IRELAND IN THE CAPITAL MARKETS - SMOOTH RECOVERY ENTERS NEW PHASE June 2014 - Sponsored by: GlobalCapital
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IRELAND IN THE CAPITAL MARKETS SMOOTH RECOVERY ENTERS NEW PHASE June 2014 Sponsored by:
IRELAND IN THE CAPITAL MARKETS
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Ireland in the Capital Markets | June 2014 | 1
FOREWORD BY THE MINISTER FOR FINANCE
Return to full market access
by Michael Noonan, TD, Minister for Finance
T
his special report on Ireland by GlobalCapital marks export markets, which should support exports of agriculture,
a period of great improvement in Ireland’s circum- tourism and manufacturing in particular. A broad range of
stances. The country has achieved full debt market high frequency indicators, including the PMIs and consumer
access at record low government bond yields and the confidence, have climbed to pre-recession highs. Although
economy continues to gain momentum. Credit rating agen- patent expiry will continue to weigh on exports in 2014, avail-
cies have reacted positively: Ireland is now rated at A- (posi- able evidence suggests that the impact will not be as large as
tive outlook) by Standard & Poor’s, Baa1 (stable outlook) by was the case in 2013. On the domestic front, the investment
Moody’s and BBB+ (stable outlook) by Fitch Ratings. cycle has clearly turned, while employment growth allied with
Ireland did not apply for a precautionary credit line as its improving confidence should support an increase in personal
EU/IMF programme ended last year and this was well received spending. Against this general background, the volume of
by the debt market. In January 2014 the National Treasury GDP is projected to increase by 2.1% in 2014 (GNP by 2.7% after
Management Agency (NTMA) raised €3.75bn from the sale 3.4% growth in 2013).
of a new 10 year benchmark bond — its first capital market The general government deficit for 2013 was estimated at
transaction since the end of the EU/IMF programme. In March 7.2% of GDP which is well within the effective deficit proce-
2014, it completed its full return to the market by resuming dure (EDP) ceiling of 7.5% of GDP. Growth in tax revenues and
regular bond auctions. Ireland is fully funded for 2014 and has expenditure restraint were the key contributors in achieving
raised €6.5bn of its planned issuance of €8bn by way of pre- the target. The 2014 Budget projected a deficit of 4.8% of GDP
funding for 2015. The NTMA maintains cash reserves consist- for this year and while some minor offsetting composition-
ent with its stated aim of having sufficient resources to cover al changes have been incorporated this projection remains
12-15 months of exchequer financing needs. unchanged. For 2015, a deficit of below 3% is forecast, in line
The NTMA’s intensive investor relations programme that with commitments under the EDP.
began in 2011 has helped to generate renewed interest among The Irish banking sector has been overhauled and is
institutional investors in Irish government bonds. It has con- returning to profitability. The next target is the euro area-
ducted a regular series of investor roadshows in the US, conti- wide stress tests in late 2014 from which no negative surprise
nental Europe, the UK, Ireland, Asia and the Middle East. is expected. Asset quality is improving and mortgage arrears
The general government debt to GDP ratio peaked at close have fallen from their peak. Deposits have stabilised and
to 124% at the end of 2013, and is now on a firm downward drawings from the ECB have fallen significantly. This is a work
trajectory. It is important to highlight that this is a gross debt in progress and is under constant review.
figure. Net public indebtedness — which takes into account The National Asset Management Agency (Nama), which
the value of the cash reserves already mentioned and other was set up to deal with the excessive property lending by the
assets built up by the state (but does not give credit for equity Irish banking sector, paid down 2%, or €7.5bn, of its senior
instruments such as state ownership of banks) — amounted bonds by the end of 2013. This progress has continued into
to just under 100% of GDP in 2013, well below the gross figure. 2014 and Nama is confident that it will complete its work ear-
From a financing perspective, it is also worth pointing out that lier than the 2020 date originally envisaged. Subject to the out-
funding requirements over the short and medium term have come of portfolio and asset sales currently underway, it aims
been reduced significantly on foot of the maturity extension to have as much as half of its senior bonds repaid by the end
to official EU loans agreed in 2013 and the promissory note of 2014 — a full two years ahead of schedule.
deal. These initiatives have reduced the funding requirement The National Pensions Reserve Fund is being reconstituted
by some €40bn over the next decade. as the Ireland Strategic Investment Fund. It has €6.8bn at its
Provisional figures show that GDP fell slightly during 2013 disposal (excluding co-investment from third party investors)
due to the negative impact of expiring patents in the phar- to lend on a commercial basis to support economic activity
maceutical chemicals sector, which depressed output and and employment. It will invest within Ireland in areas such
exports, and rising imports of royalties in the IT services sec- as infrastructure, SME financing, private equity and venture
tor without an associated rise in exports. By contrast, domes- capital, providing a further fillip to the recovering economy.
tic demand bottomed in the second quarter of 2013 and Ireland continues to be a key destination for foreign direct
returned to growth in the latter half of the year. The recovery investment. Forbes magazine, as part of a survey, recently
in domestic demand also helps explain the very strong labour ranked Ireland at the top its list of the best countries in which
market performance in 2013 where employment growth out- to do business. It stated that Ireland maintains an extremely
performed expectations. Employment grew by almost 2.5% in pro-business environment that has attracted investments by
2013 and this is a much more reliable guide to the economic some of the world’s biggest companies over the past decade.
recovery. The unemployment rate has fallen from its peak Ireland has recovered from a serious financial crisis. Mar-
above 15% to below 12%. kets have recognised the major fiscal consolidation, banking
Activity has strengthened in the UK, one of Ireland’s key reform and economic recovery. s
2 | June 2014 | Ireland in the Capital Markets
MACROECONOMIC OVERVIEW
Hard work ahead to keep
impressive recovery on track
Held up by many commentators as the poster boy of the eurozone periphery recovery, there are
plenty of signs that Ireland’s revival is maturing. But with growth still low, debt high and a lack of
credit for its crucial small to medium sized enterprise sector, there are still growing pains ahead.
