The Day after NAMA … how the world has changed

Well, apparently we’ve printed NAMA bonds to the value of €370m and given €280m to INBS and €90m to EBS – we don’t know if the EU/Regulator/Ernst and Young or the sometimes mooted EU investment bank will make INBS and EBS hand back some of those bonds as a claw-back or if the payments are subject to the valuation dispute procedure which again could mean that INBS and EBS hand back some bonds if the valuation panel determines a higher value and NAMA says “feck it! you can have your asset back”.

So what has changed today? In terms of credit availability at INBS and EBS, not very much and nor should we expect it to. Remember what AIB and BoI told the Oireachtas Finance Committee late last year – NAMA would not in itself directly lead to more credit. Eugene Sheehy, Chairman, AIB came before the Oirechtas Joint Finance and Public Services Committee on 25^th November, 2009 and gave this response to how the banks will handle the NAMA bonds.

With regard to the funding and what will happen the day after one receives a bond from NAMA, nothing will happen other than that a bond from NAMA will replace the assets one had on one’s balance sheet, many of which were earning marginally. However, the quality of the bank’s balance sheet will be vastly improved because it will have a bond which is recognised domestically and internationally as a repossessable asset. However, one will not generate any additional liquidity by repossessing it. It is not a supply problem; it is a matter of the banks being able to find risks that are appropriate to the amount of risk they can take with their capital

What has happened to employment in the State? In particular has NAMA decided that it will start releasing some of their €5bn development pot into the construction industry (and given that this €5bn doesn’t go on National Debt, I would recommend they give urgent consideraton to whether they can release any of these funds early).

What has happened with “chasing the developers to the ends of the earth” as Brian Lenihan said on Prime Time last night? Well until the developers produce their business plans in the next two months I would guess there will be little recovery action for the time being. I hope NAMA wise up pretty quickly that with ringfenced SPVs, limited personal guarantees and lawful wealth protection schemes, “chasing developers to the ends of the earth” might produce good optics but little real benefit.

What has happened to banking competition in the State. Well the signs are that not good. It is one thing for banks to say they have to increase SVRs because depositors are demanding higher savings rates – it is another thing when Ireland’s banks have overweight overheads and inefficiencies and the competition (Postbank, Halifax and who’ll be next) is leaving the field. If we do effectively control the banks their overheads should start to resemble efficient banks elsewhere.

What has happened to property values? Difficult to say because the limited figures released by NAMA are aggregated to the extent it is difficult to tease out specific examples. Prices of new properties in Dublin on DAFT this morning continue to display €500/psf and above asking prices. It will take weeks before the picture in commercial property comes into focus.

What has happened to our everyday quality of State services? Nothing in the short term but should AIB and BoI not succeed in attracting private capital and if the INBS and Anglo top end recpatisation estimates are actualised it is difficult to see how services will not suffer (or how our taxes, levies, rates will not rise).

What has happened in the attitude by the media and economists to NAMA and the recapitalisation of Anglo? It seems to be universally negative or at best neutral though questions are beginning to emerge about the economics of closing Anglo and the LEV on the first tranche.  Prominent arch-critic of NAMA, David McWilliams recalls Joan Bruton’s speech in the Dail last night and likens the Irish taxpayer to the Irish volunteer going over the top of the trenches during the Great War. I haven’t found a single economist who will stick their head above the parapet to applaud NAMA, though I think it’s fair to say we are all shell-shocked by the scale of the Anglo upper-limit recapitalisation requirement.

Have we crossed the Rubicon? Or better still has Brian Lenihan, like Xerxes, burned our boats so we have no choice but to fight on for victory? Given the parliamentary arithmetic I think we can’t change course. However what can be done is to demand detail from government and then test their policies against reality. Demanding detail means we understand what the €30bn cost of liquidating Anglo entails, it involves us demanding an updated business plan from NAMA (the fact they are spending what? 54bn with only a draft is crazy), it involves our journalists getting the nitty-gritty detail of the operation of NAMA, the credit review body and the recapitalisations and our economists and academia poring over that detail, stress-testing it, comparing it, debating it and challenging government.

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First Tranche: €16bn gross loan value, MV €9.44bn, LEV €10.51bn, NAMA consideration €8.51bn

So said Brian Lenihan in the last hour in a press conference making reference to the NAMA press conference earlier today. Why the consideration paid by NAMA is less than the Long Term Economic Value is unclear at this point – presumably if another party has a first charge then that might reduce the consideration paid. This is very important arithmetic and no doubt this point will be considered in the coming days.

Much has been made today of the 47% haircut (46.5% to be precise but given that Anglo is an estimate the point is moot) but is the truth that the haircut is 34% (€10.51bn LEV cf €16bn loanvalue)?

