EUrOWEEKIreland In the CapItal Markets

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June 2013

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Ireland in the Capital Markets | June 2013 | EUROWEEK 1

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EUrOWEEK

02 foreword by the minister for finance Reputation restored

03 economic overview Ireland’s next trick: sustainable recovery

09 ntma roundtable Sovereign drives Ireland’s capital market return

16 banking sector Battered financial sector regains forward momentum

19 corporate issuers More supply needed as companies re-engage

21 foreign direct investment Taking the right FDI pills

Contents: Ireland In the CapItal markets

2 EUROWEEK | June 2013 | Ireland in the Capital Markets

Foreword by the Minister For Finance

I welcome this special report on Ireland by EuroWeek. It comes at a time when Ireland has succeeded in returning to the debt markets and is on course to exit the EU/IMF programme of finan-

cial assistance at the end of 2013.The Government’s primary policy objective is to

grow the economy and to foster the conditions for increased employment. In 2012 Ireland recorded its second straight year of real GDP growth, following the deep recession that began in 2008. Last year, Ireland was among the fastest growing euro area economies and consensus forecasts predict that trend to continue in 2013 and 2014.

The National Treasury Management Agency (NTMA) has been active in the long-term and short-term debt markets in recent months and investors have responded enthusiastically. A total of €2.5bn of a five-year benchmark bond was sold at a yield of 3.32% in January 2013 with broad-based demand skewed towards real money buyers. Ireland then issued €5bn of a new benchmark 10 year bond in March 2013 at a yield of 4.15%, the first new 10 year issuance from Ireland since January 2010. More than 400 institutional inves-tors participated — mainly from outside Ireland. These transactions represent a significant return by Ireland to normal market funding and the NTMA plans to further consolidate this progress in the second half of 2013 and beyond.

The NTMA has been very active in meeting inves-tors on roadshows to inform them of the steady improvement in Ireland’s creditworthiness. Of course there has been a flow of positive news on Ireland’s debt position and the Irish economy generally in recent times. The deal, following the liquidation of the wind-down bank IBRC in February, to replace the promissory notes which had been issued to IBRC with much longer dated Irish Government bonds and the maturity exten-sions on the loans from the EFSF and EFSM by seven years, have reduced Ireland’s funding needs by some €4bn each year over the next decade or so, making Ire-land’s debt position more sustainable. The sale of the State’s holding of €1bn in Bank of Ireland Contingent Capital Notes and of Irish Life has also improved the funding position.

In relation to the public finances, our primary aim remains the correction of the excessive General Gov-ernment deficit by 2015. We have met, and in 2011 and 2012 outperformed, all our interim deficit targets and the Government remains committed to bringing the deficit below 3% of GDP within the stated time hori-zon. Ireland is forecast to achieve a primary budget surplus (excluding interest payments) in 2014 for the first time since 2007, of sufficient size to stabilise the debt to GDP ratio. Beyond 2015, fiscal policy in Ireland will be framed in line with the requirement to make sufficient progress towards the medium term budget-ary objective and to put the public debt to GDP ratio on a downward path.

Bank deleveraging is almost complete: this will mean that the domestic banking system is the correct size for the economy. The Eligible Liabilities Guarantee (ELG) scheme has ended for new bank liabilities and all three of the covered banks have returned to market-based funding. Covered banks’ usage of ECB funding facilities has fallen significantly and is down from a peak of €156bn in February 2011 to €39bn as of April 2013. The covered banks have significant capital buffers available for future potential losses. Personal insol-vency legislation has been reformed and the Central Bank is working to ensure a sustainable resolution to the mortgage debt overhang, in part by setting specific time-bound restructuring targets. Options for the State to exit its investments in the banks are constantly kept under review.

2012 was a year of further substantial progress for NAMA. It reported a profit for the taxpayer net of impairments for the second year in a row and is set to continue on this path. It has generated more than €12bn in cash from April 2010 to end May 2013. It is using this cash to pay down NAMA’s debt on schedule — €6.5bn has been repaid already — and, where appro-priate, to provide funding to protect and enhance the value of its assets, so that it can maximise the amount that it ultimately will recover for the taxpayer.

More generally, the Government continues to look at ways to develop the real economy and to restore com-petitiveness. Ireland’s price level and its unit labour costs have fallen significantly relative to its trading part-ners, helping to turn a large Balance of Payments deficit into a surplus. The inflow of foreign direct investment in 2012 was the highest for a decade and the pipeline is healthy. Public sector pay will be further reduced. Investment in infrastructure is set to expand in 2014 and 2015, as Exchequer funding is supplemented by Public Private Partnerships. Pillar banks have been set targets to lend to small and medium-sized enterprises (SMEs) in order to ensure that there is adequate credit for this sector to grow and to create employment.

Under the Ireland Strategic Investment Fund (ISIF) initiative, the Government is re-orienting the Nation-al Pensions Reserve Fund and making its €6.4bn of resources available for commercial investment in areas of strategic importance to the Irish economy. The ISIF will leverage its resources by attracting co-investment from third-party investors and will seek to recycle its investments over time in line with its new mandate.

Ireland has progressively restored its reputation in financial markets over the last two years. Investors have responded by investing at yields below those which could be obtained before the financial crisis. The credit rating agencies remain cautious, because Ireland’s pros-pects are closely tied to developments in the broader euro area, but, Ireland’s ratings have stabilised. It is clear that normalisation is well underway. I commend this supplement to you and hope that you find it useful and informative. s

Reputation restored by Michael Noonan, TD, Minister for Finance

Economic ovErviEw

Ireland in the Capital Markets | June 2013 | EUROWEEK 3

If there were such a thing as a mini-league of the economies that have undergone troika reform pro-grammes since the financial crisis, Ireland would win, hands-down. that was the clear message of a report pub-lished at the end of May by the Brus-sels-based think tank, Bruegel, which compared the recent performance of Ireland, Portugal and Greece.

Its conclusion was that while the troika programme has been a failure in Greece, and only “potentially” suc-cessful in Portugal, it has met and in many instances surpassed expecta-tions in Ireland.

Dublin’s recovery programme was not quite given full marks by Brue-gel, which describes Ireland’s unem-ployment rate as disappointing. But as Bruegel and most other analysts acknowledge, the most striking feature of Ireland’s economic performance over the last two years or so has been its delivery on so many of the targets.

“expectations were very low at the beginning of the troika programme, so it was easy to surpass them,” says Kevin Daly, european economist and executive director at Goldman Sachs. “But our contention back in 2011 was that the main risks to the Irish econo-my were external rather than internal. we remain confident that while Ire-land would be vulnerable to a renewed eurozone crisis, the likelihood of Ire-land defaulting in isolation is remote.”

the restoration of order to Ireland’s public finances support this view. As the Department of finance reported in its Stability Programme update at the end of April, “on the fiscal front, the Maastricht returns published [in April] highlight the progress we are making in restoring order to the public financ-es. An underlying deficit of 7.6% of GDP was recorded for 2012, well within the eDP [excessive deficit procedure] target of 9.6%. An underlying deficit of 7.4% is forecast for 2013, inside the

eDP target of 7.5%. My department remains confident that the fiscal strategy to reduce the budget deficit to below 3% by 2015 is on target.”

Exports to the rescuethe fiscal recovery has been sup-ported by growth, which at 1.4% in 2011 and 0.9% in 2012 may not have been electrifying, but it is better than most of Ireland’s eU competitors have recorded. “real GDP growth has been sluggish, but at least Ireland is growing, which is impressive, given the problems in the rest of the euro periph-eral countries,” says Daly at Goldman Sachs. “the turnaround in nominal GDP has been quite a bit stronger, which has had an important knock-on effect on the fiscal side, with tax receipts higher than expected in 2012.”

Other analysts agree that Ireland’s performance in relative terms has been noteworthy. As Morgan Stanley com-mented in an update published in feb-ruary, “even on our cautious forecasts, Ireland will be the strongest growing country in the euro area this year”.

the chief driver of Irish growth has been exports, which rose by 5.1% in 2011 and 2.9% in 2012, according to data published by the Irish Central Sta-tistics Office (CSO). that represents quite a turnaround, given that between 2004 and 2007, the contribution of net exports to economic growth was small or negative, according to the National Competitiveness Council.

“the contribution made by exports to GDP growth over the last three years has been huge,” says Blerina Uruci, UK and Ireland economist at Barclays in London. “the key to ensuring that Ireland has avoided falling into a very negative spiral has been the increased competitiveness of its exporters, which have been helped by the real devalua-tion of the exchange rate.”

According to the most recent inves-tor presentation from the National

treasury Management Agency, Ire-land’s real effective exchange rate has now returned to its 2002-03 levels, and has fallen by some 17% since its peak. Of the other eU members, only Poland, Latvia and hungary have seen greater falls, while the declines in other troubled peripheral countries was just under 12% in Spain, 3.5% in Greece and 2.9% in Portugal.

that decline, says Uruci, has been driven mainly by the sharp correc-tion in prices in recent years, and most notably by the progressive decline in Ireland’s unit labour costs. According to data published by the NCC, from a high of 9.1% growth in 2001, Irish labour costs fell by 0.6% in 2010 and 1.7% in 2011. “this represents a gain in cost competitiveness as labour costs continue to rise in the eU and euro area,” notes the NCC.

Ireland’s bright export story may, however, be starting to lose some of its gloss. As Davy noted in an update pub-lished in March, “monthly data on Ire-land’s export performance have paint-ed a worrying picture”. Specifically, Davy noted that goods export volumes fell by 7.5% in the last quarter of 2012.

“exports have been a stabilising anchor for Ireland over the course of the crisis, but they are starting to slow and we’re unlikely to see the same strength in exports growth in the com-ing years that we saw between 2010 and 2012,” says Owen Callan, senior

That ‘Ireland’ and ‘success story’ are words that go together just 2-1/2 years since the embarrassing and traumatic bail-out is nothing short of remarkable. Strong exports have provided much of the positive momentum that could make Ireland the euro area’s strongest growing country this year. But, as Philip Moore reports, it remains to be seen whether this impressive growth is sustainable, given the magnitude of Ireland’s debt, weak domestic demand and high unemployment.

Ireland’s next trick: sustainable recovery

“Unemployment is still high, but it is

already well below its peak of 15%, so it is moving in the

right direction”

Kevin Daly, Goldman Sachs

Economic ovErviEw

4 EUROWEEK | June 2013 | Ireland in the Capital Markets

analyst, fixed income strategy at Danske Bank in Dublin. “Against that, however, given that 45% of Ire-land’s trade is with the UK and the US, it probably has a unique oppor-tunity to outperform its competi-tors in the eurozone which are more dependent on intra-eU trade.”

Davy forecasts that for 2013 as a whole, annual Irish exports growth will average 2%, but many econ-omists warn that external risk remains a concern, given how open the Irish economy is compared with other peripheral eU members. Accord-ing to NtMA’s data, exports and imports account for 106% and 84% respectively of Ireland’s GDP. By con-trast, they represent 30% and 31% of Spain’s, 29% and 30% of Italy’s and 35% and 39% of Portugal’s.

Ireland’s Achilles’ heelthe snag with Ireland’s strong export story of recent years is that it has done little to fuel domestic demand, in part because many of the industries in which Irish exporters excel are rela-tively modest employers. the pharma-ceutical sector, for example, employs just 22,000 people, but accounts for a whopping 10% of GDP.