Craig McGlashan reports.
FREE OF ITS troika bail-out since here, the imports happened in agency, many analysts want a shift
December, with government yields the fourth quarter but consumer away from debt.
below the rest of the periphery for spending will only be booked in the “I’d be very encouraged to start
over a year and employment rising first quarter of this year. It’s going to to see policy solutions that promote
by 2.5% in 2013, Ireland certainly has be pretty strong first quarter number equity as a bigger part of the funding
reasons to be cheerful. But not every to compensate for the last one.” mix for SME and corporations,” says
figure points to a revitalised Celtic Laura Sarlo, senior sovereign analyst
Tiger — preliminary numbers from Small but crucial at fund manager Loomis, Sayles &
the country’s Central Statistics Office But there are worries that credit is Company in Boston.
suggest GDP dropped 2.3% quarter- not getting to the major driver of Sarlo believes the new agency can
on-quarter in the final three months employment growth — SMEs. help the SME sector in the near term,
of 2013, dragging down the figure for “SMEs provide about 70% of but that it needs to forerun a return
the whole year to minus 0.3%. Irish employment,” says Colin of private cash.
However, the European Bermingham, a macroeconomist “The common thread among these
Commission expects Ireland’s at BNP Paribas in London. SME financing agencies across the
economy to grow by 1.7% in 2014 — “Employment growth has been periphery is KfW’s participation,” she
and economists back this figure. concentrated in professional says. “These agencies are trying to
services, agricultural, a little bit of buddy up and share best practices,
construction and the hotel sector. with KfW providing funding to help
These industries are all dominated that flow of credit get to the real
“Ireland is very by SMEs, where value added is economy. That SMEs will be able to
clear — they won’t anything from 74% to 90%. access credit nearer to core eurozone
touch the 12.5% “Over the crisis period, SMEs in interest rates is a positive. But private
corporation tax rate” Ireland fared worse than SMEs in capital allocations are probably most
the eurozone generally in terms of efficiently done by the private sector
Antonio Garcia accessing finance. But there is also so hopefully after the policy banks
Pascual, a demand side element. Recent jump-start things it will transfer
Barclays central bank research found a third back.”
of SMEs have no debt whatsoever,
and 85% have debt that is less Bank backing back?
than a third of turnover. It’s not Such lending could provide the
“Ireland has no parallels in the like all SMEs are in a bad situation additional boon of helping Ireland’s
eurozone because it has such a financially and not in a position to beleaguered banking system,
large multinational sector,” says borrow.” suggests Antonio Garcia Pascual,
Rossa White, chief economist The government has taken steps chief euro area economist at Barclays
at the Irish National Treasury to improve the flow of credit to those in London.
Management Agency in Dublin. “A small businesses that want it. In “New net lending to the private
large number of patents expired in May, it announced plans to create a sector is good because Irish banks
the pharmaceuticals sector last year new entity — the Strategic Banking have excess exposure to real estate
so that ended a long stream of high Corporation of Ireland — that will and not so much to SMEs and
value added exports in that sector. In provide €500m of credit to the sector. households other than mortgages,”
the IT services sector companies had “The new fund has the potential he says. “It will make sense over the
very strong exports but paid greater to be important because gross new medium term for banks to expand
profits to their US parent companies, credit to SMEs last year was about their portfolios in those areas.”
so the bottom line took a hit because €1.9bn,” says Bermingham. “Increase Credit supply is also likely to receive
imports of royalties rose. that by €500m and it opens the a boost from the European Central
“Pharmaceuticals will be a drag door for new lending that firms can Bank’s decision in June to lower
this year but less so than the last few take advantage of, even if it’s just interest rates — despite that meaning
years. There was also a big spike in changing the terms of an existing a hit on returns from the tracker
car sales in first quarter of this year loan for a lower rate or longer term.” mortgages that still form a large part
but as there are no car manufacturers But despite welcoming the new of banks’ balance sheets — along with
Ireland in the Capital Markets | June 2014 | 3
MACROECONOMIC OVERVIEW
additional measures to provide credit property deals are encouraging. The spoke to believe the government will
in the form of targeted long term Irish government has talked about immediately shift its position.
refinancing operations, €400bn of a policy that’s a bit like Help to Buy “Ireland is very clear — they won’t
four year loans to banks that can be in the UK, providing assistance for touch the 12.5% rate,” says Barclays’
on-lent to the real economy. first time buyers. For a housing Pascual. “Ireland does have a
“The ECB’s measures will have a market that’s recovering that’s favourable corporate income tax rate
positive impact fundamentally on adding fuel to that fire. Hopefully relative to others. But in countries
periphery economies with Ireland in its implementation it will be as with much higher rates of 25% or
and Spain benefitting more than conservative as possible.” 30%, the effective tax rate is nearly
others,” says Pascual. “That’s because as low as Ireland’s when taking tax
of the very long term refinancing Celtic export breaks and so on into consideration.
operation. It is fundamental to Ireland’s exports to GDP are by far That’s not spoken about much.”
keeping lending rates low for an the largest in the eurozone, says However, BNP Paribas’
extended period of time, which is Barclays Pascual. That means the Bermingham can see changes on a
positive for households and firms ECB’s efforts to weaken the euro — longer timescale.
that need to deleverage and would another target of its June measures “There are probably elements
otherwise face higher interest rates — will be welcomed. of the Irish tax code that will be
and they’d have difficulty repaying, But there are also efforts to foster reviewed,” he says, “such as royalty
which would hit the banking system.” relations outside of Ireland’s main payments for intangibles like
But despite Irish banks returning trading partners — the eurozone, international intellectual property
to profitability — albeit weak UK and US. Asia Business Week took rights and also residency issues.
