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First Active’s diversified funding strategy Back  
With credit growing increasing rapidly in Ireland, financial institutions are increasingly turning to the capital markets for funding. No stranger to this is First Active, who this year alone raised funds via the syndicated loan market, by issuing private placements off its MTN programme, by securitisation, and by raising sub-ordinated debt, Gerry Murray reports.
In recent years credit growth has increased rapidly in Ireland and the UK at a time when retail deposits have grown much more modestly. This has led to many banks turning to the capital markets for an increasing portion of their funding as they seek to bridge this gap. In developing a funding strategy in the capital markets, diversification in terms of funding type and maturity is key as market conditions vary considerably from time to time and from market to market. In addition different funding programmes give an issuer the opportunity to tap into different investor bases.
In First Active Plc over the course of 2003 we have raised longer-term funds in the Syndicated Loan Market, by issuing a Floating Rate Note off our Medium Term Note (MTN) programme, by private placements off the MTN programme, by securitisation of our mortgage assets and by raising subordinated debt. In addition we raise shorter term funding via our euro commercial paper programme, interbank relationships and corporate deposits.

As we entered 2003 our first major target was the refinancing of an existing syndicated loan maturing in March. We were faced with the choice of going back to the syndicated loan market or alternatively going to the bond market. With the Iraq war looming, the loan market looked more stable and likely to deliver better pricing as a number of banks in the existing facility had indicated a wish to renew their lending commitments to First Active. We were however constrained in starting the process by the fact that we were due to announce a capital restructure at the time of our annual results at the end of January, which could impact the potential participants view of First Active as a credit.

Following a presentation of our results in London, attended by many of our relationship banks, we appointed Barclays Capital, Bayerische Landesbank, Danske Bank and The Royal Bank of Scotland as mandated lead arrangers for a E300 million syndicated loan transaction of three year maturity. The terms of the transaction gave us funding at around Euribor +26bps after all costs probably 3-4bps tighter than we would have raised money in the bond market at the time. While at the tight end of pricing in the syndicated loan market for an A3 rated Irish bank, we were confident that work we had done ourselves building relationships with potential participants combined with the strength of our lead banks would result in a successful transaction.

In the event we had demand for €480 million and raised €420 million.

Unlike the bond market the real work only started once the commitments were received and the negotiation of the loan documentation commenced. This process inevitably takes longer than planned and in our case we repaid the existing loan a few weeks before drawing the new facility bridging the gap with a combination of ECP issuance and interbank borrowing.

At the same time as the syndication process was taking place we were also involved in raising subordinated debt as part of our capital restructure. We planned to make a capital payment of €160m to shareholders in June 2003 and in order to meet our target total capital ratio of 11.0 per cent we needed to replace the equity with about €80/85 million of subordinated debt. The process for the return of capital involved High Court approval and our legal advisors were keen that the alternative capital was in place before approaching the High Court at the end of March. This gave us a short two-month window with the Iraq war looming to raise the necessary subordinated debt. We intended to issue off our MTN programme, which allowed for subordinated debt, which would qualify as Lower Tier 2 Capital for regulatory purposes.

While using the MTN programme speeded the process up in that we needed very little legal documentation to execute the transaction the impending war was impacting on credit spreads and investor’s preference in an uncertain environment was for liquidity. Clearly the amount we were raising was not going to result in a liquid issue but at the same time was a little large for the private placement market. Having examined the various options we decided that a sterling issue targeted at UK investors (mainly insurers) would give us the safest and best execution. We appointed ABN-AMRO as lead for the issue and they arranged a number of one on one meetings with various investors. Feedback from investors was positive but investors had different preferences in terms of maturity and the yield premium required for lack of liquidity. In the end we concentrated interest in a 15 year callable in year 10 and issued ?60m, roughly the equivalent of our euro target amount. In order to concentrate demand in the one area we had to concede a little on price but given the rational for the transaction and the market uncertainty at the time, efficient execution outweighed price considerations.

In April as uncertainty related to Iraq dissipated credit markets rallied and we issued a 2 year Floating Rate Note with CDC IXIS Capital Markets as lead targeted at French money market funds. We raised €200 million at a cost to us of Euribor +20bps, probably 3bps lower than we could have done a few weeks earlier.

The next item on our funding agenda was securitisation and we planned a €750 million Residential Mortgage Backed Securitisation (RMBS), Celtic 8, to be completed by the end of June in order to meet our target capital ratios. We started the process by meeting a number of investment banks in London and selected our arranger and lead managers based on their track record, distribution capability and overall relationship with First Active. We appointed Barclays Capital as arranger and Deutsche Bank and J P Morgan as joint leads along with Barclays. We were operating to quite a tight timetable to get the transaction completed by the end of June but given that this was our eighth transaction in the Celtic series we were confident we would hit our targets.

As part of the securitisation process it is necessary to get the transaction rated and in the past we have had Celtic deals rated by Moody’s and Fitch however in this instance we opted for Moody’s and Standard and Poor’s due to fact that we were aware that there were a group of investors who needed a rating from both Moody’s and S&P before investing in a securitised transaction. Introducing a new rating agency did cause some complications as we came to grips with differences in their ratings process however this was offset in the end by the additional investors who became involved once we had a rating from both Moody’s and S&P.

We commenced our marketing of the deal at the Barcelona Securitisation conference in early June as this gave us a chance to meet investors from centres we were unlikely to visit as part of a roadshow. Feedback from the initial meetings was positive and we commenced the official roadshow in London on the 12th June finishing a week later, with two teams on the road covering Dublin, Munich, Frankfurt, Paris, Brussels and Madrid in addition to two days in London. The initial price talk for the AAA tranche was Euribor +24bps area and within a week of the book opening it was more than two times oversubscribed and this enabled us to tighten pricing to Euribor +23bps. At this pricing level we were 1.6 times oversubscribed and had a total of forty-three investors in the deal. Allocations were generally around 65 per cent of orders with some investors who were also participating in the A tranche getting a slightly higher allocation. The deal finally closed and settled on the 30th of June just in time for our half year.

In First Active we have found that having diversified funding programmes increases the potential investor base and gives flexibility in responding to varying market conditions and potential delays in funding the timetable while also enabling us to manage our liquidity and maturity mismatches.

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