“It may be that on a net basis not too many jobs have been created by the exporters, but we have seen strong job creation in the services sector,” says Callan at Danske. “while we’ve lost some jobs on the manufacturing side at companies like hP and Dell, we have seen Google, eBay and Microsoft adding jobs in the services side of the exporting sector.”

Perhaps. But spare capacity in the manufacturing sector and the failure of industry to create jobs on a meaning-ful scale is just one of a host of reasons explaining why Ireland’s domestic economy remains weak and, by some measures, seems to be weakening even further. In March, retail sales volumes declined by 2.2%, their fastest annu-alised fall in nine months. In the first quarter, meanwhile, tesco saw like-for-like Irish sales slip by 3%, blaming “a significant reduction in consum-er sentiment and spending following the announced introduction of a local property tax on residential properties”.

“Domestic demand has been Ire-land’s Achilles’ heel,” says Uruci at Bar-clays. “this isn’t surprising when you consider Ireland’s high level of house-hold debt, the fall in nominal and real

incomes we’ve seen over the last five years, high unemployment levels and the bursting of the property bubble. this has all led to an increase in sav-ings and a general deleveraging in the household sector.”

Until recently the net result had been what Uruci describes as a “strik-ing divergence between the contribu-tion to GDP of domestic and external demand”. She adds that this gap has been narrowing as exports have slowed and the first, hesitant signs of a rise in domestic demand start to emerge. “we think domestic demand has bottomed out and may start to make a positive contribution to growth beginning in 2014,” she says.

At Goldman Sachs, Daly agrees. “Slowly but surely, the improvement which has been led by the external side is beginning to feed into the domestic economy,” he says. “Unemployment is still high, but it is already well below its peak of 15%, so it is moving in the right direction.”

household finances may also be edging in the right direction after a long decline. According to NtMA, household net worth improved in the second half of 2012, for the first time since 2007. the improvement needs to be seen in perspective, because there has still been a grim decline of 36% (or €260bn) since mid-2007, compared with a peak-to-trough fall of 38%.

the principal risk to this fragile recovery in consumer confidence, say bankers, is the precarious state of the housing market. even though house prices have begun to recover in the Dublin metropolitan area, on a nation-wide basis they remain some 50% below their pre-crisis level.

The debt dilemmaAchieving sustainable levels of growth will be critical to Ireland’s longer term recovery prospects, given the mag-nitude of Ireland’s debt. As the NCC

acknowledges in its 2012 Competi-tiveness Scorecard, “at approximately 400% of GDP, the cumulative debt in the Irish economy, encompassing all of the debts owned by enterprises, house-holds and government to both domes-tic and international lenders (but excluding the debts associated with financial corporations), represents the single greatest challenge facing Irish policymakers. excessive levels of debt act as a major constraint on econom-ic growth and negatively impact on all economic sectors.”

while economists recognise the challenge presented by Ireland’s debt mountain, most believe that Ireland’s government debt to GDP ratio, which is expected to peak at just over 120% in 2013 and fall thereafter to about 110% by 2016, is probably sustainable. “the deal Ireland completed on the promis-sory note in february was a significant help in terms of the debt, but an agree-ment on legacy debt would be even better because it would bring the debt to GDP ratio down by about 20pp,” says Uruci. “there was some hope last sum-mer that there would be a deal when eU leaders expressed their commit-ment to break the loop between the banks and sovereign risk, but at this point we think this is unlikely.”

“Nevertheless,” she adds, “given healthy nominal GDP growth of 3%-4% and interest rates of 4%-5%, the debt trajectory looks sustainable.”

Danske’s Callan agrees, although he says that the support of the eU is piv-otal. “Debt is clearly a problem,” he says. “Interest payments are about 20% of government revenues and 4.9% of GDP. Bringing this down will obviously be one of the government’s main fiscal challenges. this is why the extension of the efSM and efSf loans at low rates and very long maturities has been so important for Ireland. this year alone about 35% of Ireland’s debt has been refinanced into long term debt which is important, because if you can keep the interest burden low enough then the nominal debt itself isn’t nec-essarily a problem.”

Public support for reformCritically, say economists, there is still broad recognition at a popular level of the long-term benefits of the harsh economic medicine Ireland is being compelled to swallow. “Clear-ly, there has been much less unrest in the labour force and among the gen-

“Domestic demand has been Ireland’s

Achilles’ heel”

Blerina Uruci, Barclays

Economic ovErviEw

Ireland in the Capital Markets | June 2013 | EUROWEEK 5

eral public in response to the austerity measures than there has been in some other countries,” says Callan.

there are, however, indications that opposition to reform may be gathering momentum. At Barclays, Uruci points to the recent refusal of the unions to agree to the government’s recent pro-posals to cut the public sector wage bill by €200m this year, as part of a broad-er plan to save €1bn in expenditure by 2015. “the government has played this down, saying it has plenty of time to make cost savings between now and 2015, but the failure of the wage agree-ments suggests that reform fatigue may be creeping in,” she says.

historically, however, when Irish residents have not liked what they have seen in the domestic economy they have generally preferred to vote with their feet than take to the streets. Last year, according to NtMA’s data, 87,000 people emigrated from Ireland while 53,000 moved the other way, giv-ing a net migration figure of 34,000. As NtMA notes in its most recent inves-tor briefing, this means that migration is still not as serious a problem as it was in the late 1980s. But it is pushing up towards 1989’s numbers, when net migration was 44,000. It will also be a concern to the Irish authorities that the number of emigrants was higher in absolute terms in 2012 than it was in 1989, when 71,000 packed their bags.

At Danske in Dublin, Callan cautions against comparing today’s total figures with those from the late 1980s, for two reasons. the first is that the increase in the population over the last 25 years means that as a percentage the gross number of emigrants is still down on the late 1980s.

the second is that the comparison does not take into account the ryanair factor, which is allowing people to fly around the globe at a fraction of what it cost to do so in the 1980s. these days, low-cost airlines can speed people back

home as quickly as they can fly them away, as Ireland proved at the top of the boom in 2006 and 2007, in each of which more than 100,000 immi-grants arrived in the country.

Regaining market access for the time being, fixed income investors have demonstrated that they are prepared to give the durabil-ity of the Irish recovery the benefit of the doubt. that was strikingly appar-ent from the reception they gave to the sovereign when it capitalised on heightened risk appetite to make a highly successful return to the syn-dicated bond market on a standalone basis in January.

Ireland’s €2.5bn tap of its October 2017 benchmark, bringing the size of the issue to €6.4bn, was led by Bar-clays, Danske, Davy, rBS and Société Générale, and generated demand of more than €7.5bn.

NtMA built on the success of Janu-ary’s benchmark in March, extend-ing its yield curve by printing a new €5bn 10 year issue via Barclays, Dan-ske, Davy, Goldman Sachs, hSBC and Nomura which generated orders of about €13bn.

Both transactions were highly sig-nificant landmarks which met the NtMA’s principal objectives of dem-onstrating not just that Ireland had regained market access, but had done so in different maturities and at a mini-mal concession to its secondary curve. while the five year trade was priced at 250bp over swaps, which equated to a 5bp concession, the longer 10 year bond was offered at 240bp, which was flat to Ireland’s curve.

Another priority for Ireland in its return to the bond market in 2013 has been to diversify its international investor base and to cultivate a broad-er and deeper following among real money accounts. It has not done badly on either score, with well over 80% of

both benchmarks placed with inves-tors outside Ireland, and 90% of the 10 year bond bought by fund managers, pension funds, insurance companies and banks.

Ireland was under no pressure to raise funding in the first quarter of this year, and has already met its fund-ing needs for this year. Its longer term requirements, meanwhile, have been substantially reduced thanks to the promissory note deal, which cuts €20bn from NtMA’s funding require-ment over the next 20 years. It has also been diminished by the eU’s deci-sion, announced in April, to extend the maturity of efSM and efSf loans to Ireland (and Portugal) by seven years. As Davy advised before the official announcement, “we expect at least €10.5bn of eU loans due to mature in 2015-2016 will be rescheduled to ease Ireland back into regular market access. this compares with the €40bn Ireland had been expected to have to raise during these years.”

these developments mean that NtMA will be under no pressure to fund over the short term. As Nomu-ra’s head of eMeA syndicate, Nick Dent, says, that is good news given the volatility in markets in recent weeks. “Unless we see exceptional funding conditions towards the end of this year, I wouldn’t expect to see Ireland back in the market with significant volumes until early 2014,” he says. s

“The extension of the EFSM and

EFSF loans at low rates and very long maturities has been

so important for Ireland”

Owen Callan, Danske Bank

“I wouldn’t expect to see Ireland back in the market with

significant volumes until early 2014”

Nick Dent, Nomura

2011 2012 2013f 2014f 2015f 2016fGDP (% change, volume) 1.4 0.9 1.3 2.4 2.8 2.7

GNP (% change, volume) -2.5 3.4 0.8 1.8 2.0 2.0

Current account (% GDP) 1.1 4.9 5.0 5.1 5.2 5.3

General gov debt (% GDP) 106.4 117.6 123.3 119.4 115.5 110.8

Underlying gov balance (% GDP) -9.1 -7.6 -7.4 -4.3 -2.2 -1.7

Inflation (HICP) 1.1 2.0 1.2 1.8 2.0 2.0

Unemployment rate (%) 14.6 14.7 14.0 13.3 12.8 12.3

Economic and fiscal forecasts: Ireland’s stability programme update, April 2013

Source: Department of Finance, Stability Programme Update (Apr 2013)*

Underlying: ex-banking recapitalisation

6 EuroWeek Ireland in the Capital Markets

NTMA Roundtable

EUROWEEK: The IMF says at the start of its most recent report on Ireland that “the government’s market access is deepening, fiscal results were better than expected in 2012, and recent indicators sug-gest an upward revision to 2012 growth estimates.” Is Ireland on track to exit from the Troika programme within the next six to 12 months?

Rossa White, NTMA: The economic situation in Ireland has been quite stable over the last couple of years.

Clearly the first thing all market investors want is for a country to meet its fiscal targets and Ireland is unique

within the euro area in the sense that it has been on track on every step during its fiscal programme. Back in 2011, we beat the deficit target handsomely by 1.5 percentage points GDP. Last year again we were one point better than targeted. But growth has been similar in each year, rising by more than 1% in each of the last two years.

So Ireland has given the lie to the idea that you can’t have a successful consolidation without putting growth under pressure because the fiscal multiplier is too high. In both of those areas, confidence has built up over the last two years.

Participants in the roundtable were:

Susan Barron, director, frequent borrower origination, Barclays, London

Owen Callan, senior analyst, fixed income strategy, Danske Bank, Dublin

Nick Dent, managing director, head of EMEA syndicate, Nomura, London

Lars Humble, managing director, head of SSA syndicate, financing group, Goldman Sachs, London

Anthony Linehan, deputy director of funding and debt management, National Treasury Management Agency (NTMA), Dublin

Hugo MacNeill, managing director, investment banking division, Goldman Sachs, London

Samu Slotte, head of SSA origination, Danske Bank Debt Capital Markets, Helsinki

Paul Spurin, managing director, EMEA flow rates trading, global markets, Nomura, London

Oliver Whelan, director, funding and debt management, National Treasury Management Agency (NTMA), Dublin

Rossa White, chief economist, National Treasury Management Agency (NTMA), Dublin

Moderated by Phil Moore, EuroWeek

Sovereign drives Ireland’s capital market return

The very positive response from investors to Ireland’s return to the international bond market at the start of this year was in part a reflection of the vastly improved sentiment that followed the ECB’s momentous OMT initiative last summer. But it is churlish to ascribe the success of Ireland’s return to the market purely to external factors or to short-term swings in investor sentiment. The strength of investor demand for Irish credits over the last nine months is also a clear endorsement of the continued recovery of the economy, the strengthening of public finances and the accelerated deleveraging in the banking system.Representatives from the National Treasury Management Agency (NTMA) and a number of bankers gathered at the EuroWeek roundtable in June to exchange views on what Ireland has achieved over the last two years, and on the challenges and opportunities that lie ahead.

