Funding and Debt Management

In 2014 the NTMA made a full return to independent market funding following the State’s exit from the EU/IMF Programme of Financial Support at the end of 2013. It was an active year, during which the NTMA raised €11.75 billion in long-term bond funding.

2014 commenced with the €3.75 billion syndicated sale¹  of a new 10-year benchmark bond in January, and concluded with a second €3.75 billion issuance of a new 15-year bond in November – the first 15-year benchmark bond issuance by the NTMA since 2009.

A regular schedule of bond auctions resumed in March, for the first time since 2010. Five auctions raised a total of €4.25 billion over the course of the year. This resumption of regular bond auctions marked the full normalisation of Ireland’s market access.

Between December 2014 and March 2015, Ireland made early repayments totalling just over €18 billion or 81 per cent of the original €22.5 billion IMF loan facility granted under the EU/IMF Programme. These repayments discharge IMF principal repayment obligations that were originally to fall due from July 2015 to January 2021. Ireland has fully repaid the more expensive portion of the IMF facility generating interest savings in excess of €1.5 billion over the original life time of the loans and further improving debt sustainability.

Market Review

Irish Government bonds continued their rally throughout the year, with bond yields posting record lows. Bond turnover levels were at their highest level in recent years, driven by increased investor demand as Ireland’s underlying economic and fiscal position continued to improve.

The main factors behind the rally in Irish bonds in 2014 included:

• The successful exit from the EU/IMF programme without the need for a precautionary credit line;
• The level of prefunding achieved by the NTMA;
• The improvement in Ireland’s debt profile and underlying economic and fiscal position;
• A series of credit rating upgrades during 2014. This included the upgrade to investment grade status (Baa3, positive outlook) by Moody’s in January 2014 followed by the further two-notch upgrade to Baa1 in May 2014. Upgrades by S&P to A and Fitch to A- also reflected the positive outlook for the Irish economy;
• The January syndication and a return to a regular bond auction schedule, thus improving liquidity and turnover in the Irish bond market;
• The general reduction in yields in the eurozone from summer onwards. This was driven by market expectations that the ECB would embark on a programme of sovereign bond purchases or Quantitative Easing (QE) in 2015; and
• The announcement that Ireland had agreed the early repayment of approximately €18 billion of its IMF loan.

The downward trend in European sovereign yields was the dominant theme in 2014, yet Ireland out-performed many of its European peers. Over the calendar year, 10-year Irish bond yields fell approximately 220 basis points to 1.24 per cent at year-end. The graph below shows the performance of 10-year Irish bond yields relative to other European sovereign 10-year yields during 2014.

10-Year Government Bond Yields 1 January 2014 to
31 December 2014

Source: Bloomberg

The table below shows the change in Irish bond yields over 2014 across various tenors.

Source: Bloomberg

The continued strong investor demand into 2015 offered the NTMA the opportunity to issue new 7-year and 30-year bonds in the first quarter. These issuances, particularly the 30-year syndication, opened new parts of the curve and locked in low interest rates over a longer period.

Funding Activity

Funding Strategy
During 2014 the NTMA launched new 10-year and 15-year benchmark bonds, held a series of bond and Treasury bill auctions and executed a liability management operation on the 4.6% Treasury Bond 2016 in the form of a bond buyback and switch.

The NTMA’s intensive investor relations programme, which continued during 2014, helped to cement interest among institutional investors in Irish Government bonds and diversify the investor base. The NTMA conducted a series of investor presentations and meetings in the UK, US, Asia, and continental Europe. There were also a number of “reverse” roadshows during the year, as investors visited Dublin. The NTMA also spoke at investor conferences whenever a suitable opportunity arose.

The NTMA’s market-based funding in 2014, together with a €7.4 billion rundown in cash and other short-term investment balances, were primarily applied to fund an Exchequer deficit of €8.2 billion, to refinance €2.7 billion of maturing long-term debt and to repay €9 billion of borrowings from the IMF.

The NTMA had Exchequer cash and other short-term investment balances of €11.1 billion at end-2014 (down from €18.5 billion at end-2013), sufficient to cover projected Exchequer requirements into the early part of 2016.

Medium and Long-term Funding

2024 Bond Syndication
In the first bond market transaction of the year in January, the NTMA raised €3.75 billion through the syndicated sale of a new 10-year benchmark Treasury Bond maturing in March 2024. The funds were raised at a yield of 3.54 per cent.