profitability — there is still much place in early June in an effort to These can result in double non-
work needed to clear up the mess left grow links between Irish businesses taxation, for both Ireland and
after the financial crisis that began and their Asian counterparts. abroad. We’re going to see a policy
in 2008 and the eurozone sovereign “It’s not easy for an SME to enter of international co-ordination on tax
debt crisis that followed it. into an export market right away,” rates, which is going to be slow. If
“It’s very important that the says BNP Paribas’ Bermingham. it results in taxes being levied more
banking system clean-up continues “If you have experience of doing closely to where sales and income
as it has been so far,” says Matthew that in one market first it makes it is raised, that could be a positive
Williams, finance analyst at asset easier to get into other markets. The for Ireland as it has a transparent
manager Carmignac Gestion in Paris. government is trying to widen its system and ranks well as a place to
“It’s likely that both the large banks investor base which is a good move. do business.”
will be profitable this year so that’s There is already a lot of government
a major step forward. Both have support in place for firms that want Austerity no more?
done a lot of work on restoring their to get involved in export and there’s Former Taoiseach John Bruton said in
capital structures and cleaning up always been a bias in industrial May that Ireland faces 10 more years
their legacy non-performing asset policy to the export sector than of austerity. But economists argue
portfolios. The international banks, companies with a domestic focus, that that may be far from the case.
Danske, KBC and Royal Bank of because the revenues tend to be less “Last year the deficit was still over
Scotland, are also improving their cyclical and more reliable.” 7% of GDP but the markets did not
balance sheets, so it’s putting them Ireland has also had to deal with take issue with that — Irish sovereign
in a position that they are going to be reputational risk on the international bond spreads were the tightest of the
much more willing to provide capital stage from foreign companies — most periphery sovereigns,” says Barclays’
to the SME sector.” recently from the US — operating in Pascual. “The government designed
When ECB president Mario Draghi the country and reducing their tax a slow pace of consolidation but has
showed his hand in June, he was bill via its low corporate tax rate. But stuck to the target. That was the right
keen to point out that the TLTRO none of the economists GlobalCapital strategy and it’s paying off.”
could not be used to fund The NTMA’s White argues
residential mortgages — that austerity is too strong
something that may be Falling government bond yields and unemployment a word even in the near term.
important for Ireland, where “We won’t have to
8 480,000
property prices are on the 10 year yield at month end
implement more cuts in
rise and arguably in no need 7
People claiming unemployment benefits
460,000 2016, 2017 or 2018 to achieve
of a push. 6
440,000 budget balance under EU
“House price data for 5
420,000
rules according to official
Dublin was rather eye 4 forecasts,” he says. “In
400,000
popping in late May,” says 3 real terms there might be
Sarlo at Loomis, Sayles & 2
380,000
a decline in expenditure
Company. “However, I am 1 360,000 because of some inflation
reasonably comfortable with 0 340,000 but it’s keeping neutral in
the improvement that we’re nominal terms. There will
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about different commercial Source: Markit disciplined fiscal policy.” s
4 | June 2014 | Ireland in the Capital Markets
National Treasury Management Agency Roundtable
Move over Belgium: Ireland
targets semi-core status
Ireland — lauded among peripheral sovereigns for the way in which it has set itself on the path to recovery — exited
an EU/IMF bail-out package in November. Since then the National Treasury Management Agency (NTMA) has been
working on a return to capital markets normality through benchmark issuance and the resumption of an auction
schedule.
The sovereign has been successful enough to begin to position itself as a semi-core European issuer — next to
Belgium — and away from the periphery.
But issues remain, such as the levels of private debt in Ireland’s economy. Plus the big question of what will happen
to the European sovereign debt markets when the European Central Bank decided to turn the liquidity taps off.
GlobalCapital met with members of the NTMA at their offices in Dublin, together with key bankers and investors, to
discuss what is next in Ireland’s path towards the eurozone’s core.
Participants in the roundtable were: Andrew Salvoni, SSA syndicate, Morgan Stanley
Jamie Stirling, global co-head of SSA DCM, BNP Paribas
Susan Barron, managing director, SSAR origination,
Barclays David Warren, chief investment officer, Ireland,
Zurich Life Assurance
Fabianna del Canto, managing director,
European syndicate, Barclays Oliver Whelan, director, funding and debt management,
National Treasury Management Agency
Derek Kehoe, head of fixed income, Ireland, BNP Paribas
Rossa White, chief economist, deputy director, National
Anthony Linehan, deputy director, funding and debt Treasury Management Agency
management, National Treasury Management Agency
Tessa Wilkie, moderator, SSA markets editor,
Frank O’Connor, director designate, funding and debt GlobalCapital
management, National Treasury Management Agency
: Ireland attracted €14bn of orders to more auctions — probably two fairly small auctions
a benchmark bond in January, exited its bail-out in the second half of the year to complete that
programme without a credit line, and has resumed programme.
auctions. Have you proved market access or is Like many small countries, we will probably begin
there work left to do? looking at a syndicated issue early next year, and then
schedule bond auctions which we would announce to
Oliver Whelan, NTMA: Our view of market access was the market in advance. At the moment, we’ve been
the ability to schedule a series of auctions, as opposed announcing our issuance plans at the beginning of each
to what we used to term more opportunistic funding, quarter, telling investors what we plan for that quarter.
when the occasion allowed in previous years. We Bond and treasury bill issuance will be included in that
began with the more opportunistic benchmark issuance update of our auction schedule. We are confident that
in 2012 and 2013 and worked from there. With the we can deliver on that without any difficulty, thanks
successful syndication in January, the announcement to our primary dealers, which are around the table
and successful execution of the three auctions, we have with us here. It’s beyond doubt that we’re back with
definitely achieved market access and normalised our full market access — we don’t get questions about that
market access. It is now the same as for any other small anymore.
eurozone sovereign.