Ireland in the Capital Markets EuroWeek 7

NTMA Roundtable

The other key factor in Ireland is that it has gone about its business exactly as it said it would during the pro-gramme. We’ve had a series of quarterly targets which allow investors to track our progress, and we have con-sistently met those targets. We haven’t shocked the mar-ket over the last couple of years. In fact, when we have surprised the market it has been in a positive sense, such as with the recent promissory note deal. So the trend has been favourable.

Although we’re only half way through this year, so far so good on the fiscal numbers for 2013. So having built up a 2-1/2 year track record, it will be a case of continu-ing to deliver on our quarterly targets over the rest of this year.

EUROWEEK: And investors have been responding positively, haven’t they?

Oliver Whelan, NTMA: Yes. There has been a very good response to the two syndications we’ve launched so far this year, a five year issue in January and a 10 year benchmark in March, through which we raised a total of €7.5bn.

We had a very well diversified book for each of these benchmarks, with a preponderance of real money inves-tors and very little participation from alternative asset managers. We had a good geographic spread of investors, with strong demand from the UK, mainland Europe and Scandinavia as well as domestic investors. We also had significant participation from the US in both transactions.

In terms of reaching our objective of having full mar-ket access, we would like to issue a little bit more, per-haps through a series of auctions. We haven’t made any announcement about that yet, but our target for the year was to issue €10bn, and so far we have raised €7.5bn, so there is some scope for auctions, which we plan to do later in the year.

Of course, that opens up the potential for OMT eligibil-ity. It also helps to achieve our target, which is a cautious one, of having sufficient cash in hand at the end of this year to cover us for 12-15 months ahead. This is a target that the Troika has endorsed and it has appeared in all our documentation. We view this as a sensible strategy because irrespective of whether any sort of precautionary credit line is made available, it is prudent to have a cash buffer in place. That is what we are working towards and investors are very comfortable with this strategy.

EUROWEEK: Going back to the macro side for a moment, to what extent are investors comfortable with the macroeconomic picture? Much of the suc-cess of the five and 10 year transactions was obvi-

ously driven by the turnaround in investor sentiment towards Europe since the Draghi speech last summer. But to what extent has it also been driven by inves-tors’ response to Ireland’s macroeconomic indicators?

Nick Dent, Nomura: The catalyst for the investor feed-back we’ve had from late last year was the announcement of the budget, where the numbers were a lot better than investors were expecting. Yields were already coming down at the end of 2012, and this continued into 2013.

The tap was announced on January 8, and from that point onwards the NTMA has been very prudent about how it has approached and accessed the market. Printing €2.5bn of the tap at 5bp back from Ireland’s curve and with such a strong book was a very impressive achieve-ment. It almost left investors wanting more, and I think that naturally led NTMA to the next stage of its funding programme which was pushing down the curve and launching the new line, which was the €5bn 10 year benchmark.

Demand was driven by investors’ recognition that Ireland’s fundamentals were turning around and they bought into the prudent and sequential approach adopted by the NTMA.

Lars Humble, Goldman Sachs: Both syndications proved that traditional European government bond buyers were prepared to buy into the Irish recovery story. In spite of Ireland’s split rating, as Oliver said we saw some very high level support from investors throughout Europe.

There were some concerns about demand going into the first syndication, but investors’ response showed that the Irish recovery is well and truly underway, and that they are confident that the story is underpinned by sound macroeconomic fundamentals.

If you look at the relative value of Ireland versus some of the other European countries, it is clear that investors value the fundamental economic situation in Ireland.

Susan Barron, Barclays: The investor work that the NTMA conducted was also very important. It started from a very early stage, which made the roadmap for its return to the market very clear, and also allowed the NTMA to show the achievement of each of the milestones it passed along the way. I think this all gave investors additional comfort and allowed them to focus on the sustainable recovery path.

Samu Slotte, Danske: I agree that the NTMA has done a very good job in being open with investors and transpar-ent about what its next steps would be. As Lars said, most of the traditional European government bond buyers par-ticipated in this year’s two syndications. What we’re still missing is much of the central bank community outside Europe. But I’m sure that demand will come as and when ratings improve.

EUROWEEK: Were there any notable changes in the way NTMA roadshowed either or both of this year’s syndicated deals?

Anthony Linehan, NTMA: Clearly there has been some change over time in terms of the investors that we’ve met. But I think it has been the consistency of our market-ing, and the consistency of our approach to meeting and updating investors that has borne fruit over time. In the earlier days that was a longer haul because deals seemed further away.

Now investors are up to speed. That’s important when you’re a small country because people can forget to look

Oliver Whelan, NatioNal treasury MaNageMeNt ageNcy (NtMa)

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at you. So that constant updating of investors has been very important.

Owen Callan, Danske: As Rossa said at the start, one of the most important points about the programme is that it has been predictable, and there have been no unpleas-ant surprises along the way. Ireland has been inching its way back to normality from a fiscal perspective, as well as from a growth perspective and a market point of view.

The low volatility in Irish spreads and Irish yields has been one of the things that has encouraged people to invest more. Low volatility has meant that investors have been relaxed when spreads have retraced by 5bp or 10bp. In Spain and Italy you see much more volatility on a day to day basis.

In Spain investors have been concerned about whether the economic cycle has found a base yet, and in Italy there has been political uncertainty. Ireland has escaped from that negative spiral. It is now in a much more posi-tive spiral, which has meant that from an investor’s point of view Ireland has been a position that has been much easier to keep.

Politically there have been very few shocks because the opposition is broadly supportive of the programme. Fiscally Ireland has outperformed most of the time, and any underperformance has been benign and short-lived before kicking back into gear. So from an investor’s point of view it has been a perfect situation which was reflected in the 12 uninterrupted months of performance that we saw after the referendum last year.

EUROWEEK: You make the comparison with Spain and Italy, but was it ever appropriate to bundle Ireland in with some of the southern European coun-tries, which are very different to Ireland, economically and culturally?

Callan, Danske: The assumption was that the troubled European countries were in trouble for the same reasons. The common narrative was that monetary policy in the eurozone was broken and that the fiscal imbalances in some southern European countries were very similar to Ireland’s.

That was an over-simplification because all countries in the eurozone are obviously different. But Ireland is much more of an Anglo-Saxon economy than Spain or Italy. Some 45% of all its trade is with the US and the UK, which makes it very different from the rest of the euro-zone.

We had a banking sector crisis and a huge fiscal imbal-ance that needed to be rectified, but in many ways the Irish economy was much better placed structurally than some of those in southern Europe. From a long term demographic perspective Ireland is also very different from a country like Italy.

It was a generalisation that was probably too readily used. I don’t think Irish people wanted to be compared with southern European economies, not because they felt southern Europe was inferior, but simply because we had our own strengths and our own weaknesses which needed to be addressed independently. There was a feel-ing that a pan-European response to the crisis was not appropriate.

Hugo MacNeill, Goldman Sachs: I think the comparison with southern Europe missed the economic transforma-tion that had taken place before Ireland became side-tracked with the property market.

Between the 1970s and the early 2000s Ireland went from one of the countries in Europe with the fewest

amount of people who wanted to set up their own busi-ness to one of the highest. Even after the dot.com boom and bust in the early 2000s there has been a profound economic transformation, which has been reflected not just in the inflows of foreign direct investment. It has also been reflected in a new entrepreneurial spirit in Ireland and the transformation of a number of Irish companies which have become very significant on the world stage in their own right.

Having returned to Ireland in the early 2000s after being away for many years, this economic transformation was one of the things that struck me. This new economic structure is still in place and it is one of the key differen-tiating factors between Ireland and some of the southern European countries.

White, NTMA: At the start of the crisis we had a common fiscal narrative that was applied to several eurozone coun-tries. When the problem was more specifically diagnosed, and it was recognised that it was not a case of one prob-lem fits all across the eurozone, it became obvious that many countries that have suffered in the bond market faced a competitiveness problem.

When that became clear, Ireland was able to distin-guish itself from the others, most obviously through its current account which returned to balance quickly. That encouraged people to look in more detail at the factors that allowed Ireland to achieve this re-balancing in the economy, such as the flexibility of its labour market.

If you look at the global competitiveness ranking, for example, Ireland has moved up another three places to 17th, having slipped during the 2000s. Some of the southern European countries are much further down that ranking.

Another reason why Ireland did not conform to this fis-cal narrative was that, as we all know, banking problems were the main issue that forced Ireland into the financial assistance programme.

So when you look in greater detail at the credit story and start to explain it to investors, it becomes easier for Ireland to differentiate itself from other economies — although it may take some time for the differences to become apparent.

Dent, Nomura: From an investor’s point of view another important point is that there is so much transparency around Ireland’s debt profile. Coming into 2013 inves-tors could see that there was an €11.9bn redemption due in early 2014 and that it was being taken care of via the liability management exercise and five year tap. Coupled with the fact that Ireland was fully funded for 2013, this made the NTMA’s funding plans very easy to understand.

Rossa White, NatioNal treasury MaNageMeNt ageNcy (NtMa)

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Paul Spurin, Nomura: We’ve been living with this crisis for many years now, and it’s easy to forget just how scared and disillusioned many investors were at the beginning of the crisis. When we went to see big investors in Asia, and particularly in Japan, they weren’t interested in the economic fundamentals of individual countries. They were more worried about the future of the eurozone, and whether the currency was even going to exist in five years’ time.

I think it’s only in the last couple of years, during which time a lot of work has been done by central banks around the world, that countries have had the opportu-nity to prove themselves on the basis of their own eco-nomic fundamentals.

This comes back to Anthony’s point about why it was so crucial throughout the whole of that process to be in front of the investors all the time, and to continuously remind them of your own fundamentals. That ensured that when they were ready to make an investment deci-sion based on fundamentals alone, they were comfort-able with the Irish credit.

EUROWEEK: It’s interesting that you mention Japan. Is it too early to gauge whether Japanese investors are responding to the BoJ’s stimulus package by looking at some of the higher yielding European government bond markets?

Spurin, Nomura: They’re definitely looking. The aggres-sive moves from the BoJ have obviously caused a lot of excitement in financial markets as well as plenty of volatility and disruption. There was a knee-jerk reaction when it was assumed that the BoJ’s action at the begin-ning of April would have a very positive impact on non-yen bond markets, which was short-lived.

I think the subsequent volatility in the domestic bond and equity markets will mean that Japanese investors’ focus is going to be on their home market for some time to come. When they do start to look overseas, I think they’ll look primarily at dollar product ahead of euros. But over the longer term, Japanese investors will have a role to play in the European government bond market. Even if they’re not directly involved in the Irish market, they move in such size that when they do move into Europe there could be a meaningful knock-on effect.

Whelan, NTMA: Certainly until recently, Japanese inves-tors have been constrained by our split rating. While on our recent roadshow there were definitely pockets of interest in Asia, it’s fair to say it was limited.

It would be foolish to ignore the fact that the split rat-ing is a real issue, but once the rating impediment is out of the way I think we’ll see more involvement from Asia.

EUROWEEK: What signals are the agencies giving you about future possible ratings actions?

