Bank of Ireland offers to buy back €1 billion in mortgage securities

As reported in The Independent, The Bank of Ireland has proposed to buy back €1 billion in mortgage securities from investors.

The investors participated in 2007 in a €4.5 billion securitisation of the bank’s mortgage inventory.

For a short period, the bank is willing to pay between 28% and 92% of the original price paid by investors. If the investors accept the offer, the bank will gain about €300 million from this move alone. Analysts said that as a result of this bond auction, The Bank of Ireland is likely to get about €200 million in capital.

Any person who owns bonds of this kind can sell them until December 1. The next day, everyone will find out the result of the auction. The person or the institution who holds the mortgage bonds will lose if the debt associated with the bond will not be repaid.

At the moment, the Irish banks are in the process of reducing their risks and get rid of nonperforming or toxic assets. By buying back bonds, Bank of Ireland moves in the opposite direction.

Stephen Lyons, an analyst at Davy Stockbrokers, commented: “Reduction in long-term funding seems to go against the objectives of PLAR,”

PLAR, also known as Prudential Liquidity Assessment Review, is a document that mandated banks to improve their solvability rates by selling non performing assets and by attraction more capital.

The Central Bank has already reviewed and approved the potential deal between bank and investors. The mortgages in question are mostly owner-occupied mortgages. This means that the people who borrowed the money also wanted to live inside the house. They weren’t speculators who wanted to profit from the increase in prices.

How is the sale going to work?

The sale will look very similar to a “sealed bid” auction, where the bondholders don’t know what other bondholders are asking for their bonds.

The bonds are divided into 4 categories: A,B,C and D. The bonds called “D” are the riskiest. And the bank will probably offer around 28% of the original value. The bonds called “A” are the safest(they will be paid back almost for sure) and the bank will give around 92% of the original bond value.

First, Bank of Ireland will start buying the “A” bonds. And if they will have any money left, they will probably buy C and D bonds as well. One insider added: “Those are the minimum prices, bondholders will come to the bank and say what they’d be willing to accept, it’s a case of suck it and see.”