We have a little bit to do for the remainder of this David Warren, Zurich Life Assurance: Investor
year, about €1.5bn. We envisage having two or three access has been very relevant in the last few years.
Ireland in the Capital Markets 5
National Treasury Management Agency Roundtable
The funding team remains very much engaged and Irish Bank Resolution Corporation in February of last
listening to investors. During the crisis, the NTMA year together with the EU programme loan extensions
talked about developing new instruments, such as the has relieved us of about €40bn of funding over the next
Irish Amortising Bonds for example. They are very open decade. The downside — and it’s a good downside — is
to feedback from investors about designing instruments the lack of issuance potential there.
appropriately to meet demand. Access and debating What we’re looking at for the next four years or so
with investors directly is very important. is issuance of around €8bn-€10bn next year, much like
this year. Following that, we’re looking at about €12bn
: Has that been key to the speed of a year, so it’s pretty small for the next four years.
Ireland’s return to full market access? Our next big bond redemption is April 2016 and our
plan in the second half of this year is to offer investors
Warren, Zurich: Transparency in communication is the opportunity to switch terms, perhaps through
very important: saying clearly what you can do and a combination of switching and buy-backs. So that
what you can’t do. The NTMA’s message at the start of €10.2bn redemption could be reduced by €2bn-€3bn or
this crisis was that Ireland was going to focus on what maybe more.
it could control itself, not the whims of investors and
policy developments outside of that.
By focusing on that message it made their strategy
very clear for investors and when the NTMA got
engaged, they could engage on that basis. It was healthy
that there was that level of honesty and transparency.
Andrew Salvoni, Morgan Stanley: The dialogue with
the wider investor base has moved far beyond whether
Ireland has market access and it’s now a case of what
new investors are either entering into Ireland bonds for
the first time, or re-entering Ireland after a prolonged
period of absence during the height of the crisis. We are
seeing new geographies emerge and more high quality
investors start to come into Irish bonds and treat them
more like a rates product, rather than a peripheral or a
credit product. Oliver Whelan,
NATIONAL TREASURY MANAGEMENT AGENCY
Susan Barron, Barclays: Recent credit ratings are
opening up the investor base for Ireland with several Issuance from 2015 out to 2018 should be around
traditional investors that Ireland saw before the crisis €12bn a year.
returning. The key is proving market access, but also We would look at going further out the curve when
sustainability. we launch our programme for next year. We typically
Ireland has been very good at going out to investors look at doing a syndicated issue early in the year and
and saying: “this is the plan, this is what we have we would certainly have on the agenda a longer dated
fulfilled thus far, and this is what we’re going to do bond than the 10 year that we’ve issued so far. Coming
next.” out of the bail-out programme we were cautious not
Providing guidance on their plans and strategy to make any false moves — that dictated issuing at
to investors and market participants regularly was the standard benchmark 10 year spot, where we were
employed very well both during the crisis and as pretty assured of getting a very successful deal away.
Ireland emerged. All of this work and strategy has It’s far too early to be able to give any detail on what
cemented Ireland in its strong position today. kind of bond we might issue next year, but we certainly
have a longer dated bond on the agenda for next year.
Jamie Stirling, BNP Paribas: From the banks’ The upgrade from Standard & Poor’s to A- with a
perspective, the only frustration is that Ireland doesn’t positive outlook in June was very timely. Real money
have a slightly larger bond programme as there’s a very investors are coming back to our bonds and we expect
large amount of demand. that to continue but we will also be looking to Asia as
One of the talking points this year — similar to some the next big bid on our bonds. When we were sub-
of the other peripheral sovereigns like Spain with its investment grade, many investors there weren’t able
ultra-long deals — is whether Ireland could solidify its to seriously engage with Irish bonds. That’s opening
position by issuing longer than 10 years. up now. We are seeing that in the secondary market
But clearly they haven’t had the need, which they already.
have explained to investors in subsequent quarters, and Within Europe there are also pockets of investors
have explained the expectations for following quarters. — I’m thinking particularly of insurance companies in
. Germany and some of the Dutch funds — which would
Whelan, NTMA: We’re looking at the development of be much more willing to engage in Ireland, particularly
the market and our funding needs. They are modest and with the A- rating from S&P.
will be for a good number of years. Looking a bit further ahead we will be looking for
We’ve been helped by the fact that the maturity of Middle Eastern funds to come in later on. We think
the EU’s portion of the programme of assistance has there are good prospects for the Irish bond market,
been extended by seven years. The liquidation of the small though the issuance will be for the next number
6 Ireland in the Capital Markets
National Treasury Management Agency Roundtable
of years. We expect the broadening of the investor groundwork there already. It’s not a case of suddenly
base to continue as what we used to call fast money ratings go up and we’ve got to go to Asia. We’ve been
investors move out of our bonds and more real money meeting investors and rebuilding relationships in Asia
accounts enter the market. for some time.
As Andrew says, it takes time for demand to come
Derek Kehoe, BNP Paribas: As Ireland progresses, the back. They have to put the processes in place, within
profile of the investor type that’s going to be involved their own risk departments. It’s not a switch that you
in the market is going to change as well. We’re seeing a flick overnight but we expect to see that demand come
shift from the emerging market investor profile of three through.
years ago to crossover investors — which is typically
the fast money — through to the real money higher
grade investors.
If you believe Europe will be in an ultra-low yield
environment for the foreseeable future then Ireland
offers substantial value, and is actually trading more as
a semi-core name than a peripheral.
Different investors have different mandates: the
investor type you would target for a market like Ireland
is the high grade and, ultimately, the ultra-high grade
investors that make up the main investor base.