White, NTMA: It’s a timely question because we met one of them last week.

There is clearly a divergence between S&P and Fitch on the one hand and Moody’s on the other. We’ve had affirmations on our rating from both S&P and Fitch on all that has been done in Ireland to improve our creditwor-thiness over the last year. This has led to a change from negative to stable outlooks, at a level three notches into investment grade.

Moody’s still rates Ireland one notch into sub-investment grade. To be fair, I think they recognise the progress that has been made in Ireland, but the crisis in the euro area is still something that they cite as an issue,

which probably prevents Ireland’s rating from moving. In other words, as long as there is still pressure on ratings elsewhere in the euro area, it is difficult for Ireland to move against the grain.

But if you look at market-implied ratings, Ireland would certainly be in investment grade territory. There is no doubt about that. So hopefully we’ll continue to see improvements in ratings in Europe over the next year.

Humble, Goldman Sachs: That’s an interesting point because some investors have told us that when a number of European countries were downgraded at the begin-ning of the crisis the agencies cited a lack of an insti-tutional framework within Europe as a reason for the downgrade.

These investors have told us they have been struck by the fact that there have been no upgrades to reflect the fact that a lot of important support mechanisms have been put in place since then. It’s an interesting observa-tion from the investor community that the agencies were very quick to downgrade on the basis that there was no supportive framework, but now that it has been put in place there has been no recognition of this in the form of upgrades.

EUROWEEK: Beyond the split rating, what are inves-tors’ other concerns?

Slotte, Danske: One aspect related more to markets than to economic developments in Ireland is volatility.

Many investors have been drawn to Ireland because of the attractive yields and the low volatility which has been the result of the predictability of its economic pro-file. Secondary market liquidity has also been improving, mainly because of the NTMA’s efforts to push primary dealers to maintain a secondary market.

But in this most recent period where we have seen increased levels of market volatility in peripheral govern-ment bond markets, many investors have taken fright. That is an area where the NTMA needs to push its pri-mary dealers to increase their commitment to supporting the market.

Linehan, NTMA: We’ve always worked well with our primary dealers, but the time has now come for them to adhere to much tighter obligations than they have done heretofore. Market conditions are such that this can be done now by primary dealers, because we are no longer in stressed conditions.

When we return to auctions, we’ll have an oppor-tunity to provide liquidity to those bonds where there are special situations. That will be one of the benefits of returning to auctions.

Lars Humble, goldMaN sachs

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EUROWEEK: Do you have a timetable for reintroduc-ing auctions?

Linehan, NTMA: No. We have indicated that we are likely to do so before the end of this year, but we haven’t announced a timetable yet.

Spurin, Nomura: Investors would welcome a return to auctions. It would also give primary dealers more confidence to provide liquidity by selling bonds to inves-tors up and down the curve. It’s a difficult question to judge, because lack of supply is clearly beneficial in that it drives yields lower. This has been demonstrated by the success of the two syndicated transactions.

From a dealer’s perspective, I believe the market is ready for auctions. Investors aren’t going to be shocked if anything is announced in terms of regular bond auc-tions, and I think the positives would probably outweigh the risks. It would certainly improve secondary market liquidity, because it’s tough to trade a market that has zero regular supply.

Barron, Barclays: We’ve already seen with the advent of T-bills again, and with the amortising bonds, that making multiple products available gives the dealer community and investors a higher degree of confidence.

I think that going back to a more regular auction schedule is an integral part of that predictable time frame which the NTMA has done very well to show to the market.

Spurin, Nomura: It could also be positive in the eyes of the ratings agencies, because it might break their habit of calling all issuance opportunistic, which is slightly frus-trating. Establishing an auction schedule helps you prove that you have regular and free access to the market.

White, NTMA: Going back to your question about the macroeconomic concerns that investors may still have, the unemployment rate has been a concern. Although domestic conditions in Ireland are still difficult for many people, we appear to have passed a turning point in that we saw a peak in the unemployment rate of just over 15%. That has now come down to below 14%, which represents clear progress over the last year or so.

The other area that gets a lot of attention from inves-tors is banks’ mortgage books. The long term trend in unemployment is very important in this regard because most econometric analysis would suggest that long term unemployment is a key factor in driving mortgage arrears. So the fact that we have started to see a turning point in the unemployment numbers is key.

More generally, the domestic economy appears to have bottomed. Half way through last year we saw two consecutive quarters of improvement for the first time since 2007. Things have looked a little weaker early this year, but that is usually the pattern immediately after the budget.

We have reached a point where net exports have start-ed to weaken because global conditions have softened, and demand in the euro area has clearly shown a weaker trend over the last year. But at the same time, the domes-tic economy is starting to compensate for the fall-off in net exports. It’s lucky timing and hopefully the trend will continue.

EUROWEEK: You identify unemployment as a con-cern. But if you offered the Spanish or the Greeks an unemployment rate of 13.7%, they’d bite your hand off, wouldn’t they?

White, NTMA: They would. But then again the Irish unemployment rate is now 10 percentage points higher than it was for 10 or 12 years throughout the Celtic Tiger phase of the late 1990s and the period of the property bubble. However, you’re right to say we’re doing much better on unemployment than southern Europe. And when unemployment has passed its turning point, it tends to continue moving in the right direction.

The continued decline will be slow, and people aren’t anticipating that we’ll get back to single digit unemploy-ment rates for some time yet, but the trend is clearly in the right direction. Half of all economic sectors are now creating jobs again, and wages are rising in more than half of all sectors too.

EUROWEEK: Is there a disconnection between the exporters and the domestic economy, in the sense that export industries such as pharmaceuticals aren’t very labour intensive?

White, NTMA: It has been well-recognised for a long time that the pharmaceuticals sector is very productive in the sense that value-added per worker is high. It accounts for a large share of exports but there is also a high import content both in that sector and in other multinational industries. So the bottom line impact is not as big as it would be if you were just looking at exports.

But the general point is fair, in that the multinational sector has clearly been the driver of growth in the last two to three years. The domestic economy is only now starting to find its feet again — and with good timing.

EUROWEEK: You mentioned the banks’ mortgage books, so this might be a good time to move on to the link between the banks and the sovereign, which was clearly very strong in Ireland, given that the bank bail-out cost some 40% of GDP.

But in the capital market, what came first? Did the successful return of the sovereign to the market open the way for the banks? Or was it the return of the banks to the covered bond market in the first instance that helped the sovereign to make such a successful return to the market in January?

Dent, Nomura: There was obviously a link between the two. The approach to the market by Irish borrowers has been very well organised and the way the banks have come to the market has been as pragmatic and as pru-dent as the sovereign.

Let’s not forget that it was November when Bank of Ireland came back into the market with a three year cov-

Anthony Linehan, NatioNal treasury MaNageMeNt ageNcy (NtMa)

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ered bond. There was a lot of price discovery around that deal, and it has since followed up with five year covered bonds, subordinated debt and a three year senior. So it has gone through all the different steps of restoring fully-fledged market access.

There has never been the feeling from the market that we have had too much supply, either from the banks, or from the sovereign, or from the two combined. In fact, after all these different entry points from the banks and the sovereign, the market still feels quite under-supplied with Irish debt. I think that is down to the well organised sequence of issuance.

EUROWEEK: Does the NTMA communicate with the banks about its issuance schedule, and vice versa?

Whelan, NTMA: Yes. We are clearly aware of what the banks are doing in terms of their issuance, because it makes no sense to have a clash of calendars. When the Eligible Guarantee Scheme was in operation, we had regular discussions with the banks about their issuance plans. Even though that scheme has now ended we continue to have a dialogue with the banks, not in any controlling sense, but in the sense that they would let us know what their funding plans are.

Linehan, NTMA: When we had the ELG scheme the banks had to come to us as the Scheme Operator to apply for government guarantees. Now we’re in the post-guarantee world we’ll still get a courtesy call from the banks telling us about their funding plans but it wouldn’t be for us to tell them what to do or not to do.

EUROWEEK: So it is accurate to say that the sover-eign and the banks seem to have come to the market in a very clear, sequential way.

Whelan, NTMA: It’s fair to say that we accessed the mar-ket in 2012 in very clear phases, and the feedback we’ve had from investors suggests that this was seen as being positive for the banks, which have also regained market access on a phased basis.

But the fact that the banks were able to issue was also a good statement about Ireland, so there has been a sym-biotic relationship between the issuance of the sovereign and the banks.

Callan, Danske: The compression we saw late last year in sovereign spreads helped the banks to regain market access, and gave them impetus and support.

The change we’ve seen in the last three months is that the banks have been able to issue on their own. In the

case of Bank of Ireland, we’ve now seen a subordinated issue, the Coco trade and most recently a senior unse-cured transaction.

In the new banking world, this is all risk capital, because there won’t be any sovereign support to bail those types of securities out in the future. Unfortunately in the past when Ireland got into trouble there was no proper resolution mechanism in place to inflict losses on the more senior types of debt. But today nobody is buy-ing senior unsecured debt from Bank of Ireland thinking that the sovereign is going to back it up in the same way as it did in the past, which was obviously why Ireland got into such a crisis in the first place. The losses at the banks were so big that they impinged on the sovereign’s creditworthiness. That won’t be allowed to happen again.

MacNeill, Goldman Sachs: Related to that was the different type of foreign investment that was coming into Ireland. For a long while the only investors who seemed to be interested in Ireland were private equity and distressed debt funds. But the Bank of Ireland equity issuances have brought a number of long term institu-tional investors back into the market. We have also seen foreign investors looking to put their risk capital to work in a wider range of asset classes in Ireland, which has a positive knock-on effect for the banks as well as the sov-ereign.

At the same time, the very strong framework created by the sovereign has given investors the confidence to make the long term bet on the recovery of the Irish economy.

Slotte, Danske: I’d agree with Oliver’s comment about the symbiotic relationship between the banks and the sovereign. Some of the larger Nordic pension funds pulled out of anything related to Ireland some time ago, and they only came back when they had done their back-ground work very thoroughly. And rather than starting off by dipping their toes in the government bond market, they did so by buying bank debt in the form of covered bonds, where they said they saw better value.

EUROWEEK: Coming back to Hugo’s point about investor support for a broader range of Irish asset classes, presumably NAMA has played an important role in this process?

MacNeill, Goldman Sachs: Absolutely. NAMA has shown that it has made important progress in a number of ways, including disposing of loan books, which again gives confidence to investors that the Irish property mar-ket isn’t some vast black hole.

Samu Slotte, daNske BaNk

Nick Dent, NoMura

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Whelan, NTMA: Our experience when we’ve been on the road meeting investors is that in the early days they were concerned about NAMA. That has changed, and as Hugo says, investors are now much more comfortable with the success NAMA has had in getting to grips with the challenges it faces.

White, NTMA: There has certainly been a big change in how NAMA is viewed compared with three years ago. NAMA’s chief executive is very confident of its future and if you just look at its numbers for this year it will meet its targets very comfortably. It has to repay €7.5bn of its senior bonds by the end of 2013 and has already paid €6.25bn so it is well on track.

NAMA is also looking ahead at how to deal with the assets it is unable to sell right now. It is adding value to a lot of those assets in order to generate income and its record on creating cashflow, particularly from rents in Ireland, has been excellent over the last couple of years.

EUROWEEK: In terms of the next step for the banks, will this be a senior unsecured issue for AIB or a lon-ger dated unsecured deal for Bank of Ireland?

Barron, Barclays: Both of these would be a potential logical next step, although everyone will remain mindful of the volatility that we’ve seen in the market in recent weeks.