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What have the announcements today told us about the NAMA business plan?

Our first spreadsheet shows an overview of NAMA’s finances comparing the draft plan produced in October 2009 with what has been announced today. As you can see we have not been updated with the two key assumptions in the NAMA draft plan

(a) the % increase in the market values of the assets required so that NAMA breaks even IN THE EVENT THAT THE LOAN DEFAULT RATE IS 100% – set at 10% total over 10 years in the draft plan

(b) the % of loans that will repay their debts 100% with any additional interest accrued (though perhaps not in line with the schedule agreed to in the original contract) – set at 80% in the draft plan

Nor do we have an update on the Long Term Economic Value. Note the spreadsheet below assumes the haircuts that applied in the first tranche apply in the same percentages to the updated NAMA loan totals.

In respect of the breakdown by financial institution (FI), we have been given these updated numbers showing the gross loans including loan interest being acquired from the FIs together with the actual haircuts on the first tranche of loans. The final haircuts have not been provided but if we were to apply the first-tranche haircuts to the new estimates of gross loans being acquired from the FIs we can get an estimate of the overall haircut.

Finally and although somewhat beyond the remit of this blog we were informed of the recapitalisations required by each of the FIs – the Anglo position is subject to confirmation.

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Today’s NAMA timetable…

Now until 4.30pm, leaks from politicians and journalists (haircut, recapitalisations, Third Force, credit review committee, EU approvals, banks disputing valuations, valuation horror stories) UPDATE: It’s 3.30pm and less than an hour away from the train of announcements and even though there was a Cabinet briefing this morning and NAMA, the NTMA, Regulator and DoF have practically finalised what will be said today, for once it appears that comunication restraint  is being maintained, though the 40% fall in AIB’s share price in the last couple of days does give cause for concern.

Coverage from RTE from 4.25pm on Radio and Online.

4.00pm NAMA publishes a Guide to itself! 4 pages and very little that you won’t already know.

4.00pm press release from NAMA, new estimate of NAMA loans is €81bn cf €77.1bn previously

4.22pm It appears a briefing has been circulated by DoF to all parties and there is an emerging picture of the State’s exposure through recapitalisation being deferred for a month or so to give the banks more time to seek private capital.

4.31pm Eamon Gilmore says the average haircut is 47% citing the DoF briefing – this is the average discount applied to the first tranche, no news yet on any update on an overall haircut over the life of NAMA.

4.35pm news conference with the Regulator – new capital requirements published.

5.00pm Statement to the Dail  Minister of Finance (confirmed by Taoiseach at 4.19pm)

Tune into Primetime on RTE 1 at 9.30pm and Vincent Browne at 11pm on TV3

Check back here for links ….

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What have Ryanair and NAMA got in common?

Like skywatchers in County Mayo waiting for the Rapture, NAMA-watchers are beginning to set up camp in expectation of tomorrow’s revelations from the Father, Son and Holy Ghost of our banking rescue. Brian Lenihan is expected to give an overview of NAMA’s progress to date and what it will mean for banks’ balance sheets, the recapitalisations and possibly the creation of the long-awaited Third Force in Irish banking. The Son (and he may be independent but he knows who his Da is), or the  duo of the Regulator and CB Governor will give us their thoughts on minimum capital levels and possibly bash the banks’ past behaviour. And the Holy Ghost, NAMA, may even make a statement on how things are running there but if it’s worth knowing then Simon Carswell has probably done a feature on it already.

But coming back to the similarities between Ryanair and NAMA, Ryanair will fly you from Dublin to Paris and will do so at prices starting at zero. However we may need pay for online booking, use of most payment methods and excess luggage.  But the biggest shock might be the plane doesn’t land you by the queue for the Mona Lisa in the Louvre – you’ll need to spend some more travelling time and effort to get there. And so it will be with NAMA. NAMA will not do very much in itself to restore credit and this has been carefully explained by BoI and AIB before the Finance and Public Service committees. However it will clean up their balance sheets making it easier and cheaper for the institutions to access credit. Until they are recapitalised however (and I hope Brian Lenihan deals with impaired residential mortgages on the banks’ balance sheets), credit will not get back to normal because the betting is that banks will behave conservatively in rebuilding their balance sheets despite the best efforts of the government and the credit review channel (maybe we’ll get an announcement on that also tomorrow).

David McWilliams yesterday chastised the government for setting about confusing us with the mechanics and objective of NAMA but is he really being fair in this instance? Perhaps we’ll be better able to judge tomorrow evening after Brian Lenihan has spoken. I hope that unlike the skywatchers in Knock we come away with the satiety that we have witnessed something of lasting value.

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Will NAMA banks sell NAMA-bound loans to third parties for less than their face value?