: So, would you say Ireland is now
definitely not considered a peripheral sovereign?
Kehoe, BNP Paribas: It certainly doesn’t trade like
one. The numbers tell the story. It trades much more Rossa White,
like a semi-core sovereign. It’s closer to Belgium than it NATIONAL TREASURY MANAGEMENT AGENCY
is to Greece or Portugal.
Transparency has been part of the Irish product for
Salvoni, Morgan Stanley: As Oliver mentioned, we’re the last few years. We wanted to be more transparent
starting to see flows in the secondary market from with information through our website and through
Asia. It is a slow process, and the ratings upgrades and communications directly with investors. But the troika,
further positive rating action will be one of the drivers when they were here, were very keen on that too and
to bring more investors in. that has probably improved the general transparency of
There will be a domino effect, where investors will the Irish economy. I hope that won’t slip over the next
follow each other into a market that they feel more few years, because if Ireland continues to gain an edge
comfortable with. We’re starting to see the beginning in that area, it would be very helpful for us.
of that.
Asia is going to be crucial — particularly in the Frank O’Connor, NTMA: Adding to the liquidity
re-branding from peripheral to semi-core to eventually debate: we have concentrated on building our
ultra-high grade or core. European benchmark curve. Given the amount of
The investor base in Asia will drive spreads to official sector debt from the troika programme the
tighten further. Part of being more comfortable with market has been starved of the liquid benchmark
the credit means that in an environment where bonds.
underlying rates are so low, investors will be able to go Back in the summer of 2012, despite strong investor
further out the curve and look at longer dated assets. appetite for a dollar issue we came back to markets in
euros with a new five year benchmark and a tap of an
: Is liquidity something that you’re existing eight year bond, our focus being to come back
hearing investors taking issue with at all or are with European benchmark issuance. Investors have
they more concerned with yield? asked in the past why we haven’t had a bigger treasury
bill programme, but again our focus has been on the
Rossa White, NTMA: We haven’t particularly changed benchmark curve and returning to a series of auctions.
our investor relations strategy. We’ve fine-tuned it over With a limited issuance programme, that has again
the last year to 18 months. been the focus this year, and will remain the case into
The investor base was different three years ago — next year as well.
emerging markets-type funds that didn’t look at Ireland
six or seven years ago invested back in 2011 — and Fabianna del Canto, Barclays: The granularity of the
we are moving towards the real money investors over order book in the most recent syndication really does
time. speak to the fact that the investors are not concerned
We had more intensive roadshows back then, more about the liquidity of a programme. The issue has the
than we’ve done in the last year. depth of distribution and also the minimum size that
We’re certainly still keen to meet all of the main investors find liquid.
centres at least once a year: probably twice a year Investors are just frustrated that there aren’t more
within Europe, and then going further afield to North opportunities to buy Irish debt, but the particular deal
America and Asia once a year. We expect the Asian sizes have been managed in a way that Ireland has
investor base to come back over time. We’ve done the delivered on the minimum liquidity considerations
Ireland in the Capital Markets 7
National Treasury Management Agency Roundtable
per issue. The book speaks for itself: the NTMA has change in the central bank, the NTMA and the
managed to balance the size of the programme vis à vis Department of Finance. No investor can say they don’t
market standards and expectations. have the information available upon which to make a
good decision at this stage. It’s all there.
Anthony Linehan, NTMA: Pre-crisis, primary dealers
and banks had much bigger balance sheets, and you Del Canto, Barclays: Ireland and the NTMA have
could rely much more on the primary dealers to outperformed in the way they communicate. Ireland
distribute your bonds. That is why it’s so important is outperforming in terms of the metrics they’ve set
now that we get involved with investors themselves. themselves and how they’ve delivered.
We’ve also made technical changes. When we do an
auction now, it’s a single price auction, which is much Warren, Zurich: If I were in Rossa’s job, I would
friendlier to investors than the previous method, which certainly be pushing comparisons with Belgium.
was much more competitive and investors weren’t
quite sure where to bid. Investors are much more Whelan, NTMA: He has!
comfortable bidding into single price auctions. We saw
that development in the market over the last few years, White, NTMA: And it’s working.
and we changed our own systems to adjust.
Warren, Zurich: There is a slight caveat here from
Salvoni, Morgan Stanley: This is a topic where my point of view. Looking at the public debt situation
liability management exercises like exchange offers there are a lot of similarities there, but the picture with
can take some of the debt stock that is stuck in older private debt is substantially different.
off-the-run issues that are hard to get hold of, hard to The separation between bank debt and sovereign
trade, and move that out towards parts of the curve debt is not complete by any means, although there
where investors want to get involved and build up have been developments. That’s a consideration that I
liquidity in the more on-the-run issues. might bring to bear in my analysis or interpretation.
White, NTMA: We have had a longstanding internal
target to move towards the core countries over time
and Belgium has been what you could call the cheapest
of the core countries. But David has brought up the
one negative, a negative that we outline ourselves
when making that comparison, which is that private
debt is no doubt higher in Ireland than Belgium.
On the other hand, we think we’ve some positives
in our favour. Ireland’s potential growth in the longer
term looks more favourable than a country like
Belgium, for example, but also other countries in the
euro area.
The ageing question used to be important when
looking at debt sustainability but it stopped being such
an issue during the crisis. Ireland would score probably
the best of all the euro countries in that respect. In
Fabianna del Canto, public debt we’re moving towards where Belgium is.
BARCLAYS
Belgium has had a track record of running primary
Del Canto, Barclays: And Ireland has been successful surpluses for long periods. We’re getting back towards
in managing that. a primary surplus but it looks like gross debt and net
debt will peak at similar levels.