It is interesting to note that each of the southern European countries and Ireland have been working on positioning themselves as individual credits. You could argue that as a result we have probably seen less volatil-ity in Irish government bond spreads recently than we have in Portugal, Spain or Italy. But I think the whole market now feels that it is in a wait-and-see mode, and it’s difficult to foresee a definitive time line for likely issuance from Ireland at this stage.

Dent, Nomura: We’re now at decade-lows in terms of senior issuance, which will certainly be helpful for any of the banks going forward. The beauty of the covered bond is that in more volatile times it’s a great way for banks to access the market, so I think the Irish banks have plenty of options open to them in spite of recent events in the global fixed income market.

EUROWEEK: How has NTMA’s investor base been evolving over the last year or so? According to your latest investor presentation, foreign ownership of Irish debt has been falling but central bank participa-tion has been rising.

Whelan, NTMA: The latest figures for ownership of Irish debt are a direct reflection of the promissory note arrangement, where because of the liquidation of the IBRC in February, €25bn of those notes were replaced on the books of the central bank by long-dated Irish gov-ernment bonds. So if you strip that €25bn out of central banks’ holdings, non-resident holdings of Irish govern-ment debt remain at about 72% of the total.

There is a schedule for selling those central bank hold-ings back to the market, but that will be a very gradual process over a number of years, so the overall ownership of government debt has not changed much.

Like other countries, we would like to see more domestic support for our bonds from pension funds and insurance companies rather than banks. Last year we issued €1bn of bonds tailor-made for pension funds, and going forward we would expect pension funds’ asset allocation to have more of an exposure to domestic gov-ernment bonds.

We were talking a little while ago about the link between the domestic banks and the sovereign, and hav-ing reduced that link we don’t really want to see it built up again through the banks buying an excessive amount of Irish sovereign bonds. The banks play an important role in the market and there is a level of investment in government bonds at which they are comfortable in terms of their asset allocation. It would make no sense for them to increase their holding excessively beyond that level.

There is also quite a high level of retail participation, not in Irish government bonds, but in products such as savings certificates that are sold through the post office. There is now about €17.4bn outstanding in retail debt, so the retail investor is an important source of funding for us.

EUROWEEK: What sort of balance do bankers think that a sovereign like Ireland should be aiming for in terms of the distribution between domestic and international investors? Japan is an extreme example of a market that is overwhelmingly owned by local investors, which is one reason why until very recently yields in the JGB market have been so low. But are European sovereigns reappraising the ideal balance?

Spurin, Nomura: I think the most stable demographic for placement for it is to be as wide and as broad as pos-sible in terms of geography and investor type. Although it may give governments a secure feeling to have a very high domestic holding of their debt, if something sud-denly changes — as it has recently in Japan — you can be faced with a very unstable situation.

We’ve talked a lot about volatility and price move-ments, and for most markets, stability is all about having plenty of different types of investors buying your debt for a range of different reasons, because if one group should have to sell or want to sell, it’s very healthy to have another group ready to be on the other side of the trade.

My personal view is that the broader the distribution, the more positive it is.

Humble, Goldman Sachs: It’s clearly a balancing act, but if you think of the eurozone as a whole, domestic investors are thought of as those who buy debt in their domestic currency. Part of the objective of building a pan-European capital market was to encourage cross-border investment within Europe, which makes the definition of domestic investors very different in a euro-

Susan Barron, Barclays

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zone country to any country that has its own domestic currency.

You may generate truly domestic demand for instru-ments such as bonds linked to domestic inflation that cater to the needs of a specific investor base. But ulti-mately you would expect foreign investor ownership to be much higher within a currency union.

Linehan, NTMA: From our point of view, the most important objective is not so much to ensure that we have Irish owners of our debt but to make sure we have diversified debt-holders. In that sense, the retail market and the amortising bonds which serve a specific function both play an important role, as would inflation-linked or dollar debt if we were to issue in those markets in the future. These would all appeal to different investor bases at different times.

One of the problems we had going into the crisis was that a lot of our investors reacted the same way at the same time.

But when I joined the NTMA in 2007 we hadn’t issued any debt for three years because we had a budget surplus, and we thought that all Irish debt was about to disappear — so we’ve been through quite a roller-coaster ride.

One of our aims going forward is to tap into different investor bases. There would be no point in having a large, financially repressed domestic investor base. You want a wide range of investors who hold your debt because they want to, not because they have no alternative.

EUROWEEK: You’ve mentioned inflation-linked debt and dollars. Looking to the longer term, what is the next step for NTMA’s funding programme?

Linehan, NTMA: As we mentioned earlier, one of our main objectives is to ensure we have sufficient liquidity in the bonds we’ve already issued. As a debt manager you want two things: yes, you want a diversified investor base over time but you also want your main bond mar-ket to be liquid.

Whelan, NTMA: We have indicated to the market that we are open to the idea of issuing a bond linked to Irish inflation.

That was in the context of discussions we had with the domestic pensions and insurance industry. There would also be demand from other investors, both domestic and international, but it would be driven by local pension funds and insurance companies, so we’ll look at this when they reach a final decision about their asset alloca-tion plans.

As for a dollar issue, when we were in the US on our most recent roadshow there was huge investor support for a potential dollar issue, so last autumn we could probably have issued a very successful dollar deal. We chose not to, but it is something we would certainly keep as an option going forward as part of our funding diversification.

But we really wanted to make a statement in Europe that we are committed to issuing in a normal way and we made that statement very clearly through our euro denominated issuance. A dollar issue would be regarded as opportunistic, but the contacts we have built up with the US investor base would certainly enable us to issue in dollars if we wish to do so.

EUROWEEK: If you went to the dollar market would it be arbitrage-driven or would you be prepared to pay up to access the deeper pool of US liquidity?

Whelan, NTMA: Of course the pricing would have to be competitive. It wouldn’t necessarily be beneficial for us to pay more for 10 year dollars than for 10 year euros, say. The diversification would be beneficial, but pricing would be a significant factor.

Once we have fully re-established our presence in the euro market then perhaps we can look at alternatives such as dollars.

EUROWEEK: Would the bankers around the table agree about the likely strength of investor demand for alternative instruments from NTMA such as inflation-linked or dollar bonds? US investors love Ireland, don’t they?

Dent, Nomura: There was a lot of talk at the back end of last year about a dollar deal, and the general view was that demand would have been very strong. But since then it has become clear that there is also good demand in that investor base for domestic issues, with about 10% of both the tap and the 10 year line sold into North American accounts.

In terms of maturity profile, the dollar market this year has been concentrated in five years. There has not been much 10 year issuance, at least not from the European names.

There is also the basis swap back into euros to consid-er, which can mean that the costs of dollar issuance has flip-flopped above and below that of domestic issuance.

Looking at other instruments, as the Irish recovery story gathers momentum floating rate notes and inflation-linked bonds are also likely to be well received, although their main appeal would be to domestic investors.

Spurin, Nomura: I think dollars would be well received by Asian investors. We were in Asia three weeks ago and virtually every investor we visited was asking us about issuance from European borrowers in dollars. Demand from non-Japan Asia has increased noticeably, so I think a European sovereign bond in dollars would sell very well there.

Slotte, Danske: It might have made more sense to have issued a dollar bond last autumn than it would now. That is simply because the execution risk in the dollar market is much lower given that you can issue a $1bn bench-mark, whereas in euros you need to do a bigger size to be regarded as a benchmark.

It has now become quite clear that Ireland has market access in euros, so unless a dollar deal is price-competi-tive and brings in new investors I think Ireland should focus on the existing products at its disposal.

Paul Spurin, NoMura

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Humble, Goldman Sachs: I agree. It all comes down to issuers’ needs, which is why I think the top priority for Ireland should be to go back to having regular auctions. That to me would be a more important exercise than issuing US dollars or some other instrument.

Dent, Nomura: We’ve spoken a lot today about taking the next step in a funding programme. In many ways the jump from the five year to the 10 year benchmark was a giant leap for Ireland to prove that it has access to the euro market. It has also certainly taken the pressure off a number of other potential issuance opportunities. But as we’ve seen over the last four or five months of this year, the market does from time to time throw up opportuni-ties for longer dated issuance.

Given the major market event that Ireland has just been through, however, I think investors’ expectations for any major new issuance this year are pretty low.

Callan, Danske: Ireland is in a relatively unique posi-tion, in that because of its €7.5bn of syndicated issues, the promissory note deal and the extensions from the EFSF and the EFSM, it is already way ahead in its fund-ing requirements. It is pre-funded for about 15-18 months, so it can spend six months getting a full, regular monthly auction programme together and re-engage investors in a very slow and deliberate manner without having to worry about finding execution windows, as Spain and Italy do every month.

The decisions about Spain’s and Italy’s funding are made by the market as much as by their national debt offices, whereas the NTMA can be much more selective in its issuance. Time is on the NTMA’s side, which means it can focus on making sure the products, tenors and pricing are exactly what it wants from a long term point of view.

EUROWEEK: So just to be clear, the combination of the syndicated deals NTMA has already done, the promissory note and the EFSF and EFSM extensions means that Ireland has no funding requirement at all for the next 12-18 months. But you can pre-fund if the conditions allow, yes?

Whelan, NTMA: We’d like to have an ongoing market presence through small auctions, but yes — the objective at the end of this year is to ensure that we have 12-15 months of pre-funding in place which now takes us through to the end of 2014 and into the start of 2015.

In that respect, the promissory note and the maturity extensions you mentioned have been enormously help-ful. Between them, they have reduced our funding needs

by roughly €4bn each year over the next decade. That’s €40bn taken out of our funding needs, so that has rein-forced the positive background and of course it has also hugely strengthened the debt sustainability picture by allowing us to stretch our funding over a much longer period. It has also significantly reduced our refinancing risk.

So as Owen said, we have plenty of time and we are under no pressure to rush back to the market.

Slotte, Danske: It’s interesting that from the NTMA’s point of view the maturity profile of Ireland’s debt is quite long, whereas investors would like to have longer bonds. Ireland has longer dated funding on its books, but from official rather than market sources. So there is a bit of a mismatch there.

EUROWEEK: What is the average maturity of Ireland’s debt?

White, NTMA: Of the medium and long term and official debt, it’s over 10 years now. One of the Troika partners has mentioned that Ireland is in the top three longest in the eurozone in terms of the average maturity of its debt.

Callan, Danske: The key point is that through all the initiatives we’ve discussed, 35% of Ireland’s debt has been refinanced into long term, cheaper debt. That com-pares with Italy which couldn’t issue anything over 10 years last year. So Ireland has clearly been improving its debt metrics and therefore its debt sustainability. That is what sovereign debt is ultimately all about: it’s not about being able to repay it, but being able to roll over short term debt and bear the interest costs of that debt.

EUROWEEK: What was the market impact of key developments such as the promissory note arrange-ment and the EFSF and EFSM extensions?

Barron, Barclays: Both were very positively perceived. The promissory note deal came between the two syndi-cated transactions and if you compare the two deals, in the second we saw almost twice as many investors, and a book that was double the size.

The promissory note and the rescheduling provided another example of the sustainability of Ireland’s debt. When we were marketing earlier this year there were a lot of questions from investors about the promissory note, and February’s arrangement was a very helpful clarification.

Humble, Goldman Sachs: I think the promissory note deal was all part of the gradual process of regaining investors’ confidence. The added clarity certainly helped performance.

EUROWEEK: What are the NTMA’s plans for road-showing? Are you adding any more stops to your usual roadshow itinerary these days?

