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Archive for January 16th, 2013

“A prison sentence of some substance is really inevitable” Judge Andrew Goymer this morning at the Southwark Crown Court

In London this morning, the verdict in the long-running trial of Achilleas Kallakis and Alexander Williams, was delivered. Both were found guilty of defrauding AIB and British bank, HBOS. Sentencing takes place tomorrow morning, and it seems the judge has a lengthy prison sentence in mind.

AIB had advanced loans of GBP 740m to the pair between 2003 and 2008 on the basis of forged documents which purported to offer security for the loans.

AIB says it has suffered a GBP 60m (€75m) loss on the lending which went to purchasing 16 properties which were eventually repossessed by AIB and most were sold to Stephen Vernon’s Green Property for GBP 650m. The jewel in the crown in the portfolio was the Telegraph Building at 111 Buckingham Palace Road in Victoria, London on which AIB loaned GBP 224m and which was bought by Kallakis for GBP 200m in 2007 from the Barclay twins (of Maybourne and Paddy McKillen fame).

The fraud was eventually uncovered when AIB visited Hong Kong and discovered documents provided by Achilleas, purported to be authentic documents from a well-known HK property group, Sun Hun Kai Properties were in fact forged.

Property Week reported this morning “executives at the bank [AIB] accepted lavish hospitality from the tycoon that included trips to the 2006 World Cup final, the Monaco Grand Prix where AIB relationship managers stayed on board Kallakis’s yacht, and parties in Mauritius and St Petersberg.”

AIB, which we 99.5% own after shoveling €20.7bn into it and EBS, was asked for a comment on the verdict this morning, and also if it had conducted investigations over the acceptance of the security and if AIB personnel have questions to answer over the transaction and the entertainment referred to during the trial. There hasn’t been any response at time of writing.

UPDATE: 17th January, 2013. Achilleas was sentenced to seven years in prison this morning at the Southwark Crown Court. Alexander Williams was sentenced to five years. The UK’s property magazine Property Week reports “The judge lifted a court order banning the press from reporting that the first trial collapsed in January 2012 when Williams made an attempt on his own life… The judge noted in mitigation that Kallakis had the “loyal support” of a wife and four children. He said Williams was less fortunate since “his life fell apart” when his wife moved to the Philippines with his daughter.”

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NAMA has this morning published its report and accounts for the three months ending 30th September 2012. These documents were provided to the Minister for Finance, Michael Noonan on 14th December 2012 who has approved the documents for publication. The report is here. The accounts are here.

Here are the highlights:

(1) A profit before impairment of €141m was generated in Q3,2012. Previously, NAMA has reported profits after impairment of €222m for H1,2012. NAMA now calculates “impairments” twice yearly, and such impairments in part reflect the deterioration in the values of property underpinning NAMA loans. The profit is slightly down on previous quarters.

(2) Performing loans by reference to original book value have declined from 19% in Q2,2012 to just 17% in Q3,2012.  Remember these will include some restructured loans, so by reference to the original loan agreements, the 17% is likely to be closer to 13%. The original NAMA business plan anticipated 40% performing loans. 75% of the non-performing loans are classified as “delinquent” with default of over 120 days.

(3) NAMA has now taken enforcement action on a staggering €10bn of its €74bn loans, including 319 individual loans worth €1.452bn in Q3,2012 alone where receivers were appointed at NAMA’s behest.

(4) We get a little detail on four of the legal cases initiated in Q3,2012 including the reliefs sought. It is interesting that in the case against Flynns and O’Reillys, NAMA was merely seeking the rectification of a mortgage and charge.

(5) NAMA’s expenses are in line with previous quarters, the biggies are staff costs of €7m, payment to AIB, Bank of Ireland and IBRC to manage NAMA loans of €14m,

(6) Legal fees were just €695,000 in Q3 but we found out recently that NAMA is hiding most of its legal fees by capitalizing them in the balance sheet and claiming them back from developers, even developers whose loans are totally under water.

(7) A new-ish trend is emerging whereby NAMA claims it must place cash on deposit with the NTMA – €1.15bn at end of Q3, compared with €0.85m at end Q2, to cover derivative exposures. People generally glaze over at the mention of derivatives, but this deserves some scrutiny.

There will be an analysis by Profit and Loss and Balance sheet line here tomorrow, but in summary, NAMA continues to generate profits before impairment, as it should at this stage, and performing loans have deteriorated which confirms that NAMA will face great challenges as it continues to dispose of the better quality assets.

NAMA has already produced an end of year (2012) review here, and we can expect the full year unaudited accounts for 2012 in April/May 2013 and the audited accounts and annual report in July 2013.

The Q2,2012 report and accounts are examined here.