Seventeen per cent of the issuance was taken up by domestic investors and 83 per cent by international investors. The international investors were mainly from the UK (26 per cent), the Nordic region (15 per cent), Germany, Austria and Switzerland (14 per cent), and North America (14 per cent).

The order book reflected broad investor interest from some 400 fund managers, pension funds, insurance companies, banks and other investors, including some from the Middle East and Asia. Although the total order book amounted to some €14 billion, the NTMA decided to limit the initial issue of the new bond to €3.75 billion in order to leave capacity for a series of auctions over the remainder of the year.

2024 Bond Syndication by Geographic Area

Source: NTMA

2024 Bond Syndication by Investor Type

Source: NTMA

2016 Bond Switch and Buyback
In July the NTMA conducted a buyback and switch of the 4.6% Treasury Bond 2016 to assist in smoothing the outstanding bond maturity profile. This operation reduced the outstanding balance of the bond by just over €2 billion (20 per cent). €1,078 million nominal was bought back on an outright basis. The switch transaction, done on a 2-for-1 nominal basis, bought back an additional €959 million of the 2016 bond and sold €480 million of the 3.9% Treasury Bond 2023.

2030 Bond Syndication
In November the NTMA sold a new benchmark 15-year bond (2.4 per cent May 2030) by syndication. It issued €3.75 billion at a yield of 2.49 per cent. Eleven per cent of the issue was taken up by domestic investors and 89 per cent by overseas investors. The overseas investors were mainly from Germany, Austria and Switzerland (27 per cent), the UK (16 per cent), France (15 per cent), the Nordic region (11 per cent) and North America (5 per cent).

The total order book amounted to some €8.4 billion, with interest from over 250 accounts. This included a broad range of investor categories, including fund managers, pension funds, banks and insurance companies.

This 15-year bond sale represented funding in an area last accessed by Ireland for a new issue in 2009, as well as representing a historical low yield for 15-year issuance by Ireland.

2030 Bond Syndication by Geographic Area

Source: NTMA

2030 Bond Syndication by Investor Type

Source: NTMA

Bond Auction Programme
The NTMA resumed its bond auction programme during 2014 – for the first time since September 2010. There were five auctions over the course of the year, raising a total of €4.25 billion. The new 2024 Treasury Bond was offered in each case.

*excludes proceeds of non-competitive auctions.
Source: NTMA

Short-term Funding
The NTMA’s Treasury Bill programme continued throughout 2014.

Source: NTMA

The NTMA also maintained Ireland’s Multi–Currency Euro Commercial Paper (ECP) programme in 2014. This programme is listed on the Irish Stock Exchange. Paper is sold on a reverse-enquiry basis and prices are quoted on Bloomberg. There was €2.3 billion outstanding at end-2014 compared with €0.5 billion at end-2013.

The NTMA also issued short-term debt in the form of Exchequer Notes and Central Treasury Notes, mainly to domestic institutional investors.

Irish Government Bond Market

Benchmark Bonds
At end-December 2014 Ireland had 12 benchmark bonds with maturities extending across the yield curve to 2030.

Source: NTMA

The change in profile between end-2013 and end-2014 reflects the redemption of the January 2014 bond and the buyback and cancellation of €1.4 billion of the 2015 bond. The end-2014 profile also reflects the new issuance of the 2024 and 2030 bonds, along with the switch and buyback of the 2016/2023 bonds.

Amortising Bonds
In addition to the benchmark bonds, Ireland had €1.2 billion outstanding in Irish Amortising Bonds at end-2014. These instruments, which make equal annual payments over their lifetime, were issued primarily in 2012 and 2013 to meet the needs of the Irish pensions industry.

Floating Rate Bonds
On 8 February 2013 the NTMA issued €25 billion nominal Floating Rate Bonds which were exchanged for the Promissory Notes held by the Central Bank of Ireland. The outstanding balance of the Floating Rate Bonds at end-2014 is detailed in the table opposite

Source: NTMA

Following discussions with the Central Bank of Ireland, €500 million nominal of the 2038 bond was bought back and cancelled by the NTMA in December 2014.