Hours away from the news that the first tranche of NAMA loans (estimated at €500m after haircut – €1150m before) have come across to the State, serious questions are arising as to whether the five NAMA financial institutions (BoI, AIB, Anglo, INBS and EBS) are selling designated loans to third parties below face value.

Today’s Sunday Times reports on the finances of one of Ireland’s most prominent property tycoons, the widely-respected Derek Quinlan. The Times claims that a third party investor has approached Anglo to buy the estimated €300m personally owing by Derek Quinlan to Anglo. The assumption must be that the third party has made an offer less than the face-value sum outstanding but more than the likely sum to be offered by NAMA. If the sum offered was equal to or more than the face value of the loan then why would Mr Quinlan not arrange for the loan to be paid off in full in concert with the third party? If the sum offered was less than the NAMA offer why would Anglo even contemplate it?

An ugly conclusion suggested by the above scenario is that (a) the State-owned Anglo is contemplating selling NAMA-bound loans and assets to private third parties at a loss to the State and (b) depriving NAMA of not-so-toxic assets.

The scenario outlined above is possibly not unique. BoI and AIB have reportedly reduced the value of their NAMA-bound loans – in the case of AIB by €1bn and BoI by almost €4bn since last September. The portmanteau explanantion has been that some borrowers have paid off loans or refinanced loans in order that they don’t come under the aegis of NAMA. A question that needs to be asked is whether BoI and AIB have sold these loans at less than their face value – if it emerges that developers are able to buy back their loans from NAMA financial institutions at less (and in some cases far less) than face value and avoid the fairly draconian procedures suggested by NAMA the consequences would be explosive.

UPDATE: 25th March, 2010, The Irish Times reports that two assumed NAMA-bound developers, Paddy McKillen and Joe O’Reilly, were attempting to sell assets in London which were backing loans from Ulster Bank. The article states “by selling the properties now, Mr O’Reilly and Mr McKillen ensure the money from these investments cannot be used to service any debts that may be destined for the toxic loans agency”! This pre-NAMA period is a bit of a twilight zone for banks and developers and it is to be hoped that when NAMA eventually conduct audits of banks that they ensure there was no activity which disadvantaged the taxpayer. Developer action doesn’t appear to be restricted prior to NAMA transfers save for the usual insolvency laws.

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Latest CSO statistics indicate population in the State may increase by 5,000 for the 12 months to April 2010 – the lowest increase in 20 years.

It is with reference to the month of April each year that the CSO issue their population estimates which include births, deaths, immigration and emigration in the previous 12 months and we must wait another couple of months before we will know what happened between April 2009 when the State had 4,459,300 souls and today. However the latest QNHS and statistics from the CSO do point to the lowest increase in our population since 1990 which has consequences for housing demand (and in the economics world of price elasticity of demand, for house prices).

Firstly what does the latest QNHS actually say? It tells us that the population in the 15-64 age range declined from 3,531,500 to 3,521,000 from the end of March 2009 to the end of December 2009. The population estimate from the CSO’s website database for April 2009 showed that there were an estimated 288,100 people in the 10-14 age group and 207,500 in the 60-64 age group. If one assumes that the ages are spread evenly, then one would expect 1/5th of the 288,100 aged 10-14 to be aged 14 and therefore turning 15 in the present year (ie 57,600) and that 1/5th of those aged 60-64 would be turning 65 in the present year (ie 41,500) and that the 15-64 age group should have increased by 16,100 (57,600 less 41,500) so the 3,531,500 should have increased to 3,547,600. Instead it is at 3,521,000. Where are the missing 26,600? Emigrated I would assume together with their under 15 children (1 per 3.5 adults aged 15-64 according to the 2009 CSO population estimate – I am assuming that they have abandoned their 65 and older relatives!). This would indicate net outward migration of 26,600 15-64 year olds and 7,600 under 14s or 34,200 in total for the 9 months to the end of December 2009. If we assume the same rate for Q1 for 2010 then the net outward migration would be 45,600 (34,200 divided by 3 and multiplied by 4).

What happened with organic population growth? Well the CSO has confirmed that we are busy maintaining one of the highest birth rates in the developed world (17.3 per 1000) and perhaps just as surprising we still have one of the lowest death rates in the developed world (6/1000) giving a natural population increase rate of 11.3/1000.

Therefore the 4,459,300 would be increased by births of 77,146 and reduced by deaths of 26,756 and net outward migration of 45,600 and our population in April is estimated to have increased to 4,464,090.

Given the reported statistic that over 10,000 dwellings were constructed last year and if we apply an obsolescence rate of 0.5% to the housing stock of 2m and if we assume we have 2.7 souls per household, we would need to call upon less than 2,000 dwellings from the overhang in supply, a tiny proportion even if you accept the CIF estimate of 35,000 vacant new homes.