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Although the Central Bank of Ireland and Financial Regulator in (the Republic of) Ireland appear reluctant to scrutinize too closely the conduct of banks operating in Ireland in respect of the selling or mis-selling of interest rate hedging products known as “swaps”, the campaign is getting closer. Today, the Belfast Telegraph reports that recently bankrupted Belfast developer Peter Curistan is setting up a local pressure group in Northern Ireland to more effectively deal with banks, which in the UK, are exposed to liabilities estimated at over €2bn for mis-selling swaps. Several Irish banks, including AIB and Bank of Ireland are being investigated by the UK’s Financial Services Authority for mis-selling swaps.

Peter Curistan has had a particularly acrimonious relationship with Anglo, now the Irish Bank Resolution Corporation and there is still outstanding litigation and an appeal in Dublin, all of which will now be scrutinized by the bankruptcy trustee to see if they should be continued. Peter was bankrupted in Belfast just before Christmas.

And on this side of the Border, the Dublin solicitors Downes have been behind two court cases, one involving Cortina-averse developer David Agar which settled last summer and a new case launched last November 2012 which is ongoing and involves two Irish property development partnerships.

The Belfast Telegraph today reports Peter Curistan – developer of the Parnell Centre on Dublin’s Parnell Street and the Odyssey in Belfast – “is now getting behind the Bully-Banks campaign, a UK-wide organisation created in 2011 to co-ordinate complaints by the owners of small and medium sized businesses against banks”

There is a meeting/conference taking place on 1st February 2012 at the Belvoir Golf Club, Belfast (tickets £30). Register at membership@bully-banks.co.uk. See website bully-banks.co.uk.

Lastly, you might be interested in what is claimed to be the first UK swaps mis-selling case to make it all the way through the court  system, reported by British solicitors Pearce Bond here.

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JLLQ42012

Jones Lang LaSalle (JLL) has this morning published its Irish commercial property indices for the three months ending 31st December 2012, and unsurprisingly prices continue to decline, by 1.8% in Q4,2012 compared with Q3,2012 and by 8% for the past four quarters which include the effect of the giveaway Budget 2012 when stamp duty was slashed from 6% to 2% and other incentives were offered to commercial property owners. Prices are now down 67.1% from peak and 27% from November 2009, the NAMA valuation date. The report should be available online at the JLL website shortly.

There is some eagerness at JLL to emphasise that the index is a general index covering all 30 properties in its portfolio that are analysed every quarter – 29 might seem like a small sample, but there is a very strong correlation between the JLL index and the 300-strong property SCSI/IPD index. JLL does say that some prices in some subsectors are stabilizing – prime property with new leases – but declines in older property especially with pre-March 2010 leases continues to drag the overall capital values down.

JLL says “It should be of no surprise that the overall capital values continue to decline across all property sectors given the high level of over-renting in existing leases across the market. The example portfolio which is used for compiling the Index is currently over-rented by 32%, or €7.0m per annum. Margaret Fleming, International Director Investments explained that “income will trend down as existing long leases with above-market rents come to an end. Growth in rents is unlikely to counter this and over-renting will remain an issue, although the gap may narrow somewhat. The erosion of this historic high rental income will continue to affect capital values on an annual basis, effectively eliminating portions of value from the capital value index and portfolios every quarter”. Margaret points out the “for example, while there is evidence that prime rack-rented office values have stabilised in the last few quarters and even improved a little based on recent transactions, such properties do not make up a significant portion of the Investment Market and therefore do not impact on overall results. It will be important to monitor both trends in the coming year.””

Rents are down 1.0% in the quarter and 2.2% in the past year and are down by nearly 55% from peak. Because most pre-March 2010 leases in Ireland contained so-called Upward Only Rent Review clauses, older lease tenants may still be paying rents today which are more than double the market rent.

The JLL series is one of the two Irish commercial indices referenced by NAMA’s Long Term Economic Value Regulations (Schedule 2) and is used to help calculate the performance of NAMA’s “key markets data” shown at the top of this page. The other quarterly Irish price series is published by SCSI/IPD and will be available on Thursday 24rd January 2013 at 3pm; because it is generally published after JLL’s, it is not used here to help compile the NWL index, but the SCSI/IPD index does historically show a very close correlation with JLL’s.

With the latest release from JLL, Irish commercial property prices have fallen 27.0% since 30th November, 2009, the date chosen by NAMA pursuant to the section 73 of the NAMA Act by reference to which Current Market Values of assets are valued. The NWL Index is now at 782  meaning that average prices of NAMA property must increase by a weighted average of 27.9% for NAMA to breakeven on a gross basis.

UPDATE: 25th January 2013. This afternoon the “other” quarterly index of Irish commercial property prices has been published by the Society of Chartered Surveyors in Ireland and IPD, a group supported by estate agencies. The SCSI/IPD index continues to show a strong correlation with the JLL index, and reveals that in Q4,2012 Irish commercial property declined by 1.5% – compared to 1.8% recorded by JLL. The SCSI decline from peak is now 66.9% – compared to 67.1% at JLL.  SCSI/IPD says retail suffered most in Q4,2012 with a decline of 2.2%, industrial by 1.9% and offices by just 0.9%.

JLLSCSIQ42013

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