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Covered bond market to grow to €50 billion as new issuer joins Back  
Bank of Ireland’s intention to issue €10 billion in asset covered securities over the next 4/5 years has given a boost to the Irish asset covered securities market, which is currently the third largest in Europe, (See adjacent graph which shows Ireland's share of the European covered bond market, year to date) with the overall size of the market predicted to grow to €50 billion.
The size of the euro denominated Irish asset covered securities market is currently approximately €17.4 billion, but the market has potential to grow even further. A report by Barclays Capital, published on March 19th, estimates the total potential size of the market to be €50 billion.

So far this year, DEPFA ACS Bank has already issued a €4 billion public sector backed bond, and is committed to raising a further €4 billion via the ACCS by the end of the year. WestLB, the only other issuer to date, has committed to launching two benchmark issues of around €2 billion a year. If Bank of Ireland goes ahead with its €2 billion mortgage bond, total issuance for 2004 should be around €12 billion, and total issuance to date around €21.4 billion.

According to the report, the European covered bond market in 2003 totalled €117 billion, and so far in 2004, total issuance stands at approximately €40 billion. Barclays projects that the market size will reach €150 billion in 2004.

In 2003, issuance in Ireland accounted for 9 per cent of the total European market, behind Germany with 42 per cent, Spain with 28 per cent, and France with 12 per cent. Already in 2004, Ireland has jumped into third position, with 18 per cent of the market, behind Germany and Spain, which account for 29 per cent each.

The planned Bank of Ireland deal is seen as being a great boost to the market. It is the first mortgage bond issued under the Asset Covered Securities Act 2001, and BOI plans to use both Irish and UK mortgages to back this funding initiative. Initially, the concentration will be on Irish mortgage assets, however, it is envisaged that the programme will ultimately contain bonds backed by Irish and UK mortgages.

Speaking to FINANCE, Mick Sweeney, chief executive of Bank of Ireland Global Markets, says that the bank is looking for diversification of product, geography and investor, as well as a cheaper form of funding, adding that the programme will replace a more expensive form of funding, which, at the moment, is BOI’s €10 billion senior medium-term note (MTN) programme. The bank chose ACS over a traditional mortgage securitisation as it is cheaper, and attracts a different investor base, Sweeney says.

Regulations for the mortgage bond market are not yet in place, but the Irish Bankers’ Federation is currently in discussions with IFSRA, and it is expected that they will be published shortly.

With the first mortgage bond on its way, it is now expected that other domestic banks/mortgage institutions may follow in BOI’s footsteps

One possible contender is First Active/ Ulster Bank. First Active was a regular issuer of residential mortgage backed securities (RMBS), which are quite similar to covered bonds, but it is understood that its new parent, The Royal Bank of Scotland has ruled out securitisation in future. As such, to address its long-term funding needs, First Active may look to pool its mortgage book with Ulster Bank’s, and issue a covered bond together.

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