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Archive for July 6th, 2010

The NAMA Business Plan, such as it is, has three different scenarios which produce Net Present Values (cashflows discounted by 5.5%) of between MINUS €0.8bn to PLUS €3.9bn with the base plan being PLUS €1bn. Below is the summary of the statistics from the base plan. As you can see the plan now has less granularity than the plan last October 2009, ergo the sea of ‘?’s. Why has the bottom line metric, Net Present Value dropped from €4.8bn last October 2009 to €1bn today? I can confidently say I have no idea and I write a blog dedicated to NAMA matters. So if something happens in NAMA it might be forecasting a PLUS €3.9bn NPV, if something else happens it might be forecasting a MINUS €0.8bn NPV. If my aunt had liathróidí indeed.

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NAMA Business Plan published!

Available here.

Quarterly Report available here.

Extensive commentary will be appear on here later.

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The EU Competition Commissioner, Joaquin Almunia, yesterday published his letter to Michael Martin, our Foreign Minister, in response to the application for approval of the restructuring of Anglo submitted in November 2009 (remember another plan was due for submission at the end of May, but this November 2009 plan is interesting nonetheless). A decision was issued in March 2010 which in summary granted limited approval to an injection, but the publication yesterday of the Commissioner’s letter gives an interesting, if disturbing, commentary on the Department of Finance’s ability to put a business plan together. And as we are still waiting with bated breath for the NAMA Business Plan and because there are similarities between the brave new worlds of the NAMA experiment and salvaging a good bank out of Anglo, not to mention both being at the nexus of property and banking, I thought it would be interesting to see what the Commissioner had to say about the Anglo Business Plan.

First of all there is a little froth in the Commissioner’s letter that is amusing and in some cases interesting to highlight.

  1. In answer to Enda Kenny’s questions in the Oireachtas about when the government decided that Anglo needed a further injection of capital beyond the initial injection of €4bn in early 2009, an answer is that on 22nd December, 2009 Brian Lenihan wrote to Anglo giving commitments to meet capital shortfalls and on the 29th January, 2010 the government informed the EU of their intention to inject further capital into Anglo. This communication from the government to the EU was followed up with a formal notification to the EU on 17th February, 2010 and on 17th March, 2010 the government informed the EU that Anglo would need €8.3bn and on 29th March, 2010 that quantification of Anglo’s recap needs went up to €10.44bn. So Enda might feel a little aggrieved that he only found out about the recapitalisation needs at the end of March 2010. Also one might want to ask again – did the Financial Regulator allow Anglo to operate on an insolvent basis at the start of this year? There is apparently a letter (note 33) from the MfF to Anglo on 22 December 2009 which gives a commitment to inject capital to meet capital requirements but is that sufficient for proper regulatory oversight of a bank? Mr Elderfield?
  2. Although the figures have been redacted the early part of the document seems to paint a picture of mass withdrawals from Anglo in early 2009 some months after the Guarantee in September 2008.
  3. The government through the decision by the EU in March 2010 was allowed inject a maximum of €10.44bn in Anglo additional to the €4bn injected in Anglo in mid -2009. As €10.3bn has been injected in March and May, that means that the government must go back to the EU to get approval for the any further injection.  Given that Anglo is expected to have €8bn nominal loan value transferred in tranche 2 imminently and the NAMA Chairman expects the haircuts from tranche 1 to broadly apply (Anglo 55%), does this mean that the government is already drafting the request for another €4.4bn to be injected into Anglo? Also Anglo has been pretty busy in the courts recently having receivers appointed to property-backed loan assets, so write-downs in the non-NAMA portfolio might even push up that €4.4bn. With €4bn injected into NAMA last year and €10.3bn injected this year so far, another €4.4bn would bring the total injection to €18.7bn – the lion’s share of the total estimate so any debate about the injections will soon be academic because they will have happened.
  4. Note 41 – property prices were seen to be dropping in 2009 by 15-19% [actual according to Permanent TSB/ESRI was 18.5%] but here’s the kicker – they are seen to be falling in 2010 and 2011 before starting to rise in 2012. So how could Brian Lenihan be talking about the bottom, either in late 2009 or indeed in April 2010? I suppose the answer is he wears two hats and with the realistic economic planning hat on he sees falls to 2012 but with a politician’s hat on he has to talk up the market and instil confidence. The average decline in property prices in the plan is estimated at 47% peak to trough but in the worst case is 69%.
  5. Note 71 – “Old” Anglo has approximately €2bn of subordinated debt outstanding. What is to happen with that is redacted.
  6. Note 96 – Brian Lenihan is judged to have broken State-aid rules in December 2009 when he wrote the letter to Anglo giving an undertaking to make any injection required to satisfy its capital requirements. This was before the end of March 2010 when the EU gave its approval. Slap on wrist to Brian. But again, Matthew Elderfield, was that letter which committed to something the EU had not agreed adequate for a bank under your regulatory wings?
  7. The government’s plans for New Bank Anglo are that it acquires loans at market value from Old Bank Anglo and there is no mention of Long Term Economic Value. What’s good for the goose is plainly distasteful to the gander.