Government Bond Turnover
Turnover increased significantly during 2014, reflecting increased demand for Irish Government bonds and regular issuance. Total turnover by value, as reported by the Irish Stock Exchange, was €257 billion in 2014, compared to €96 billion in 2013 – an increase of more than 100 per cent. January and November saw the largest monthly turnover in 2014, influenced by the bond syndications in these months.

Irish Government Bond Turnover by Value

Source: Irish Stock Exchange

Primary Dealer System
The Irish Government bond market has a strong primary dealer group, mainly international investment banks with a global reach. The 18 primary dealers recognised by the NTMA each make continuous two-way prices in designated benchmark bonds in specified minimum amounts at market levels. A number of stockbrokers also match client orders.

The primary dealers are:

• Barclays, London
• BNP Paribas, Paris
• Cantor Fitzgerald Ireland Limited, Dublin
• Crédit Agricole CIB, London
• Citigroup, London
• Davy, Dublin
• Danske Bank, Copenhagen
• Deutsche Bank, Frankfurt
• Goldman Sachs, London
• HSBC CCF, Paris ING
• Bank NV, Amsterdam
• JP Morgan, London Merrill
• Lynch International, London
• Morgan Stanley & Co International plc, London
• Nomura International plc, London
• Royal Bank of Scotland, London
• Société Générale, Paris
• UBS Limited, London

The primary dealers are members of the Irish Stock Exchange, on which Irish Government bonds are listed. They have exclusive access to the NTMA’s bond auctions and may avail of repo facilities (short-term collateralised borrowing) which the NTMA provides in Irish Government bonds.

Credit Rating
Ireland has investment grade status with all of the main rating agencies. The current ratings are listed in the table below.

During 2014 a series of credit rating upgrades had a significant impact on bond yields and investor sentiment towards Ireland. Moody’s restored Ireland’s rating to investment grade with a rating of Baa3 and a positive outlook in January 2014. This was followed in May by a further two-notch upgrade to Baa1. Fitch Ratings upgraded Ireland’s rating to A- in August 2014. Standard & Poor’s upgraded Ireland’s sovereign credit rating to A- in July 2014, to A in December 2014 and to A+ in June 2015.

With the exception of Moody’s, all of the short-term ratings are currently in the A rating category.

*As at 19 June 2015
Source: NTMA

State Savings

State Savings is the brand name applied by the NTMA to the range of Irish Government savings products offered to personal savers.

During 2014 there were net inflows of €0.9 billion into the State Savings products and at end-2014 the total amount outstanding was €19.1 billion.

Figures may not total due to rounding.
Source: NTMA

State Savings Amounts Outstanding End-2014

Figures may not total due to rounding.
Source: NTMA

An Post acts as an agent of the NTMA in relation to the sale and administration of State Savings products (except Prize Bonds). The Prize Bond Company (a joint venture between An Post and the Irish financial services company Fexco) operates the Prize Bond Scheme on behalf of the NTMA.

In line with the fall in interest rates both nationally and internationally, in October 2014 the NTMA announced (i) new issues of each of the fixed-rate, fixed-term State Savings products and (ii) a reduction in the variable rate used to calculate the prize fund for Prize Bonds.

The current fixed interest rate offerings on issues are detailed below:

Source: NTMA

These new rates apply only to new purchases from 5 October 2014 onwards and have no effect on holders of the previous issues of the above products.

Changes were made to the variable rate of interest used to determine the value of the Prize Bonds’ monthly prize fund. With effect from November 2014, the Prize Bonds prize fund rate is 1.25 per cent. A €1 million prize draw takes place every second month.

There were no changes to the variable rate on the Ordinary Deposit Account which continues to pay a rate of 0.25 per cent or the 30 day notice Deposit Account Plus which continues to pay a rate of 0.50 per cent.

EU/IMF Programme of Financial Support for Ireland

The three-year EU/IMF Programme of Financial Support that Ireland entered into in November 2010 officially ended on 15 December 2013, with the final programme disbursement of €800 million received in March 2014.

Following agreement from EU member states and bilateral lenders, Ireland received approval in November 2014 to complete the early repayment of the portion of IMF loans subject to the higher rate of interest.

Between December 2014 and March 2015, Ireland made early repayments totalling just over €18 billion or 81 per cent of the original €22.5 billion IMF loan granted under the EU/IMF programme.

