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Archive for June 10th, 2010

Just a week after speculation here that the IGB site was the reason NAMA needed a €250m “advance” from the Department of Finance in May 2010 to provide a “working capital buffer”, the mystery deepens today with the release of Becbay’s accounts for year ended 31st December, 2008  and signed by directors Bernard McNamara and Derek Quinlan on 13th May, 2010 – available here.

To recap, Becbay is a consortium of three companies – the Dublin Docklands Development Authority (DDDA, state-owned), Donatex (a limited company most widely associated with, and according to the Becbay accounts controlled by, developer Bernard McNamara) and Mempal (a limited company most widely associated with, and according to the Becbay accounts controlled by, with developer Derek Quinlan). The shareholdings of the three parties is shown in the annual accounts to be DDDA (26%), Donatex (41%) and Mempal (33%).Both Bernard McNamara and Derek Quinlan were widely reported to be amongst the “Top 10” developers whose loans were transferred to NAMA in the first tranche. Becbay bought the 25-acre site in Ringsend in August 2006 for a reported sum of €412m from the Paul Coulson’s South Wharf PLC and Dublin Port Company (a private limited company owned by the State), a reported €70-100m more than was offered by rival developer Sean Mulryan and according to the Sunday Business Post, the sum offered by Becbay Limited was “up to €100m more” than the next highest bidder. The accounts prompt some questions:

  1. From Note 9 to the accounts, why was a loan of €101,869 repaid to Bernard McNamara during the period when so much more was owing to what are now State banks? Why did Mr McNamara’s loan (described as a loan from a director in the accounts) have precedence over other loans, particularly loans from what are now State-owned financial institutions? What was the  precise date of the repayment of Mr McNamara’s loan?
  2. From Note 8, why was €2.7m paid to “related parties”, presumably Bernard McNamara’s Grattan Property for management services or Michael McNamara & Co for construction (see Note 18 for related party transactions), “after year end”, ie after 31st December, 2008 when so much was owing to the State?
  3. If NAMA were supposed to have taken over the “Top 10” developer loans in the first tranche and it is indeed true that Bernard McNamara and Derek Quinlan are amongst the Top 10, then why were loans relating to Donatex and Mempal not taken over? When NAMA said it was taking over loans in respect of the Top 10 did it mean it was only taking over the loans where the individuals were 100% the recipient of the loans? Plainly it was not talking about loans to companies controlled by the Top 10.
  4. Why is it that the knowledgeable Simon Carswell at the Irish Times was confident in April 2010 that the loans relating to the IGB were to transfer to NAMA in the first tranche and indeed Neil Callanan at the Sunday Tribune reported on 30th May, 2010 that “The loan that funded the purchase of the Irish Glass Bottle site was one of the first that moved from Anglo Irish Bank to NAMA” and apparently confirmed by the Chairman of the DDDA since March 2009, Niamh Brennan, speaking on RTE Radio two weeks ago with David Murphy (2:50 into the interview “The site is now owned by the taxpayer, because it is it is now owned by NAMA”), yet the Becbay accounts signed on 13th May, 2010 – 3 days after NAMA had confirmed the transfer of the first tranche – say that the loans haven’t been transferred (see Note 20 – post balance sheet events)? Indeed why do the directors of Becbay say on 13th May, 2010 “It is unclear as to the terms on which NAMA may continue to finance the working capital requirements of the company in the future. The directors have not had any direct discussions with NAMA in this regard”? Seriously, for what is likely to be the single biggest property-backed loan in the NAMA portfolio, the directors have not had direct discussions with NAMA?
  5. NAMA reduced its estimate of gross loans to be transferred from Anglo in the first tranche between the end of March 2010 and the start of May 2010 when the first tranche transfer was confirmed from an estimated total of  €10bn to a final actual gross loan total of €9.3bn. The reported reason for the fall in value was that the €0.7m loans did not have adequate documentation or clarity of security. Were the IGB loans (c€300m) in that €0.7bn?
  6. From note 6, Becbay reports €29m expenditure as an addition to the value of the site during the year plus €25m of capitalised interest. This was a substantial investment in the site during a period when prices were crashing. There is practically no breakdown of this expenditure in the accounts.
  7. John Mulcahy, one of NAMA’s most experienced property men is a former employee of Jones Lang Lasalle (JLL) and indeed is reported to still have a significant shareholding in that company. JLL acted for South Wharf PLC, the main beneficiary of the sale of the site in 2006. To what extent is Mr Mulcahy involved in any dealings with NAMA’s reported acquisition of the loans relating to the site?

The auditor’s agreement with the directors’ view that Becbay is still a going concern (a company with a net worth of minus €0.5bn) is … interesting as is the opening sentence in the directors’ report “The directors have pleasure in submitting their annual report ..” – these are light diversions from some serious questions for what is likely to be  NAMA’s single biggest acquisition (by reference to original value).