Whelan, NTMA: We’ll be visiting investors in the US later this year and we’ll also be going back to Asia. We also remain active in roadshowing in the main financial centres of Europe.

EUROWEEK: Going back to the macro story, and to the subject of confidence in the longer term pros-pects for Ireland, what are net migration patterns telling us? Are the Irish prepared to dig in for the

Owen Callan, daNske BaNk

Ireland in the Capital Markets EuroWeek 15

NTMA Roundtable

long term recovery, or are they doing what they did in previous downturns, packing their bags and leaving?

MacNeill, Goldman Sachs: You need to look at Irish net migration figures over a longer period. In the early 1980s there was huge emigration because we had 20% unem-ployment, with 50% of the jobless out of work for more than one year. In the 1990s unemployment fell to 4%, and pretty much everyone who wanted to come back did come back.

The Irish Times recently published a survey of young people going abroad, and 60%-70% said they were doing so out of choice, in order to gain experience with a view to coming back later. As somebody once said, permanent emigration may be a national tragedy but temporary emi-gration can be a national asset.

During the economic transformation there was an interesting statistic that 40%-50% of the workforce between 20 and 45 was either non-Irish, or were Irish people who had lived abroad and come back. That con-tributed to the dynamism of the economic transforma-tion we saw here during the 1990s, because these people imported entrepreneurial ideas from overseas.

One of the things the government has been doing quite effectively in recent years is focusing on the Irish diaspora which don’t come back, and harnessing its potential in terms of investment and capability expertise.

White, NTMA: If you look at the census data for between 2006 and 2011, the main migration we saw was among unskilled workers.

The number of graduates staying in Ireland between 2006 and 2011 did not change very much. We don’t have figures updated to 2013, but unless there has been a dramatic change in the last couple of years we haven’t actually lost too many skilled workers.

As long as the domestic economy picks up and people come back, temporary emigration is not a threat. We saw a pattern where the people who left in the 1980s came back in the 1990s. I expect we’ll see a similar pattern this time round.

Dent, Nomura: You can’t have them all back. I think the City of London would suffer if all the best Irish graduates went back home.

Callan, Danske: It’s also worth remembering that the Irish population has increased by about 40% since the early 1990s. So 15-20 years of positive inward migration has been met with two or three years of outward migra-tion, which is by no means a tragedy.

EUROWEEK: Among the other long threats to the Irish economy, is sabre-rattling in Europe about a harmonised corporate tax rate a worry, given its importance in attracting FDI?

White, NTMA: Ireland has a very attractive corporate tax rate of 12.5% and the government has made it clear that this is not going to change. But there is always the dan-ger that something comes from leftfield in terms of tax. Two years ago there was some sabre-rattling in France about tax and a fear that Ireland would be forced to do something to bring its tax rate in line with the rest of the eurozone. That was dropped, but there is also always the danger that if the US tax code is changed that could have a negative impact on Ireland — and that is something that is getting a lot of attention at the moment.

EUROWEEK: Debt sustainability has been mentioned a couple of times. Is NTMA comfortable with Ireland’s debt to GDP ratio of 120%?

White, NTMA: We’re a year away from returning to pri-mary surplus. We’ve consistently laid out the numbers demonstrating that Ireland is on track to do so, and if we do return to primary surplus it will become clear that we have achieved debt sustainability.

On debt to GDP, we are set to peak at just above 120% and we then edge down. There’s no consensus about what debt ratio is too high, but if you compare Ireland to other countries in Europe with tighter spreads, our metrics over the next couple of years will end up very similar.

EUROWEEK: Just to wrap up, is there a general belief that although neither Ireland nor the eurozone is out of the woods, the worst is behind us?

Slotte, Danske: Yes. From an Irish perspective, defi-nitely. The only question mark is over the European situation.

Dent, Nomura: I’d agree. We’ve definitely turned a cor-ner. The worries and concerns we discuss today are very different from those we were talking about a year ago. If you ask most economists, they view the recent correc-tion we’ve seen in the market as a short term dip. Some investors may even see this as a buying opportunity, because they recognise spreads aren’t going to go tighter in a straight line.

Spurin, Nomura: What began as a banking crisis devel-oped into a sovereign crisis and is now a good old-fash-ioned economic crisis, which has been good for pushing interest rates and bond yields lower everywhere. We’re now seeing the first signs of growth in the US, which everyone agrees we need, but the risk is that it will spook the bond market. That’s the balancing act we’ll need to negotiate.

Humble, Goldman Sachs: If you look at yield levels in Ireland, we’re not far off all-time lows at the moment, which is a pretty good indicator of how the market is interpreting the Ireland recovery story. If you believe markets are even vaguely efficient, that is a good sign of what to expect from Ireland.

Barron, Barclays: I agree. I believe Ireland has decou-pled itself from many other European countries, and over the course of the last few months has definitely addressed investors’ concerns. s

Hugo MacNeill, goldMaN sachs

Banking Sector

16 EUROWEEK | June 2013 | Ireland in the Capital Markets

“EvEry linE in the income state-ment and key performance metrics were better in the second half of 2012,” says Bank of ireland (Boi) in an upbeat presentation delivered to investors in February.

it’s a statement that is true enough, but it is one that analysts say needs to be put in some perspective. income is rising, but is still modest. net inter-est margins are up, but from a deep trough. impairment charges are fall-ing, but from a vertiginous height. The loan-to-deposit ratio is declining, but also from an unsustainably lofty level.

The direction of travel, however, is clear enough, and the recovery from a very low base has been reflected in the performance of Boi’s share price this year, which by early June had risen by 49%. That’s not bad for a bank which Goldman Sachs expects to post a loss this year and next, exiguous earnings per share of €0.01 in 2015 and no divi-dend for the foreseeable future.

Aside from reflecting the return of risk appetite to global capital markets after the summer of 2012, the support that Boi has enjoyed from equity and — increasingly — from debt investors is a recognition of the progress that has been made by the irish banking indus-try in the last two years.

“The rescue funding made available to ireland required the central bank to implement a wholesale restructur-ing of the banking system,” says Ben Davey, co-head of FiG EMEA at Bar-clays, who was one of the team advis-ing the irish authorities on the reha-bilitation of the industry in 2011. The restructuring plan drawn up by the central bank and its advisers, says Davey, identified three core objec-tives. The two leading banks, Allied irish Banks (AiB) and Boi, have clearly achieved two of these goals, and are making palpable progress towards delivering on the third.

“The first priority was a significant deleveraging of the banking system,

with specific targets set for AiB and Boi,” says Davey. This process is clearly advancing well ahead of schedule, with AiB reporting that 89% of its delever-aging target for the end of 2013 had already been achieved by December 2012. last year, AiB reported a decline in its risk-weighted assets (rWAs) of 15%, from €84.3bn to €71.4bn.

Boi, meanwhile, completed €10.6bn of asset divestments in 2012, which it says “exceeded targets, below assumed cost and ahead of schedule”, and reduced its rWAs by €10bn, from €67bn to €57bn.

“The second objective was the deliv-ery of a loan-to-deposit ratio of 122.5% by the end of 2013,” says Davey. Boi reports that it is on target to reach its loan-to-deposit (lTD) ratio of 120% by 2014, having reduced the ratio from 175% in December 2010 to 123% at the end of 2012. AiB, meanwhile, brought its lTD ratio down from 169% to 115% over the same period.

There are, of course, two sides to

the lTD story, with the banks required by the government to observe lend-ing targets as well as bolster their retail deposits. AiB, which is 99% owned by the government, reports that in 2012 it was ahead of schedule on mortgage and SME lending. in mortgage lending, it was 50% ahead of its target last year, which has encouraged it to double its target for 2013. loan approvals in the SME area reached €4.8bn in 2012, compared with a target of €3.5bn.

Boi, meanwhile, also beat its lending target last year. its loans to SMEs grew by 16% in 2012, and it forecasts a fur-ther 12% increase in 2013.

Jury out on profitability“The third target for the two big banks was a restructuring of their operations and a downsizing of the cost base, with a view to achieving high single-digit or low double-digit returns on equity within three to five years,” says Davey.

it is too early to ascertain how far the banks have come down the road to

Ireland’s banking sector has ridden the return of risk appetite to global capital markets after the summer of 2012 with great skill. Irish covered, senior and Coco bonds have all been launched over the last nine months — quite an achievement considering what the country has been through over the past five years. But as Philip Moore reports, capital remains a key concern, as does profitability.

Battered financial sector regains forward momentum

€bn AIB/EBS Boi IL&P IBRC Total % of GDP**Pre-PCAR 2011:Gov preference shares (2009) — NPRF 3.5 3.5* 7.0 4%

Ordinary share capital

(2009) — exchequer 4.0 4.0 3%

Promissory notes (2010) 0.3 30.6 30.9 20%

Special investment shares (2010)

— exchequer 0.6 0.1 0.7 0%

Ordinary share capital (2010) — NPRF 3.7 3.7 2%

Total pre-PCAR 2011 8.1 3.5 34.7 46.3 30%PCAR 2011:Capital from exchequer 3.9 2.7 6.6 4%

NPRF capital 8.8 1.2 10.0 6%

Total PCAR 2011 12.7 1.2 2.7 16.5 11%Purchase of Irish Life 1.3 1.3

Total recapitalisation from the state 20.8 4.7 4.0 34.7 64.1 41%Source of fundsPromissory notes 0.3 30.6 30.9 20%

Exchequer 4.5 4.0 4.1 12.6 8%

NPRF 16.0 4.7 20.7 13%

*€1.7bn of BoI’s government preference shares were converted into ordinary shares in May/June

2010 (€1.8bn government preference shares remain in existence). ** 2011 GDP

Ireland: gross domestic bank recapitalisation

Source: Department of Finance

Banking Sector

Ireland in the Capital Markets | June 2013 | EUROWEEK 17

profitability. “We are seeing a stabili-sation but not yet a reversal of mort-gage arrears,” says Christy Hajiloizou, credit analyst at Barclays in london. “impairment charges are still at an elevated level, but are trending in the right direction.”

Per Høg Jensen, head of financial origination, debt capital markets, at Danske Bank in Copenhagen, points to the problem of tracker home loans, for example, which carry a fixed mar-gin above the ECB lending rate, as a drag on profitability. These represent more than half of all irish mortgages — about 40% of GDP — and “current-ly generate a near-zero, or even nega-tive, net interest margin for the banks,” according to Standard & Poor’s.

recent initiatives such as a proposal for a law that will make repossessions more straightforward should help arrears level off, says Denzil De Bie, director, financial institutions, at Fitch ratings in london. “it’s unlikely that we’ll see clean banks in the next couple of years,” he says. “But by 2015-16 we may see banks start to make sustain-able profits.”

Discontinuation of ELGAnother key step towards normalisa-tion was taken at the end of February, when it was announced that the Eligi-ble liabilities Guarantee (ElG) Scheme would be discontinued as from March 28. At Barclays, Davey says the scheme was the subject of some controversy when it was introduced in December 2009, and that its discontinuation was an important milestone for the banks for two reasons.

“First, it represented a very real cost to the banks,” says Davey. That much is clear enough from their accounts. Boi, for one, paid €388m of fees on its ElG-covered liabilities of €26bn in 2012. “Second, it was a signal to the market that they are making progress towards operating as viable entities and with-out the state guarantee,” adds Davey.

Regaining market accessBefore the discontinuation of the ElG scheme, however, ireland’s leading banks had already re-established their presence in the capital market, starting in the covered bond space in late 2012. “The covered bond market was the right place for the banks to begin the regeneration of the irish credit mar-ket, given that the collateral had largely been restructured,” says Mark Geller,

head of European financial institutions syndicate at Barclays.