And to the Business Plan (the restructuring plan) itself:

  1. Note 106 – after an initial assessment the Commission has doubts about the preferred plan option for Anglo – the Old Bank/New Bank split.
  2. Note 107 – no detailed business plan has been produced for the restructure. It is therefore not possible to assess the extent to which the plan is credible or contains prudent assumptions. Yes the EU are talking about Anglo here, not NAMA, but given the plan that was produced by NAMA in October 2009 the exact same criticism might apply. Let’s hope what is published later this week does have sufficient detail to lend the NAMA operation credibility.
  3. Note 108 – by 2014 the plan is that Old Bank/New Bank Anglo would produce a profit equal to that at the height of the boom- from recollection that was €1.2bn in 2007 – up 44% from the previous year, the accounts are here. Optimistic? Reckless? Fantasy? Let’s recap again – Anglo who everyone agrees is a basket case could get back to a position in 4 years time whereby it generated net profit of €1.2bn per annum (and just to be clear that was be a profit of more than €1.2bn for New Bank offset by a loss on Old Bank)!!!
  4. Note 110 – the Commission has *doubts* (as opposed to “the Commission is unclear”) that the assumptions regarding NAMA and non-NAMA haircuts are conservative enough.
  5. Note 111 – the Commission has *doubts* about the macreconomic indicators used and notes that those produced are in any case incomplete.
  6. Notes 112-113 – the Commission  says insufficient information has been provided on the structure of New Bank/Old Bank to allow it to consider its feasibility
  7. Note 116 – the Commission notes that the substantiation of the risk rating of loans to be transferred to New Bank is insufficient and therefore the Commission *doubts* the feasibility of the new structure.
  8. Notes 117-118 – little or no explanation given to substantiate the plan that New Bank will heavily diversify.
  9. Note 120 – “At the moment, the Commission doubts whether further large exposure to a sector which is experiencing severe difficulties and which is volatile by nature will contribute to the viability of New Bank. The plan also does not indicate whether New Bank will stop with risky lending practices such as interest-only loans and high loan-to-value loans (with possibility for the borrower to increase its borrowing when the value of the mortgaged property increased).” When you consider what got Anglo into its present mess, you would have to laugh or cry at this assessment on the plans.
  10. Notes 121-122 – Funding plans not “sufficiently developed” and “unrealistic”

Let us hope the NAMA Business Plan is produced to a better standard.

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No leaks today from the NAMA Business Plan, though the Irish Examiner do say “NAMA is expected to release its first business plan later this week, once it receives approval from Finance Minister Brian Lenihan.” Although it was reported last week that NAMA was forced to change its Business Plan, that term “forced” wasn’t explained and could conceivably have meant that NAMA had no option but to change the draft Business Plan as a result of its experience with the first tranches and its general operations since last October 2009. The Examiner says that Brian Lenihan’s approval is required prior to publication. Up to last week there had not been any suggestion that the DoF had veto powers over the Business Plan, the way both NAMA CEO and MfF had explained it, the Business Plan would be forwarded from NAMA to the DoF and published – no veto, no approval was ever suggested.

How independent is NAMA if government bankrolls your organisation (€49m in the NAMA SPV and €250m of an “advance” in May 2010), makes appointments to your Board and approves or rejects your Business Plan? And of course it would seem that the DoF is holding onto those draft NAMA Codes of Practice for an awfully long time too.

Lastly when Enda Kenny asked the Tainaiste in the Dail last Thursday “With regard to NAMA, is it intended that the Dáil will have an opportunity next week to discuss the quarterly report submitted to the Minister for Finance, Deputy Brian Lenihan, and the changes to the NAMA business plan that have been introduced? We now know that developers have been looking for €1.5 billion in working capital from NAMA, loan covenants have been waived by NAMA and developers have sought to transfer assets outside the jurisdiction. We need to discuss these and many other issues of critical importance so the people know exactly what is going on. Will we have an opportunity next week to hear what are the changes in the revised NAMA business plan and to have a discussion on the quarterly report that was submitted?”

Here was the reply

“I am not sure we will have time available next week to discuss the NAMA business plan on the basis that a number of pieces of legislation must go through the House.”

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