Warren, Zurich: Ireland offered investors active buy- There are certainly some negatives in terms of
backs, switching and consolidation programmes even private debt, but potentially in terms of growth Ireland
pre-euro. Those operations infer a lot of engagement looks better, so it’s still a reasonable expectation that
with investors at that time. Hearing Oliver talking we could close that gap with Belgium — maybe not
about plans for that continuing is very encouraging fully but we would like to close a lot more of that gap.
from an investor’s point of view. It would be interesting to get the banks’ thoughts on
There’s only so much that a debt agency of a that.
modestly sized country issuing bonds can do, in
terms of primary market access, and delivering Stirling, BNP Paribas: There was a little blip in
primary market operations to investors in an efficient, the sovereign market in mid-May because investors
transparent way. thought spread compression was perhaps slightly
Secondary market liquidity is really outside the overdone and took profits. The announcement from
control of any debt agency. In a country of Ireland’s the ECB meeting in June means that there is room for
size, we’re just not going to have the same liquidity as further spread performance. There is no reason to think
the Treasury market. There is a point at which investors that this is as far as Ireland can go.
need to exercise judgment.
As an investor, the volume of information we receive Kehoe, BNP Paribas: Absolutely right. We are going
from countries like Ireland is on a different plane to see further spread compression. Investors are
compared to what it was previously. That’s a structural trading Ireland against Belgium, and they’re trading
8 Ireland in the Capital Markets
National Treasury Management Agency Roundtable
Ireland and Belgium against Germany. The safe spread down, alongside all the credit progress we’ve made.
compression trade in Europe over the remainder of this We have to be grateful for that.
year is to buy Ireland over Germany or Belgium. I’d like to hear David’s view on how he views the
That gap with Belgium may not go to zero — there euro landscape after the ECB announcement.
may be liquidity reasons why it won’t go to zero — but
it will get close, I’m sure of that. Warren, Zurich: The ECB has missed a substantial trick
here. I’m concerned about its definitions of disinflation
Barron, Barclays: I agree. It was interesting to see how and deflation. The way it characterises deflation doesn’t
well Ireland’s bonds stood up to the recent volatility work for me. They say they will pick up evidence of
in peripheral European sovereign debt trading in deflationary expectations in rising savings ratios —
May. That is testament to the fact that Ireland is now people postponing purchases because they feel prices
considered more of a semi-core than peripheral name. are going to fall. But the lessons of Japan, which are
very relevant, are that you can’t afford to wait for that
to happen.
Persistent low inflation does support low, long term
interest rates, but it’s a significant issue for many
countries in the eurozone. It’s just as big an issue as
abnormally high or accelerating inflation. The ECB has
been dragged reluctantly into action.
I don’t share the popular characterisation of June’s
policy move: it seems to me slightly more pea shooter
than bazooka.
The best has to be yet to come from the ECB because
there needs to be a substantial counter to the very
low nominal levels of growth and falling inflation
expectations in the eurozone.
: What would you like to see them
Susan Barron, doing?
BARCLAYS
Warren, Zurich: It’s inevitable that the ECB introduces
Investors look at the overall credit metrics. The some sort of quantitative easing programme involving
upward trajectory of the ratings is affording Ireland an direct asset purchases. Equity markets remain at
opportunity to attract a much broader investor base, good levels in the eurozone despite the disappointing
and that could further aid spread compression but also amount of ECB action, which implies that investors
opportunities to issue maybe in the longer end. expect further action. So the ECB will be dragged
into further policy action. The longer the European
Del Canto, Barclays: What has been supporting the authorities leave it, the more substantially they might
spread compression, as Susan says, is new investors have to act in the end.
coming in and other investors not selling. The investors The US authorities acted faster to cleanse banks’
that supported Ireland over the last few years have balance sheets and support asset prices. European
held on to that paper, for the most part. If anything authorities have been slower for philosophical and
they would like to go further out the curve to find a bit practical reasons. But the net result has been that we’ve
more yield but they are happy with their exposure. been slower in cleaning up our system. That’s a drag
That’s a testament to the investor relation work on activity, it’s a depressant to inflation and that’s not
that the NTMA has done along with improvements in what we want at this stage.
Ireland’s economic fundamentals. Ireland has retained In an isolated sense, Ireland having low
the investor base that it has built over the last two inflation versus competitors is a good thing from a
years, and is just adding to it. Spreads have further to competitiveness point of view, but if everybody around
go. the world is in that situation, it’s much harder to gain
competitiveness, so we would have to do it through
Salvoni, Morgan Stanley: We can’t underestimate more painful activities internally.
the impact of the ECB’s actions in early June and how
investors are going to operate in this persistently low Linehan, NTMA: Very low bond yields are an issue for
rates environment. A lot of investors are looking at pension funds and for long term savers — especially
the landscape of European sovereigns now, looking at for people buying annuities. The Irish position is
where they can outperform the various metrics and to probably better as we have a younger age profile. But
do so without having to make the jump from the core across Europe I expect those problems for savers and
to a credit like Greece, for instance. Ireland definitely for retirees to cause big issues in coming years. That is
provides one of those opportunities, and those a theme that will develop over the next few years.
opportunities are getting few and far between.
: How will banking union in Europe
White, NTMA: The incredibly loose monetary policy affect Ireland and its banks?
around the world has benefited all sovereigns and
certainly those that were in difficulty. We have to be Kehoe, BNP Paribas: Banking union is only to be
happy with that, it has helped us get our funding costs welcomed, and we would be very much in favour of
Ireland in the Capital Markets 9National Treasury Management Agency Roundtable
it. It’s long overdue. It will be good for Ireland’s banks
because having a single monetary area, with a large
number of different banking regulators not always in
tune, cannot be a good thing. Transparency is just as
important for banking regulation as it is for a sovereign
issuer.
White, NTMA: From a sovereign perspective the link
between banks and the sovereign has been pernicious
in certain countries including Ireland in the past. One
of the key goals of banking union, aside from the
supervisory element of making sure that banks don’t
get themselves into trouble, was to break this link in
some sense.
