AIB raises €395m using UK mortgages

STATE-CONTROLLED AIB has borrowed €395 million using mortgages in the bank’s €3 billion UK portfolio as collateral in the bank’s first raising of unguaranteed funding since November 2009.

The bank said it raised the three-year sterling loans on an AAA rating from a “wide range of international investors”, in the lender’s first public securitisation of prime UK mortgages.

“This is a positive return to the markets for AIB and forms part of our longer-term, diversified funding strategy,” said David Duffy, chief executive of the bank. “It is also a further indicator of the improving international sentiment towards Ireland and the Irish financial system.”

AIB raised the possibility of tapping funding using UK mortgages last autumn but lagged Bank of Ireland and Irish Life Permanent, which raised €4.2 billion and €2.7 billion respectively last year.

The term of the funding raised by AIB is, however, longer than the deals agreed by those banks.

“It is disappointing that it has taken them so long to get around to doing something after flagging it last year. However, the fact that this is long-dated issuance is a positive,” said Stephen Lyons, analyst at stockbroking firm Davy.

“Any accessing of the funding markets is important but the funding for Irish banks is only likely to grow for secured issues.”

AIB’s securitisation deal involves a significant credit enhancement or sweetener for investors in the debt – there would need to be 28 per cent mortgage losses before investors in the AAA-rated loan notes incur a loss.

Such an enhancement was a common feature of funding deals agreed by lenders at present, a source close to the bank said.

The debt is priced at a rate of 250 basis points – or 2.5 percentage points – over the Libor market rate, which is at a lower rate to the deal agreed by the bank on unguaranteed funding of €750 million over a five-year term in late 2009. AIB last raised any kind of funding in the markets in March 2010, two months before the Greek debt crisis erupted, although that transaction fell under the government guarantee.

Bank of Ireland and Irish Life & Permanent have greater access to funding backed by sterling loans as they have larger UK portfolios.

AIB has residential mortgages of €3 billion in the UK, of which €2 billion is in Northern Ireland. This compares with Bank of Ireland’s UK portfolio of €27 billion and €7 billion of loans at Irish Life & Permanent’s British lender CHL.

Most loans securing AIB’s funding are prime, low loan-to-value mortgages in Britain.