiped out. The state should not be investing in such risky assets so while the State won't be earning €100 million of interest we now we have a €1 billion of cash and a big reduction in risk.

It is only a guess but I would think that Moody's would look at the government's balance sheet and see a couple of billion of these subordinated bonds on board and say "you want us to raise the sovereign rating above 'junk' when you are holding this risky stuff. Get rid of that stuff and come back to us."
I was always under the impression that this was the type of thing the government was trying to secure the famous banking deal on. The thing I dont understand is if the policy is to get the banks back on stable footing (BoI is half of the pilar bank policy), by keeping this 10% coupon alive, it makes BoI's recovery less likely.

Was this a case of sacrificing one lamb to save another?
 

Howya

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Are you being serious?
Sadly yes - if the markets are open as we are being told then why sell these bonds now - we could borrow another 1bn at 3% and make a 7% profit.
 

Bobcolebrooke

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On an article relating to this on the RTE website Michael Noonan was trumpething the fact that this money was making a generous 10% per annum since it was invested in July 2011. If the return was so good why was it decided to sell it? Does the new buyer make 10% per annum? Nice return if you can get it.


Did the State sell its interest at a premium to the amount it paid for the investment. If the State was skimming 300 million odd from BOI wouldit make sense for the investors who bought 16% of the Ordinary Share Capital to buy more of the preferential and Subordinate debt to ease the funding cost of BOI?
 

Taxi Driver

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And BoI tapped the markets for a €1bn back in Nov '12 at an interest rate of just over 3% for a 3 year note - at that yield the loan note just sold should be worth well over a €1bn
In November BOI issued a covered bond. That is very different to the subordinated bond the government sold today.
 

Taxi Driver

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I was always under the impression that this was the type of thing the government was trying to secure the famous banking deal on. The thing I dont understand is if the policy is to get the banks back on stable footing (BoI is half of the pilar bank policy), by keeping this 10% coupon alive, it makes BoI's recovery less likely.

Was this a case of sacrificing one lamb to save another?
If BOI wanted to they could have purchased the bond, but they didn't. Banks need capital on their balance sheet. This is €1 billion of capital.

And yes, this is exactly the sort of thing a "bank debt deal" could incorporate. Some suggestions are that we could sell the banks to the ESM. Well today we managed to sell €1 billion of sub-debt in BOI without any assistance from the ESM.

The DoF have €1 billion of cash and some one else is carrying the risk of BOI needing to burn its capital.
 

Bobcolebrooke

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Will the State now endup with an investment in a Bank that is paying 8.25% for a lot of its capital?

How do you make a profit from such an investment? It leaves the State as Guarantor.
 

Taxi Driver

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It was noted that it was Tier 2 capital with equity conversion rights - I don't know if that is the same thing as a subordinated bond?
Yes, a subordinated bond is below deposits and senior bonds. Sub-debt gets wiped out when banks make losses. Sub-debt holders lost around €15 billion in Irish banks already. Having someone willing to buy €1 billion of it is a very positive move.
 

bonkers

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It's a subordinated bond. If BOI gets back into trouble the holders of this will get wiped out. While holding the bond the State had that risk, now some private investors are carrying the risk.

The bond yields 10% which is pretty big but it comes with the risk of being wiped out. The state should not be investing in such risky assets so while the State won't be earning €100 million of interest we now we have a €1 billion of cash and a big reduction in risk.

It is only a guess but I would think that Moody's would look at the government's balance sheet and see a couple of billion of these subordinated bonds on board and say "you want us to raise the sovereign rating above 'junk' when you are holding this risky stuff. Get rid of that stuff and come back to us."
How is it a risk? Every bond holder has been paid.
 
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