These repayments discharge the IMF principal repayment obligations that were originally to fall due from July 2015 to January 2021. Ireland has fully repaid the more expensive portion of the IMF facility, generating interest savings in excess of €1.5 billion over the original life time of the loans and further improving debt sustainability.

Figures may not total due to rounding.
* Euro equivalents are translated at the reporting date exchange rates, taking account of the effect of currency hedging transactions.
**IMF loans are denominated in Special Drawing Rights (SDRs), an international reserve asset created by the IMF. Its value is currently based on a basket of four key international currencies – the euro, Japanese yen, pound sterling and U.S. dollar.
Source: NTMA

Debt Profile

General Government Debt (GGD) is a measure of the total gross consolidated debt of the State compiled by the Central Statistics Office (CSO) and is the measure used for comparative purposes across the European Union.

National Debt is the net debt incurred by the Exchequer after taking account of cash balances and other financial assets. Gross National Debt is the principal component of GGD but GGD also includes the debt of central and local government bodies.

Unlike National Debt, GGD is reported on a gross basis and does not net off outstanding cash balances and other financial assets. While the figures in this section relate primarily to GGD, the NTMA’s responsibilities relate to National Debt only.

Figures may not total due to rounding.
* Net of a pre-paid margin of €0.53 billion on the first EFSF disbursement of February 2011.
**State Savings Schemes also include moneys placed by depositors in the Post Office Savings Bank (POSB) which does not form part of the National Debt. These funds are mainly lent to the Exchequer as short-term advances and through the purchase of Irish Government Bonds. Taking into account the POSB Deposits, total State Savings outstanding were €19.1 billion at end-2014.
***Of which, Exchequer cash and other short-term investments accounted for €11.1 billion at end-2014.
Source: NTMA and Central Statistics Office

Composition of Gross National Debt End-2014

Source: NTMA End-2014

End-2014 GGD is estimated by the CSO at €203.3 billion or 109.7 per cent of Gross Domestic Product (GDP).

It is important to maintain investor confidence in Ireland by continuing to reduce the Government debt ratio. Based on the public finances being in balance by 2018 and with nominal GDP growth averaging just over 4 per cent per annum over the medium-term, the Stability Programme Update, April 2015 forecasts that the GGD/GDP ratio will decline to 85 per cent by 2020. This forecast does not reflect the potential sale of Government stakes in the banking sector. A primary budget surplus (the budget balance excluding debt interest payments) of 1.1 per cent of GDP is forecast for 2015, the first such surplus since 2007.

As noted previously, GGD is a gross measure that does not allow for the netting off of cash balances and other financial assets. However, the CSO produces an estimate of General Government Net Debt (net GGD), which is calculated by deducting from gross GGD the value of the financial assets corresponding to the categories of financial liabilities which comprise gross GGD. The CSO estimates that net GGD stood at €166.7 billion or 89.9 per cent of GDP at end-2014³ .

General Government Debt 2009-2020

Source: CSO and Department of Finance

The weighted-average maturity of Ireland’s long-term marketable and official debt at end-2014 is estimated at 12.4 years ⁴ .. The chart opposite details the maturity profile of outstanding long-term marketable and official debt at end-2014.

Maturity Profile of Ireland’s Long-Term Marketable and Official Debt at End-2014

*Bilateral loans were provided by the United Kingdom, Sweden and Denmark.
**EFSF loans reflect the maturity extensions agreed in 2013.
***EFSM loans are also subject to a seven year extension. It is not expected that Ireland will have to refinance any of its EFSM loans before 2027. However, the revised maturity dates of individual EFSM loans will only be determined as they approach their original maturity dates. The original EFSM maturities are reflected in the chart above.
Source: NTMA

Debt Service Outturn

The NTMA’s primary debt management objectives are to ensure adequate liquidity for the Exchequer and to optimise debt service costs over the medium term.

The cash interest cost of the National Debt in 2014 was €7,470 million. The other debt service items were sinking funds⁵ of €633 million – this is in effect a technical charge on the current budget which is also reflected as a receipt in the capital budget – and fees and administration expenses of €108 million.

Under the wider General Government measure, interest expenditure in 2014 is estimated at €7,502 million⁶.

Both the National Debt and General Government interest cost outturns in 2014 were just over 8 per cent lower than their respective Budget 2014 projections: the lower than projected costs primarily reflecting a more favourable interest rate environment.

