AIB has picked a consortium involving US-based Ellington Financial and Morgan Stanley as preferred bidders for a portfolio of problem loans, mainly mortgages, that were originally worth €500 million, according to sources.
Mars Capital Finance Ireland, the loan servicing firm, has been lined up to manage the loans on a day-to-day basis, the sources said, adding that a deal is on track to be announced in the coming weeks. A sale will be at a deep discount to the par value of the loans.
The make-up of the preferred bidders suggests that the portfolio, known as Project Bay, includes loans that are deep in arrears and mortgages that have been restructured, and will be refinanced on international bond markets in the near term, according to industry sources.
About half of the loans are classified by AIB as re-performing, where borrowers are meeting eased terms after their loans went into default or were otherwise impaired. However, AIB must continue to classify them as non-performing loans (NPLs) under strict regulatory criteria, according to sources.
Spokesmen for AIB, Morgan Stanley and Mars Capital, which is owned by the Arrow Global distressed debt investment firm, declined to comment on the deal. Representatives for Ellington Financial did not respond to a request for comment.
Ellington, a specialist in mortgage finance, and Morgan Stanley, the Wall Street investment bank, have each been involved in the active market for refinancing Irish NPLs in bond markets in recent years in a process where investors, such as pension funds, buy exposure to the mortgages.
It entails investors buying bonds where interest – or coupon – payments are funded by interest income from the underlying mortgages. These are known as residential mortgaged-backed securitisation (RMBS) transactions.
The AIB spokesman said that “notwithstanding the considerable progress” the bank has made in reducing non-performing exposures (NPEs) from €31 billion in 2013 to €3.8 billion, or 6.5 per cent of gross loans, as of the end of June, the problem loans ratio “remains elevated and we are committed to reaching an NPEs to circa 3 per cent, which is more in line with European levels”.
He added that European banks are obliged to classify certain loans by regulators as NPEs for a variety of reasons.
While most of the decline in non-performing loans (NPLs) over the past eight years has been down to the bank restructuring loans as well as the sale of portfolios of soured non-mortgage debt, AIB has turned its focus more recently to shifting owner-occupier loans off its books.
In February, the State's largest mortgage lender agreed to sell a portfolio of mainly deep-in-arrears home loans to US investment group Apollo for a discounted price of €400 million, with Mars Capital Finance Ireland contracted to service the loans. The total original value of the loans in the portfolio, known as Project Oak, was about €1 billion.
Kroll Bond Rating Agency (KBRA), the US credit ratings agency, highlighted in a report last month that an average of more than 86 per cent of owner-occupier mortgages in the Republic that were restructured in the wake of the financial crash have continued to meet their new terms since 2015.
KBRA said the “very high” level of borrowers sticking to their new terms has been helped by the fact that they would otherwise face steeper monthly costs in rent if they lost their homes.