It’s fair to say momentum on that has been lost over
the last couple of years since the declaration at the
end of June 2012. If we found ourselves back in crisis
David Warren,
ZURICH LIFE ASSURANCE
again, maybe that momentum would restart. Key areas
would include deposit insurance and a wider safety the broader macro level because the fiscal compact
net for the euro area, as well as a centralised bank gives one comfort that there can’t be macro upheaval,
recapitalisation tool. regardless of the political landscape. That said we have
If the stress tests later this year bring some some concerns about the voices thrown up in these
problems to light, it would be interesting to see if that elections, and the potential longer term impact on
momentum comes back, because the link between the policy.
sovereign and the banking system hasn’t been fully
dealt with. : We’ve talked about Ireland attracting,
Certain countries’ banks have already bought a lot and looking to attract, new investors in different
of sovereign debt. And we can see that because of the geographies. Are investors that aren’t based in
Targeted Long Term Refinancing Operations and the Europe concerned about anti-EU parties making a
cheap funding that’s in place banks are probably going strong showing?
to buy a lot more sovereign debt in the next few years.
Salvoni, Morgan Stanley: As an American living in
: When you say it has lost momentum, London I’m no great expert on the political side, but
do you mean the regulations not coming through from the point of view of the markets, there haven’t
fast enough, or that when it does come through it’s been any ill effects at this stage. If we’d had this vote a
not going to have any teeth? year ago, or two years ago, then maybe things would
have been a little bit different.
White, NTMA: You don’t want the sovereign to be I suspect there’s a little bit of lag between the general
burdened by problems in the banks. Clearly Ireland public’s sentiment and what’s actually happening with
was and there is a question over whether that is old the economies in Europe. I expect over time the views
news or whether it could throw up problems in future. of the general public to improve — so perhaps this
We want to make sure the same thing doesn’t happen won’t be a topic next year. The questions we’re getting
again. Are the structures really in place to make sure it from investors are about potential ratings upgrades,
doesn’t? The work is far from complete at this stage. and the fundamentals of the economy, rather than
political questions.
Stirling, BNP Paribas: It would be interesting to hear
the NTMA’s views about the outcome of the European Barron, Barclays: Investors are looking at the
elections. Clearly there has been a lot of noise across big picture — the credit metrics of the individual
Europe about the strong right-wing vote in numerous sovereigns as well as monetary policy across the globe.
countries — is this a concern in Ireland? Is the decent But investors globally were also aware of the European
performance of the minority Irish parties a problem or elections and the results but there has been limited
is it just a general malaise across Europe feeding into market effect as investors note that there has been no
the country? notable fiscal impact.
Whelan, NTMA: Investors are certainly aware of what’s Stirling, BNP Paribas: A few years ago the concern
happening across Europe but there’s no particular was whether there would be a Europe. But that has
problem about Ireland compared to any other country. totally changed. As Susan says, our discussions with
Many investors have noted that there hasn’t been investors centre on macro situations, not about a break
a specifically anti-European tone to the elections in up.
Ireland. Certainly, people aren’t happy with austerity
— that has come through — but you don’t have a sharp Del Canto, Barclays: After a period of reform and
edge of the anti-EU, anti-euro tone in Ireland that you austerity measures throughout Europe, it’s to be
had in certain countries. expected that some of the population will voice a sense
of displeasure. Market participants fully expected that
Warren, Zurich: The macroeconomic consequences and were prepared for that.
are limited at this stage. We wouldn’t be concerned at The point at which it could impact markets will be
10 Ireland in the Capital MarketsNational Treasury Management Agency Roundtable
if it starts impeding the progress of policy. We saw Salvoni, Morgan Stanley: Reassuringly expensive.
that in Washington. When there was political gridlock
that started to impede policy — that’s when investors Stirling, BNP Paribas: Exactly. The only thing they
started to focus more on those issues. In Europe, even require is some level of stability. Rossa mentioned a
though you have a lot more disparate jurisdictions straight line of performance, if that straight line were
and a lot of different forces acting on policy, it has not to level out a bit, you might see those Asian investors
reached the point where investors are so worried that coming in — attracted to the yield stability. We’re
they are not buying. already seeing Asian participation in the secondary
markets, so that has begun.
Kehoe, BNP Paribas: Given how acute the fiscal
adjustment was in Ireland over the course of the last Salvoni, Morgan Stanley: There are still some
four years, the level of social unrest relative to other structural longs among the EM-type funds and the high
European countries was virtually non-existent. yield funds. They still feel that there is some positive
The citizens of Ireland have taken it on the chin. price action to be taken advantage of here. The transfer
In terms of their political leanings, nobody has been between the different types of investors hasn’t come
pushed to the same degree as might have been seen to completion yet because many of the investors that
in some other European jurisdictions. Domestically, bought several years ago feel that there’s a compression
people accepted that the reforms were needed. trade to be held on to. I’m sure when they do start to
exit those positions it will be smooth.
Whelan, NTMA: We have met a good number of
investors since the election and we have heard none Stirling BNP Paribas: What we’ve seen with some
reassessing whether they would want to be in Ireland. of the semi-core sovereigns with larger borrowing
What we are hearing in our visits to investors is that programmes over the last few years is that those yield-
some that bought Irish bonds early have locked in focused investors haven’t sold completely. They have
a good profit and are thinking about crystallising it. got the performance in the five or 10 year part of the
There are other investors waiting to pick those bonds curve and have crystallised it. They still want to own
up and there has been no disruption due to investor the credit, but want a higher yield for it, so they’re
rotation. willing to buy further out the curve.
