Barclays buys Bank of Scotland Ireland mortgage book

Brendan Burgess

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I heard this on the RTE Business News just now.

https://www.rte.ie/news/business/2018/0518/964326-lloyds-irish-assets/

They have bought €4.3 billion of loans from BoSI , only €300m of which are impaired. They paid €4 billion for them which is astonishing as they are almost all cheap trackers.

This could mean that Barclays will actively lend in the Irish market which would be great for the existing customers and for the market in general.

Brendan
 
Brendan Burgess said:
They paid €4 billion for them which is astonishing as they are almost all cheap trackers.
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About 93c in the euro. Sounds about right, and in line with what Danske sold for.
They're low margin trackers, but they're highly performing (albeit the number of interest only loans might be masking future problems). Barclays will wrap these up into bonds, and refinance the lot extremely cheaply. A portfolio like this is easy to create AAA bonds covering about 80% which they'll issue at a negative rate in current environment.

Brendan Burgess said:
This could mean that Barclays will actively lend in the Irish market
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I wouldn't get my hopes up. I suspect it's purely a bond play.
 
RedOnion said:
I wouldn't get my hopes up. I suspect it's purely a bond play.
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Hi Red

That is a pity.
Could you describe what will actually happen here. If the average return is 0.8%, how do they make a profit on it?

I could understand if they paid 50 cents in the euro, the return would be over 1.6%. But I am struggling to see what they sell this on at.

If Barclays see a lot of performing loans in Ireland, might they not take another look?

Brendan
 
Roughly speaking, they'll create a securitised bond around it.
C. 80% will be AAA rated. Will issue at negative yield to pension funds. Let's say even if they pay positive 10bps.
Next 10% will still be investment grade, but yielding a positive rate. Let's say 30bps.
Remaining 10% is junior debt that Barclays keep. But with 7% discount, it only costs them 3%. It's effectively capital.
Even allowing for 20bps management fees, the junior debt is now yielding 10%, assuming average rate of 0.6% over ECB. If average is 0.8%, yield shoots up over 16%.

This is simplified version. They'll mix with fixed rate derivatives to issue fixed rate bonds so could actually borrow at much lower rates.

Brendan Burgess said:
If Barclays see a lot of performing loans in Ireland, might they not take another look?
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Let's look at KBC. They're well established, but announced yesterday they've issued 198m mortgages in first quarter. How long would it take Barclays to get the same market share?
I'm not saying they won't lend here, but I can't see the market being big enough for them to be interested.

Edit: edited to fix my numbers.
 
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Thats a helpful way of explaining it, thanks for that. Just to clarify my understanding from your example above;

The first 80% is created as a securitised bond and AAA rated (effectively the best performing 80% of the loan book). So if they pay a premium of 10bps over 3 month Euribor, which is -0.323% today, this 80% will have a cost of funds of -.0223%? i.e this element isn't costing them anything?

The next 10% will cost 30 bps, after taking into consideration Euribor?

The junior debt element that the purchaser keeps, assuming they purchase the book at a 5% discount, this 10% element has only cost them 5%. Can I ask how you calculate that the junior debt is yielding 10% assuming an average rate of 0.6% over ECB, or 16% if its 0.8% over ECB? If 10% of the book purchase price is €100m and assuming a 7% discount, they'll have net paid €30m for this element... if they generate net 0.6% (after mgt fees of 0.2%), they'll make €6m on their €30m every year or 20%. Is this the correct way to look at it?

Thanks
 
Hi @Ned Stark
Yes, that's the concept, explained a bit better than I did. I had assumed the first 80% was costing 0.1% which is the difference in our numbers I think.
 
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