Other Functions

In addition to its core functions of borrowing for the Exchequer and debt management, the NTMA Funding and Debt Management Directorate perform a number of other functions.

Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009

In December 2009 the Government introduced a new guarantee scheme to follow the Credit Institutions (Financial Support) Scheme 2008 to provide for the guarantee of bank liabilities beyond 29 September 2010 – the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 (ELG Scheme). The Minister for Finance appointed the NTMA as the ELG Scheme Operator.

The ELG Scheme provided for an unconditional and irrevocable State guarantee for certain eligible liabilities (including deposits) of up to five years maturity issued by participating institutions to the extent that they are not covered by the Deposit Guarantee Scheme operated by the Central Bank of Ireland. These liabilities must have been incurred by participating institutions between the date of their joining the Scheme and the discontinuation of the Scheme.  The ELG Scheme was discontinued effective from midnight on 28 March 2013.

Any liabilities guaranteed under the ELG Scheme up to 28 March 2013 remain guaranteed until their maturities. As of the date of the discontinuation of the ELG Scheme amounts guaranteed under the Scheme totalled €75 billion. Amounts guaranteed at end-December 2014 totalled €10 billion, as debt and deposits continued to mature following the end of the Scheme.

The liquidation of Irish Bank Resolution Corporation Limited (IBRC) on 7 February 2013 triggered claims under the ELG Scheme. The ELG Scheme (unlike the Central Bank’s Deposit Guarantee Scheme) is a claim-driven system and the NTMA as ELG Scheme Operator is managing claims submitted in respect of IBRC liabilities guaranteed under the Scheme. Further information is available on the NTMA website (ntma.ie).

The guaranteed liabilities of IBRC comprised both bonds and deposits, to the degree that they were not covered by the Deposit Guarantee Scheme. The two ELG-covered bonds were repaid in March 2013 and in total amounted to €934 million. Approximately €140 million has been paid out to date in relation to deposits. The NTMA continues to co-ordinate with the IBRC Special Liquidators on resolving outstanding claims.

Central Treasury Service
The NTMA’s Central Treasury Service (CTS) takes deposits from, and makes advances to, non-commercial State bodies, as well as local government authorities, the Health Service Executive and education and training boards. The objective is to provide these bodies with a competitive alternative to the banking sector for their treasury business and thus to make savings for the Exchequer. At end-2014 CTS loans to a total of 18 designated bodies amounted to €31.9 million. There were 175 deposits placed with the CTS in 2014, with an average balance outstanding of €163.3 million.

Dormant Accounts Fund
Under the Dormant Accounts Act, 2001 and the Unclaimed Life Assurance Policies Act 2003, balances on dormant accounts with banks, building societies and An Post and the net encashment value of certain life assurance policies are remitted to the State annually to be disbursed for charitable purposes or for purposes of community benefit.  The period for determining dormancy is normally 15 years since the last customer-initiated transaction.  In the case of life assurance policies with a specified term, it is five years after the end of that term.  The legislation guarantees the right of account and policy holders to reclaim their moneys at any time from the financial institutions.

Pending disbursement, moneys in the Dormant Accounts Fund are managed by the NTMA. The NTMA had €215 million under management at end-2014.  €49.3 million was transferred to the Fund in 2014, while €18.8 million of previously dormant funds was reclaimed.  Disbursements from the Fund amounted to €2.0 million in 2014.

Other Activities
The Funding and Debt Management Directorate also carries out the following functions:

• Provision of treasury execution services to NAMA, the SBCI and the IBRC Special Liquidator;
• Funding the Housing Finance Agency under its €5 billion short-term and medium-term Guaranteed Note Programme;
• Engaging in daily short-term cash management operations to regulate the level of Government cash balances at the Central Bank of Ireland. This is undertaken as part of the overall management of liquidity in the eurozone by the European Central Bank; and
• Management of Ireland’s Carbon Fund.

¹ A syndicated sale is the issuance of a new bond managed through a group of primary dealers.
² Annual Equivalent Rate.
³ CSO, Government Finance Statistics, April 2015.
⁴ As the revised maturity dates of individual EFSM loans will only be determined as they approach their original maturity dates, the end-2014 weighted-average maturity of 12.4 years is an estimate.
⁵ The requirement to make an annual sinking fund payment was removed in the Finance Act 2014.
⁶ CSO, Government Finance Statistics, April 2015.