Chris Agathangelou, head of finan-cial debt syndicate at nomura, says an indication of the strengthening credit profile of the irish banks was that Boi was able to return to the market in advance of the sovereign. “in a normal environment you would expect the sovereign to come first,” he says. “Boi came ahead of schedule, and should be commended for its flexibility.”

Boi’s capital market rehabilitation began in november 2012, with an €1bn three year asset covered security (ACS), which was its first in non-government guaranteed format for three years. led by Citi, Morgan Stanley, nomura, rBS and UBS, the Boi issue was a spectacu-larly successful re-opener of the mar-ket for the irish banking sector, har-nessing demand of €2.5bn for a deal priced at 270bp over swaps, which was the tight end of guidance. “Boi’s cov-ered bond, which traded through the government’s curve in the secondary market, was a phenomenal success,” says Agathangelou.

Boi’s return to the ACS market also opened the door for AiB to issue later the same month for the first time since 2007, with a €500m three year trade led by Deutsche, HSBC, JP Morgan and UBS. Demand of €2.3bn allowed AiB to price at the same spread as Boi’s ice-breaker. That was perhaps surprising, given AiB’s lower rating and weaker credit profile, but again pointed to the magnitude of the change in investor sentiment towards ireland.

Boi followed up on its return to the covered bond market in December with a €250m 10 year lower tier two transaction, which was the first subor-dinated debt issue from an irish bank since before the lehman crisis, and was four times subscribed. “Boi has implemented its capital strategy very well,” says Agathangelou. “The major-ity of the tier two deal was pre-placed,

and opening the book for the remain-der of the trade was an interesting strategy because it created price ten-sion, which accounted for its excep-tional performance in the secondary market.”

The lower tier two trade paved the way for Boi to complete a secondary placement in January of €1bn of tier two convertible contingent capital (Coco) bonds which had initially been placed with the government as part of the bank’s recapitalisation. led by Davy, Deutsche and UBS, the Boi Coco offered a coupon of 10% and generated an order book of close to €5bn.

Bankers say that the Coco was an important breakthrough for Boi. “it has also rallied very aggressively in the secondary market, eventually trading with a yield below 8% before the recent market sell-off, which is a powerful statement about investor appetite,” says David Sismey, head of FiG origina-tion in EMEA at Goldman Sachs.

Good news storyThe highly successful 10 year deal from the national Treasury Management Agency (nTMA) in March presented the irish banking sector with its next gold-plated opportunity to continue rebuilding its credentials in the capi-tal market. Boi grasped the opportu-nity, extending and repricing its cov-ered bond curve by issuing a €500m five year deal via Deutsche, Morgan Stanley, natixis and rBS. Boi was able to build a book of €2.25bn and price at 190bp over swaps, well below original guidance and 80bp inside the pricing on its shorter dated deal in november.

That spoke volumes less about the progress made by the irish banking sector in the space of just four months, and more about the warm glow that all things irish were enjoying in the aftermath of the nTMA’s sparkling 10 year trade. “ireland has become a good news story, investors have become comfortable with irish sovereign risk, and banks are clearly benefiting as a result,” says De Bie at Fitch.

The most recent landmark was passed at the end of May, when Boi printed the first senior unsecured issue from an irish bank since before the financial crisis. This was a three year €500m transaction led by BnP Paribas, Deutsche Bank, Morgan Stanley and rBS, priced at 220bp over mid-swaps. While the size of the order book, which reached €1.25bn, did not pull up any

“The covered bond market was the right

place for the banks to begin the regen-eration of the Irish

credit market, given that the collateral had largely been

restructured”

Mark Geller, Barclays

Banking Sector

18 EUROWEEK | June 2013 | Ireland in the Capital Markets

trees, it allowed for pricing to be set at the narrow end of guidance of between 220bp and 225bp, and for the major-ity of the bonds (87%) to be placed with real money accounts. Distribution was well diversified across Europe, with Germany taking 18%, italy 17%, and the UK and France, 15% each.

“Boi’s senior issue was very success-ful in that it was well oversubscribed and priced within guidance,” says Dan-ske’s Jensen. “The three year maturity was well chosen because the depth of liquidity is always greater at the shorter end of the curve. i’m sure Boi could have issued further out on the curve, but the three year maturity minimised the cost and execution risk.”

in less than a fortnight, the bond had widened by about 100bp, but bankers say this was a function of a sharp rever-sal in general market sentiment, rather than a reflection of Boi’s credit profile or of the pricing of its senior issue.

The deterioration in market senti-ment in recent weeks throws a ques-tion mark over the next likely step in the continued re-establishment of ireland’s leading banks as borrowers across the capital structure.

Bankers believe, however, that there is no reason why AiB should be unable to follow Boi into the senior unsecured market. “Although the early June mar-ket sell-off has stalled new issues for now, there is no doubt that AiB could fund in senior, and that both Boi and AiB could issue five year debt once the broader market stabilises,” says Sismey at Goldman Sachs. “For both banks, funding is now a question of price, not market access.”

Sismey does not believe bail-in risk would unnerve holders of senior debt in irish bonds. “Even for some of Europe’s weaker banks, the credit curve has been flat enough between three and 10 years to suggest that investors believe that by the time sen-ior debt becomes bail-inable, banks will have sufficient buffers in place between equity and subordinated debt that the risk of senior being bailed in will be minimal,” he says.

nick Dent, head of EMEA syndicate at nomura, says that one of the keys to the irish banks’ successful return to the market has been the careful plan-ning, timing and sizing of the transac-tions. “Because they have been under no funding pressure, the banks have been able to limit the size of their issues, always leaving investors hun-

gry for more,” he says. “This has had the twin effect of supporting their secondary market performance and preparing the ground for subsequent transactions.”

ireland’s banks should continue to benefit from relative scarcity value. As Sismey at Goldman Sachs points out, one of the technical reasons for why transactions such as the Boi senior unsecured trade were so well supported in the primary market is the general expectation that issuance volumes will be modest.

Perspective needednone of this is to suggest that ireland’s banks don’t face a number of very for-midable challenges, some of which are making equity investors jittery. reports published this month by Gold-man Sachs and Fitch were credited by the irish press for prompting a fall in share prices in the banking sector, but both should be seen in perspective. Goldman Sachs’ ‘sell’ call on Boi shares came after they had outperformed their European peers by a wide margin.

Fitch’s update expressed the caution shared by all rating agencies about the capital requirements likely to be dic-tated by the Prudential Capital Assess-ment review (PCAr), originally drawn up in 2011 on a Basel ii basis. “Since then,” Fitch says, “capital expectations of market participants have increased in terms of both quantity and qual-ity. Fitch believes that the 2014 PCAr may revise the stress assumptions and requirements to align more closely with Basel iii. As irish banks’ capi-tal ratios continue to be eroded and a return to profitability only appears fea-sible in the longer term, further capital may be required before the banks can contemplate a future independent of state support.”

nigel Greenwood, analyst at Stand-ard & Poor’s, shares this caution. “Although we have seen mildly positive developments on the funding side, our main concern is that the banks’ capital is weak on a Basel iii basis according to our metrics, which continues to be a constraint on their ratings,” he says.

Credit analysts agree that the next PCAr stress tests, expected in the last quarter of 2013 or early 2014, are the next critical landmark for the irish banks, and possibly a key determinant on ireland’s readiness to exit the Troi-ka programme. “The next stress tests will probably establish a new core tier

one target ratio in line with Basel iii,” says Hajiloizou at Barclays. “This will be at least 7%, although i wouldn’t be surprised if ireland requires a slightly higher ratio for its banks than the EU minimum level.”

Hajiloizou says that as of the end of March 2013, AiB and Boi had core tier one under Basel ii of 15% and 13.8% respectively. Their last reported fully-loaded Basel iii ratios, meanwhile, were 9.7% and 8.5% , including the gov-ernment’s preference shares. “There will be some capital erosion from con-tinuing loan losses, which could be partially offset by further rWA reduc-tions, but most importantly ratios will remain well above the 10.5% minimum requirements set by the PCAr in 2011,” she says. “A Basel iii core tier one pass rate under the stress tests of up to 8% or 9% would put them under renewed pressure. The banks will need to find ways to bolster capital levels to meet new rules, like all European banks.”

The return of foreign banks?Barclays’ Davey says that although downside risks remain, the brighter prospects for ireland’s economy and banking industry raise the prospect of foreign banks re-evaluating the oppor-tunity presented by the country. “Pre-crisis, foreign banks represented about a third of the banking system,” he says. “During the crisis, it was assumed they would wind down and exit. But given how strongly the economy is rebound-ing, it may be that one or two of these banks review their strategies.”

Owen Callan, senior analyst, fixed income strategy at Danske Bank in Dublin agrees. “if a foreign bank were to come into this market in a meaning-ful way it would be a massive boost to confidence,” he says. That would cer-tainly be the case if a buyer could be found for Ulster Bank, which has 135 branches in the republic and which its parent, rBS, is eager to offload. s

“The rescue fund-ing made available to Ireland required the central bank to

implement a whole-sale restructuring of the banking system”

Ben Davey, Barclays

Corporate Issuers

Ireland in the Capital Markets | June 2013 | EUROWEEK 19

From a Fundamental perspec-tive, CrH scarcely counts as an Irish credit. But Ireland was not going to let a detail like that get in the way when the building materials group re-opened the market for Irish-based corporates in January 2012. the €500m seven year transaction, led by Citi, InG, rBS and Société Générale was the first issue from an Irish corporate borrower since Feb-ruary 2010.

Ireland is no more than a modest part of CrH’s business. While cen-tral and eastern europe account-ed for 40% of its ebitda in 2012, and Switzerland, Benelux and Fin-land for a further 45%, Ireland and Spain contributed just 5%. and with domestic cement sales down 17% last year, the Irish contribution appears to be declining.

nevertheless, the fact that CrH is headquartered and listed in dub-lin clearly means it is technically an Irish issuer, which made investors’ response to its trade at the begin-ning of 2012 all the more impres-sive, with 280 accounts generating an order book of close to €4bn.

a more appropriate test of true demand for Irish corporate risk, say bankers, came at the end of august, when the country’s state-owned utility, electricity Supply Board (eSB), returned to the market with a €600m five year benchmark led by BBVa, danske Bank, deutsche, rBS and Société Générale. the best part of six months in the making, having originally been roadshowed in march, the eBS transaction was worth the wait, with a book of about €2.8bn from 228 investors allowing for the issue to be increased from an originally planned €500m mini-mum.

eSB priced its august 2012 trans-action at 590bp over Bunds, which was the tight end of guidance, and represented a spread to the Irish

government curve of about 110bp. “For investors who believed in the Irish recovery theme, the eSB deal offered a good way of buying into the story with a yield pick-up,” says Paul Gregory, head of corpo-rate origination at danske Bank in Copenhagen.

Sentiment sea changeIt was a measure of how quick-ly sentiment towards Ireland changed in the last quarter of 2012, however, that by the time eSB returned to the market, three months later, the spread to Germa-ny had tightened to below 330bp.

that allowed eSB to print a €500m seven year issue in novem-ber via Bank of america mer-rill lynch, Barclays, BnP Paribas, HSBC, rBS and Société Générale at a spread of just 320bp, with the order book reaching €6bn from 375 investors.

the momentum created by this demand allowed the gas supplier and distributor, Board Gáis Éire-ann, to follow eSB into the market a few days afterwards, with very similar results. With the eSB issue having tightened to well below 300bp, Board Gáis was able to price its €500m five year deal, led by Barclays, BnP Paribas, danske, HSBC, rBC and rBS, at 275bp, with demand swelling to €6.5bn.