A number of high profile investors over the last
six months or so have said publicly that they have Warren, Zurich: When you’ve got very low absolute
sold some of their holdings in Irish bonds. But you bond yields even modest spreads can be attractive from
wouldn’t know, looking at the price action of Irish a roll down or carry point of view.
bonds, when that occurred. I’d like to pick up on the point about banking union
and progress. We can all agree that wherever we
White, NTMA: Given that the improvement in Irish are now is not an equilibrium point. If you take an
yields has been more or less in a straight line this optimistic view, it’s a work in progress.
year, there hasn’t been much opportunity for investors Policymakers have interpreted spread compression
looking to pick up bonds after a bit of a sell-off to buy as a credit to them. In some ways that has allowed
Irish debt. them to ease off on other measures. The architecture
Perhaps a wider question is, looking at Asian is incomplete if we want to embrace a currency union,
investments in France in particular, what would it take a banking union, a mutualisation of debt, cross-zone
for those investors to rotate into smaller sovereigns deposit protection. These issues seem to have been
where there is a bit of a pick-up over France? eased off the table as everybody has breathed a sigh of
relief because of the spread compression.
Stirling, BNP Paribas: If yields go too low that doesn’t The architecture as it is, is not probably compatible
mean there are no buyers out there. Because conversely with a self-sustaining long term currency union. The
when yields get low Asian investors tend to get more architects of a currency union would agree with that.
comfortable. How quickly we get there, and in what circumstances,
is still open. The progress to banking union has been
in baby steps so far. At some point we may need
bold measures. With spreads very narrow and some
structural issues unresolved there are system-wide risks
out there. We have to feel that they will come back on
to the agenda at some time.
Linehan, NTMA: A few years ago market participants
were questioning the ability of the European
community to step up to the plate in a crisis. More
and more we’ve seen that maybe Europe works best
in a crisis. When we get to a crisis, then we can all sit
around the table and sort it out fairly quickly. Europe
doesn’t really like to work in the abstract.
Market participants accept that if we were to have
further crises, the policymakers would act and there is
Jamie Stirling, that commitment there to the European Union.
BNP PARIBAS Now that Irish debt is performing as a semi-core
Ireland in the Capital Markets 11National Treasury Management Agency Roundtable
memory and we’re back to more normal debt issuance
then we may look to use other methods of issuance.
But that may be in a number of years’ time when our
funding requirement will have grown. It’s an idea to
keep on the backburner. We have done a lot of work in
preparing for different kinds of issuance.
For instance, we did a lot of work to prepare for
index-linked bonds but the demand didn’t materialise
in a way that would justify launching that kind of
bond. We are quite flexible in having new instruments.
We have a whole range of long term floating rate
debt which was issued at the time of the Irish Bank
Resolution Corporation liquidation. We have all the
usual short term programmes ready as well. We have
several which we can put out at any stage.
Anthony Linehan, O’Connor, NTMA: We wouldn’t rule out any of these
NATIONAL TREASURY MANAGEMENT AGENCY
instruments but they’re another product or supporting
sovereign where there isn’t a great run to be had in measure that we can have in reserve.
Irish yields anymore, what investors are looking for is We’ve had quite a lot of demand for treasury bills
transparency, consistency and no big shocks, one way and Euro-commercial paper, and there are two reasons
or the other. we haven’t done more. First our concentration on
What we have shown over the last year is benchmark issuance already mentioned and second
consistency: we do what we say we will do. The as we came out of the programme we wouldn’t count
government has done what it said it would do. At the three month treasury bill funding as part of our core
yields Ireland is trading at now, volatility isn’t helpful cash buffer. As our debt performance has normalised
for investors as they do not have the same yield and as it continues to normalise, I would see short
enhancement as before, so we want low volatility and dated paper — longer than three month duration
for that to happen we need to be transparent. — becoming part of our cash buffer. We do want to
develop that market in a greater size and it is why we
White, NTMA: We can’t become complacent. We have continue to issue treasury bills as we want to have a
to avoid unforced errors. presence there. It’s quite limited for now, which can
Since OMT, which was the game changer in be disappointing for investors, but it’s with an eye to
Europe, a lot of those unforeseen risks have been having a short term book of bigger size. This is a target
dampened down or hidden — whether it be slow burn for the latter half of next year and into 2016.
political risk if societies lose faith in reform because
unemployment rates aren’t coming down, or whether
it’s the pace of structural reform for longer term
growth. For now these issues aren’t on investors’ radar.
But — and the effect of the OMT and the commitment
of central banks to keep spreads low may never wear
off — there is always the chance that there is a blip at
some stage and one of these things will come back to
bite you. We have to be conscious that this sweet spot
that we’re in may not last forever.
: I’d like to move on to other debt
issuance strategies. Belgium has come up quite
a lot in this roundtable, and that is a sovereign
borrower which has a smaller requirement, but it
has done some innovative MTNs to go right out
the curve in small size. Is that something that you Frank O’Connor,
NATIONAL TREASURY MANAGEMENT AGENCY
would look to do, in response to investor demand,
or would you prefer to do it through a benchmark,
or syndicated format? Linehan, NTMA: It’s worth noting as well that we’ve
diversified by increasing our retail offering here. Some
Whelan, NTMA: We would like to support the 10% of our debt is largely domestic based through
liquidity of the bonds on the curve — the benchmark retail products.
bonds — and given our limited fire power, we will
concentrate on that. Salvoni, Morgan Stanley: Flexibility is a key aspect.
Frank mentioned earlier that we could have done a Looking at MTNs and smaller issues when you have
dollar issuance at the end of 2012. But we wanted to a smaller annual funding requirement can be tricky,
make a statement that the euro is our natural funding because you have to balance that with injecting
currency, and that it is there that we need prove liquidity into on-the-run issues.
ourselves. From time to time there can be very attractive
When the bail-out programme becomes a distant opportunities at the long end — whether it’s a German
12 Ireland in the Capital MarketsYou can also read
