Ulster Bank, the retail mortgage subsidiary of the Royal Bank of Scotland, has opted not to call the bonds from its Celtic residential mortgage-backed program. The firm said “current economic conditions” lay behind the decision, and now London-based officials reckon other Irish RMBS issuers could follow suit, instead opting to launch more tender offers instead of calling.
The decision affects 15 bonds in total across the Celtic 9, Celtic 10, Celtic 11 and Celtic 12 Irish RMBS deals. The step-up dates for Celtic 9 and Celtic 11 are due in March, with Celtic 12 due in June and Celtic 10 in October. The Celtic program is backed by a pool of prime residential mortgages originated to borrowers in Ireland.
Firms are said to be eyeing more tender offers, buying back the bonds in order to pledge them as collateral for the European Central Bank’s repo funding program, though Ulster Bank’s intentions remain unclear.
The move is “not entirely surprising,” according to a London-based portfolio chief at a U.K. investment manager, who said that a tender offer on the Celtic bonds from Ulster in June last year “significantly reduced” the probability of exercising the call options. Ulster bought EUR1.1 billion ($1.44 billion) during that tender, leaving almost EUR6 billion ($7.89 billion) outstanding.
“Clearly the financing commitment to call EUR6 billion ($7.89 billion) is going to be difficult, although they are spread out over the next eight months,” the investor told SI Wednesday. “[Ulster] has given the market liquidity and price upside through a tender, so it’s not then unreasonable for the market to view the likelihood of a call as being relatively low. I don’t think people will be too surprised.”
With Celtic bonds trading below par in the secondary market, particularly junior bonds, the originator could opt for a second tender further down the line, taking advantage of cheaper prices to boost regulatory capital, according to Barclays Capital analysts in London.
In a research note issued late on Tuesday, BarCap analysts forecast further buy-back offers across the Irish RMBS sector. In December, Bank of Ireland launched a buy-back of bonds in its Kildare Securities and Brunel Mortgage Securitization No. 1 (SI, 1/9).
“For the next couple of years at least, unless the economic environment improves significantly, the probability of call options being exercised in Irish RMBS transactions is likely to remain low, with Irish originators preferring to carry out tender offers instead,” BarCap analysts explained. They pointed to the high extension risk across Irish RMBS—coupled with heightening risk of junior note losses and low secondary market liquidity—as incentives for noteholders to take up tender offers in order to liquidate holdings.