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Oh dear, the nature of “personal guarantees” and “bankruptcy remote” SPVs beginning to emerge in NAMA banks

We may find out soon how INBS’s loans will be treated by NAMA in the coming days but today’s “revelations” in the Independent really should not come as any surprise to those in the property business and discussed in some detail here weeks ago. I presume there is a typo in the line “The National Asset Management Agency will not apply a far larger discount on Irish Nationwide than any other institution to reflect the nature of its lending and equity participation deals, particularly into the UK” and the ‘not’ should read ‘now’. Anyway we should find out in the coming days what the haircut on the first tranche is proposed at.

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“with values such as this, it is increasingly difficult to see prices going much lower”

So says a mortgage broker involved in selling a scheme of 28 apartments in Mullingar for between €69,950 for 1-bed, 48sq metre, apartments to €82,450 for 2-bedrooms to €98,000 for 117m 3-bedrooms. The scheme is in the hands of a receiver and not one of the 28 apartments has yet been sold.

To this author, the prospect of paying €130/psf for an apartment in a distressed scheme in Mullingar with unspecified management charges and uncertainty over neighbours and empty units, I don’t see much difficulty at all with seeing prices going lower, much lower.

To take a look at the development and its advertisement on DAFT click here.

UPDATE: According to the Independent today, all 28 flats sold over the weekend and indeed an additional 18 were sold presumably from a new phase of the development. Whilst there is debate over the size of the excess potential supply in the State, there is no doubt that it is significant and against our population changes (the latest statistics would indicate a marginal increase in 2009/10, the lowest in 20 years) we may get a better picture of supply and demand for housing later this year.

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Is there any reason why a financial institution WOULDN’T dispute the NAMA valuations?

Aside from the cost of the review by the valuation panel which could run to 10s of €k, then no, there would appear to be very little downside and given the colossal sums involved a dispute might make good financial sense. So how will the dispute procedure work?

It’s all contained in Chapter 2 of the NAMA Act (section 119-127). In the following, I use EBS for example purposes only.

1. EBS receives the Acquisition Schedule (AS).
2. EBS has upto 14 days to raise a dispute with NAMA with respect to an asset valuation.
3. NAMA, upon receipt of the dispute can decide to (a) remove the asset from the AS and continue on as normal (b) revoke the AS in its entirety and start again or (c) acquire the asset at the price in the AS and serve EBS with a Completion Notice (CN).
4. Upon receipt of the CN under 3(c) and if EBS wishes to pursue the matter (why wouldn’t it?) then EBS must within 14 days of receipt of the CN raise a dispute in respect of the ENTIRE portfolio in the AS, not just an individual asset AND the individual asset dispute raised by EBS in 2 above must be greater than 12.5% of the total value of the portfolio.
5. Upon receipt of the portfolio dispute notice from EBS, NAMA will pass the dispute to the Valuation Panel (VP) for review.
6. EBS have upto 28 days from the date they receive the CN to pass all documentation to the VP that they wish considered as part of the review.
7. NAMA have slightly more time to submit to the VP the documentation they want considered as part of the review – 28 days from when EBS notified them of the dispute under 4 above.
8. The VP can make documentation from either side available to the other side.
9. If either side, NAMA or EBS, wish to comment on the documentation received under 8 they will have 7 days in which to do so.
10. The VP can request additional information from EBS or NAMA
11. The VP have then upto 90 days (which can be extended by the Minister of Finance – “the Minister”) to make their determination TO THE MINISTER.
12. The Minister has upto 28 days to either accept the VP’s valuation or he can send the matter back to the VP and tell them to reconsider. The VP can ignore the Minister and confirm the valuations as previously or they can modify their determination. The Minister gets one bite at this apple so if the second time round the VP comes up with the same valuation or indeed a different valuation then that is it.
13. The Minister confirms what the VP have decided and if it is greater than the NAMA value then NAMA must compensate EBS for the difference. NAMA can choose to do that with a cash or cash equivalent OR NAMA can return an asset to the value of the difference.
14. EBS picks up the cost of the entire review unless the VP comes up with a value which is higher than the NAMA value

Risks to EBS would include the cost of the review and the possibility of NAMA repaying the difference by way of an asset which EBS may not want. The VP would appear not to have an option of determining a value below that of NAMA so there is only upside for EBS in that respect. If an asset was worth €100m at origination and was granted a €77m loan (a 77% LTV) and NAMA valued the loan with a 40% haircut at €46.2m and EBS valued it with a 30% haircut at €53.9m, then would the cost of a VP act to prevent a dispute? I don’t think so and in these circumstances it would seem advantageous for EBS to lodge the dispute.

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