UPDATE: July 7th, 2010. There is a cost to the State update contained in an exchange in the Oireachtas: Joan Bruton: the total loss to the Exchequer to date arising from the purchase of the Irish Glass Bottle site for €412 million by the Dublin Docklands Development Authority in 2006; and if he will make a statement on the matter. John Gormley: In 2006, the Dublin Docklands Development Authority took a 26% share in Becbay Limited, a joint venture with Bernard McNamara (through his company Donatex) and Derek Quinlan (through the company Mempal), which purchased the Irish Glass Bottle (IGB) site. A €288 million loan to Becbay Limited was provided jointly by Anglo Irish Bank and AIB. It is a non-recourse loan largely secured against the land, with the exception of €111.9 million that is secured by guarantees of the three shareholders in proportion to their respective shareholdings. The Authority also invested equity of €43 million which was used primarily to remediate the site.

In terms of the Authority’s liability arising from the deal, at end 2009 this comprised a principal guarantee on its 26% share of the loans, totalling €29.1 million, and €5m interest accrued on its share of the loans for 2009 (interest to end-2008 had been paid by all shareholders). This leaves a current liability of some €34.1 million, although interest continues to accrue at a rate of €5m per annum until such time as the loan is terminated. I understand that the Becbay loans have now transferred to the National Assets Management Agency and that NAMA has requested Becbay Ltd. to submit a detailed business plan in relation to its outstanding debts by end July. Looking at the wider State sector’s position arising from the transaction, it should also be noted that the Dublin Port Company received some €138 million in respect of its share of the proceeds from the IGB site sale.

UPDATE:28th July, 2010. It has been confirmed by NAMA and reported in the Irish Times that the IGB site loans of €288m have now been transferred to NAMA and that a business plan is expected from the shareholders in Becbay by the end of this month. It is also reported that there is disagreement amongst the shareholders and they may not even be talking with one another. Bernard McNamara, effectively one of the shareholders,  is suing another shareholder, the State-owned DDDA.  NAMA has not revealed apparently their valuation for the site, but the DDDA had valued it at €50m earlier this year.

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On Tuesday the National Treasury Management Agency set out its “Information Memorandum” for 2010 for State bond holders, current and potential. The document gives an overall assessment of the economic health of the State and sets out future plans. Given that the document is introduced by the Minister for Finance, Brian Lenihan and deals with government plans, it is worth exploring any impact on NAMA’s operation.

Property taxes – the MfF says that  “In future budgets the emphasis will be on

broadening the tax base by the introduction, for example, of a property tax and water charges for domestic use.” The Irish Independent yesterday interprets this as a “pledge” to introduce property taxes and water charges.  Actually in terms of language and remembering the MfF is a barrister and has in the past used clear language, I think this language is unclear. The intention to broaden the tax base is clear. But it is unclear if property taxes and water charges are examples of ways in which this *might* be done or *will* be done. Elsewhere in the Irish Times yesterday, Green Party Minister for the Environment, John Gormley, is reported to have ruled out a flat-rate property tax saying “All the evidence is that people are prepared to pay taxes if they are brought in on a fair basis” which implies a more progressive tax reflecting, presumably, the value of the property. Water rates are also to be based on usage. These statements from the Minister seem to give the green light to employ an army of water meter installers and property valuers for the 2m homes in the State. The main reason for introducing the taxes is to plug the deficit. However in a weak property market a side effect will be to depress further the value of property, though the impact on different sectors of the property market may vary depending on how the property tax is calculated. Given that NAMA is depending more and more on an increase in property values, these new taxes will not be helpful to the agency’s operations.

Economic growth – “Based on demographics, estimates of spare capacity and other factors, the Irish economy is projected to expand at an average annual rate of 4 per cent between 2011 and 2014.”. Unit labour costs are forecast to come down by nearly 10% between 2009 and 2011. No forecast is provided for unemployment though previously it was forecast to peak at 13-14% in 2010 and would then gradually reduce by 1-2% per annum. No projections are given for the future population though the report does emphasise the strong growth in population during the boom years and, in my opinion, downplays the effect of the potential for mass emigration in the near term. The report says “Demographic trends: The growth in labour supply has played a key role in Ireland’s economic development over the past decade. Ireland’s labour force has grown strongly, driven by both natural increases in the Irish-born population and inward migration. The stock of foreign labour as a percentage of the total labour force is above the OECD average. Moreover, Ireland has the most favourable old age dependency ratio in the EU and this will still be the position in 2050.” “Demographic trends” are clouded, in my view, by the future scale of emigration. So the return to growth may instill confidence but the effects of wage cuts and unemployment are likely to be a drag on long term purchasing decisions.

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