Morning Equity Briefing
Allied Irish Banks
ALBK ID
Successful issuance of €3bn of senior guaranteed funding
Stephen Lyons
| Closing Price | 140c | Rating: | Outperform | 11/09/09 | Previous: | Neutral | 30/06/09 |
ALBK yesterday (March 11th) successfully issued €3bn of senior guaranteed funding, split between a two-year floating issue priced at 95bps over mid-swaps and a €2bn five-year fixed-rate priced at 155bps over mid-swaps. Both issuances were well received with the floating issuance 1.2x oversubscribed and the fixed rate 1.65x oversubscribed.
The price of the fixed-rate issuance compares with the bank's €1.5bn three-year fixed-rate issuance back in January priced at 130bps over. However, market credit conditions deteriorated significantly in February as Greece's fiscal concerns came to the fore. Since the end of February, credit conditions have improved. ALBK's five-year CDS finished yesterday at 213bps, compared with 258bps back in early February. The cost of the issuance compares favourably with the 175bps spread over mid-swaps paid by BKIR for a two-year dollar issuance back in February and the 165bps spread over mid-swaps paid by IPM for a five-year issuance last week. The Irish government's spread over German bunds for 10-year bond yields also continues to tighten, and is now at 128bps over — the lowest since end-2008. Also yesterday, Abbey became the second UK lender in a week to issue under a covered bond program which suggests further easing in credit conditions.
Separately, we have done further analysis on ALBK's 'renegotiated loans' balances as detailed in its 20F filing issued this week. The balance of €4.5bn or 3.4% gross loans appears high and raises concerns that the renegotiated loans balance hides additional stress in the book. However, as the 20F notes, any renegotiation of loans on concessionary rates or uncommercial terms would not prevent such loans from being classified as impaired. Instead, the balance points to successful arrears management practices that reduced the bank's 'past due but not impaired' balance for 1-30 days from €6.1bn at the end of 2008 to €3.75bn in the year. The renegotiated loans figure compares with a figure of 5.8% for KBC Ireland — whose book is predominantly residential mortgages — suggesting that such a figure is appropriate at this stage in the credit cycle as banks seek to work with customers through extension of loan terms, move rates from fixed to variable or allow customers to move to interest-only only for a period.