Granted, both eSB and Board Gáis were given a big helping hand by the eCB’s outright monetary trans-actions announcement. neverthe-less, both were also instrumental in helping to rebuild Ireland’s cred-ibility in the international capital market. “true, eSB has some activi-ties in the uK and northern Ireland, but it and Board Gáis are Irish risk through and through, unlike CrH which is a multinational that hap-pens to be based in Ireland,” says danske’s Gregory.

the strength of demand for both issuers was perhaps all the more remarkable, says Gregory, in light of two potentially negative elements for their credit stories. the first was the discussion, given plenty of air-time in the press, about possible asset sales in Ireland and the per-ceived candidacy of both compa-nies for at least partial privatisation. “that discussion was not particular-ly helpful given that the companies were both presented to the market as being almost 100% government-owned,” says Gregory.

Sovereign riskthe second was the perceived vul-nerability of the Irish sovereign rat-ing in the fourth quarter of 2012. “although both companies enjoy a ratings uplift because of the resil-ience of their businesses, they were still on the cusp of investment grade because of Ireland’s Ba1 with a neg-ative outlook from moody’s,” says Gregory. “It was potentially a chal-lenge to ask investors to buy into a story where they might have faced a downgrade to below investment grade, although both issuers offered a coupon step-up to mitigate this.”

In the event, says Gregory, the perception among investors has been that as ultra-defensive utili-ties, credits such as eSB and Board Gáis are as strong as the Irish gov-ernment itself.

Irish companies have regained access to international debt markets in some style over the last 12 months. But how much of their success is down to the warm fuzzy feeling created by the European Central Bank’s open market transactions programme and global quantitative easing — and how much is down to a genuine belief in the Irish recovery theme? Philip Moore reports.

More supply needed as companies re-engage

“For investors who believed in the Irish

recovery theme, the ESB deal offered a

good way of buying into the story with a

yield pick-up”

Paul Gregory, Danske Bank

Corporate Issuers

20 EUROWEEK | June 2013 | Ireland in the Capital Markets

“eSB and Board Gáis have both traded more in line with high grade european credits than with some of their southern european peers, with eSB recently trading 40bp through the government,” says oliver Sedg-wick, head of emea investment grade syndicate at Goldman Sachs in london. “that is not necessarily a surprise, because there are plen-ty of examples in europe of cred-its that have dissociated themselves from the sovereign in the second-ary market, such as the Spanish and Italian banks.”

Beyond the domestic euro inves-tor base, demand for elusive Irish-based corporate borrowers is also robust in the dollar market. When the dublin-listed food company, Kerry Group, launched its debut public bond in april, it generated an order book of $3.25bn for a $750m 10 year deal, allowing it to price at the tight end of guidance.

Supply dwarfed by demandBeyond the issuance from the utili-ties, there has been precious little in the way of supply aside from cred-its such as Smurfit Kappa, which printed a €400m seven year high yield trade in January. like CrH,

however, Smurfit Kappa is regard-ed as a multinational based in Ire-land, rather than as a corporate that is a genuine play on the Irish economy. as it says on page two of its latest annual report, Smurfit Kappa operates in 21 countries in europe and 11 in the americas, and owns 104,000 hectares of for-est plantations in latin america.

“there is definitely more appe-tite for Irish corporate credit than supply,” says Sedgwick. “although there has been some volatility in the credit market recently the cor-porate market clearly remains a safe haven.”

morven Jones, head of european corporate and SSa debt capital mar-kets at nomura in london, agrees, saying that the supply-demand disequilibrium has had a visible impact on pricing in the Irish corpo-rate space. “there is no shortage of liquidity for Irish credits,” he says. “Investors would love to see more Irish borrowers coming to the mar-ket, and it is this scarcity combined with the successful return to the market of the sovereign which has helped to reduce the premium for issuers in general.”

the fixed income space is not the

only market starved of exposure to Irish corporate names. “Barclays is one of the most significant lend-ers to large cap Irish companies, a segment which obviously has more modest funding requirements than large cap companies in bigger scale markets,” says Charlotte Weir, man-aging director of debt capital mar-kets at Barclays in london. “the tenors of banks’ loans to Irish com-panies are shorter than they were, but the days of lending 15 or 20 year money to companies anywhere in europe are long gone. From the per-spective of lenders and bond inves-tors, any perceived stigma that might have been associated with the Irish economy has significantly dis-sipated.” s

Bankers say that the imbalance between demand and supply from Irish borrowers is probably even more striking in the Us private placement (UsPP) space than it is in the pub-lic market.

“The UsPP market has historically been a very important source of funding for Irish corporates outside of the bank market,” says angus Whelchel, head of european private capital markets at Barclays, who adds that the private placement market has been espe-cially appealing to corporates that are often unrated and have modest funding require-ments. Part of the attraction is the product flexibility, which allows transactions to be tailored to suit issuer needs. “It is not un-common to see deals with multiple tranches based on different tenors and currencies,” he says.

“There is a natural affinity among Us in-vestors for Irish corporates,” adds Whel-cel. “They are regarded as strong operators with a similar management style to Us com-panies, and they have performed well over time. even during the crisis, Irish corporate

borrowers continued to have very good ac-cess to the UsPP market.”

Perhaps the clearest example of how re-ceptive the UsPP market has been for Irish corporate borrowers came in 2003 when electricity supply Board launched a seven-tranche issue in dollars and sterling which raised the equivalent of $1.03bn, which at the time was the largest issue ever from a non-Us borrower in the market.

Bankers say that the recent expansion of demand in the UsPP market is such that in-vestors would easily be able to accommodate a deal of this size from Irish corporates, par-ticularly those with a demonstrable interna-tional presence in terms of their assets and revenues.

“The buying power of the Us investor base has increased over the last two to three years, and importantly, for european issuers we are also starting to see demand from eu-ropean investors,” says Whelchel.

The bad news, says Whelchel, is that there is insufficient supply to meet this burgeoning demand. “There is a sizeable supply-demand

imbalance,” he says. The result is that total issuance, which reached a record $55bn in 2013, is down this year by about 20%, and that well received borrowers looking for $100m are regularly swamped by demand.

Bankers add that the overall reduction in supply is creating outstanding opportunities for issuers. “Pricing levels are very competi-tive with the public market,” says one. “and because investors are largely buy and hold in-stitutions which aren’t concerned with mark-ing to market, volatility is much lower.” s

The potential of the USPP market

“Although there has been some

volatility in the credit market recently the

corporate market clearly remains a

safe haven”

Oliver Sedgwick, Goldman Sachs

“There is a natural affinity

among US investors for Irish

corporates”

Angus Whelchel, Barclays

Foreign Direct investment

Ireland in the Capital Markets | June 2013 | EUROWEEK 21

Maybe astraZeneca knows some-thing about Ireland that the world’s other largest pharmaceuticals com-panies don’t. according to barry O’Leary, chief executive officer of IDa Ireland, the Irish government agen-cy responsible for attracting foreign direct investment (FDI), each of the world’s 10 largest pharmaceuticals companies has invested in Ireland — except astraZeneca.

the pharmaceuticals industry has been one of the most conspicuous successes in the Irish FDI story, which traces its roots back to 1970. that was when the IDa opened its doors, offer-ing an attractive corporate tax rate as the main carrot with which to attract inward investment. “In the 1970s, many european countries used grants to attract FDI,” says Kevin Daly, sen-ior european economist at Goldman sachs. “but as Ireland’s fiscal posi-tion at the time was weak, it couldn’t afford to compete by offering similar grants, so the focus shifted to using low taxes as an incentive instead.”

this competitive tax regime helped to attract some high quality invest-ment, especially from sectors such as pharmaceuticals and technology. It did not do so immediately, however. “When we first opened, we welcomed any industry we could,” says O’Leary. as recently as 1990, he adds, the big-gest investor measured by job crea-tion was the t-shirt producer, Fruit of the Loom, which employed 4,500 people.

by then, however, higher value-added industries had also been alert-ed to Ireland’s potential. “by the early 1990s, Intel was breaking ground on its facility in Ireland, and the Irish Financial services centre (IFsc), which was set up in 1987, was expand-ing,” says O’Leary. “today, Intel has invested about €8bn in Ireland and there are more than 30,000 people working in the IFsc.”

O’Leary says that technology, finan-cial services, pharmaceuticals and

medical devices, and digital media are the four sectors that IDa is pushing as the anchors of FDI in Ire-land. Us companies, in particular, have been attracted by the Ireland’s tax regime, legal system and lan-guage. but O’Leary insists that is the country’s talent pool and its demon-strable track record that have been its greatest assets in pulling in FDI. “Frankly, if tax was your number one concern, it wouldn’t be Ireland you’d go to,” says O’Leary. “It would be switzerland or singapore.”

analysts say that Ireland’s success in attracting FDI, which in the eU has been bettered only by belgium and Luxembourg over the last three years, has been pivotal in supporting its recent growth. “FDI inflows have been running at about 10% of GDP,” says blerina Uruci, UK and Ireland econo-mist at barclays in London.

Resilient performersIt is not just the absolute inflows of FDI that have made an important contribution to Ireland’s recovery in recent years. as Daly at Goldman points out, multinationals choosing Ireland as the base for their eU opera-tions were resilient performers dur-ing the crisis. “Of course, inflows of FDI declined during the crisis, but the export performance of the sector remained strong,” he says.

FDI’s record of job creation in Ire-land, however, is mixed. according to the IMF, employment at FDI-related firms rose by 4.5% in 2012, although the direct contribution of FDI to total employment was what the IMF describes as a “more modest” 0.4%. net job creation in the multinational sector of just under 6,000 in 2011 and a little over 6,500 in 2012 is of course welcome, but, as Davy comments in a recent research update, “pale” against job losses in the broader economy.

O’Leary says that many estimates of the contribution of FDI to the Irish economy fail to take into account the

indirect employment created and sus-tained by multinational investors. For example, he says that by the IDa’s cal-culations, the pharmaceuticals sector accounts for about 45,000 Irish jobs — more than double the amount sug-gested in a recent Davy report. “FDI alone isn’t going to solve the Irish economy’s problems,” says O’Leary. “but most of the recent employment growth in Ireland has come out of the FDI space. about one in seven jobs in Ireland is dependent on FDI.”

although O’Leary insists that tax is not the main draw for FDI, calls for a level playing field in the european tax regime would inevitably weaken its appeal to multinationals. “there is a constant debate about corporate tax harmonisation in europe, which remains a long term risk to Ireland,” says Daly at Goldman sachs. “the Irish authorities argue that while the headline corporate tax rate in Ireland is 12.5%, the effective corporate tax rate is very close to that level, at 11.9%. this contrasts with the situation in many other advanced economies which have headline corporate tax rates that are higher than Ireland’s, but effective rates that are often com-parable or lower.”

O’Leary confirms that focusing purely on the headline rate of cor-porate tax is misleading. “although we have a low corporate tax rate, our income and capital gains taxes are both higher than in many european countries,” he says. s

Ireland’s success in attracting foreign direct investment has been pivotal in supporting the return of economic growth and, therefore, to the country’s impressive recovery in recent months. Philip Moore reports.

Taking the right FDI pills

“If tax was your number one

concern, it wouldn’t be Ireland you’d

go to. It would be Switzerland or

Singapore”

Barry O’Leary, IDA

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