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Archive for July 21st, 2010

As expected, not a lot of substance to emerge from today’s continuation of Peter Mathews’ presentation on the subject of “NAMA and the banking crisis” to the Oireachtas Joint Committee on Finance and the Public Service. There seems to be some intense antipathy between Peter Mathews and Deputy Frank Fahey with Frank seeming to make insinuations about Peter’s expertise and Peter (less subtly) questioning Frank’s expertise. When the transcript is eventually published, you will find a very high word count on the words “expert” and “expertise”.

Peter’s presentation today continues his theme of NAMA not being fit for purpose, not leading to an increase in bank lending and the wrong people being listened to. Frank’s position is that NAMA has the support of the IMF, OECD, ECB, EU and our own Central Bank governor and that banks should tend to exchange NAMA bonds for cash with the ECB (to whom they’ll pay 1.5%) and lend that money out at a profit.

There were a few snippets of interest from the presentation:

1. Peter Mathews believes that Anglo will eventually end up with losses in the region of €32bn – now we know that the NAMA-bound portfolio of €36bn will probably have a 55% haircut so there would be close to €20bn of losses there. The remaining non-NAMA loans also of €36bn have a provision already of €4bn so an extra €12bn of loss would bring the overall loss to 44%. How likely is that level of loss on the non-NAMA portfolio? Difficult to say but the €22bn would appear to be on the low side unless Anglo can offset losses with other assets or profits.

2. There was a Committee hearing on Anglo in June 2010 at which the Chairman-in-waiting, Alan Dukes, appeared and answered questions. Mr Dukes had not at that point taken up the post of Chairman. Peter Matthews believes that it was inappropriate not to have had Donal O’Connor, the Anglo chairman from Jan 2009 (and non-executive director from June 2008) until he retired in June 2010, to attend the discussion of Anglo’s business.

3. Peter Mathews says that NAMA financial institutions can only get loans of upto 80% of the face value of NAMA bonds at the ECB. The published haircut at the ECB is 1.5% so it is difficult to see where he sourced the “80%”. Michael Noonan asked whether there was a secondary market for NAMA bonds and Peter was unsure, though he seemed to agree with Michael Noonan’s view that there was generally a secondary market for all bonds.

4. Anglo has recently claimed a €1.8bn profit on redeeming bonds which had a book value of €2.4bn in return for a payment from Anglo of €0.6bn. Peter says that from the bondholders point of view this was regarded as a €0.6bn profit because they had written down the value of the bonds to zero. This was an interesting claim and could carry an implication that Anglo were keen to bolster short-term paper profit (they could only recognise the profit when the bondholders accepted the deal) at the expense of longer term profit (if the bonds were redeemed for zero then eventually Anglo would have booked the entire €2.4bn as a profit but they could only do that when there was certainty as to the value). Was there a digout of €0.6bn for Anglo bondholders to flatter Anglo’s profit at the expense of the taxpayers’ long-term interest?

5. In Peter’s view NAMA can be undone with the loans being given back to the banks and the 80-odd employees at NAMA being deployed to work in the banks and the expertise already gained (and paid for) in the process being of future benefit.

6. Whilst not examined in any real depth – apparently Peter has a paper on the subject and he is on record as saying that anyone from the public can ask him for the information – Peter thinks Anglo and INBS should be wound down over a 5 year period at a cost of €17bn.

It was a strange hearing in the sense that the theme of Peter’s presentation veered from what appeared to be a ballsy job application to a passionate expression of patriotism. One of the few constructive contributions came from Deputy Fahey at the end who asked the Chairman when the Committee would have the opportunity of questioning NAMA officials. The Chairman. Michael Ahern, said that there would be a hearing with NAMA officials when the Committee came back after the recess in September 2010 but that the Committee had a pressing workload. Deputy Fahey said he was particularly concerned at the apparent slow progress with NAMA transferring loans with Chairman Ahern assuring him that work was progressing to plan.

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Most definitely, according to a Cork businessman Sean Power who runs a business around the rent2buy.ie website. According to the Irish Examiner Mr Power believes “that NAMA had stopped everything in its tracks and there was no incentive for banks or developers to look at other options for off-loading property”.

With respect to the number of property transactions, there is no one source of up to date information in the State. The most recent mortgage statistics show that new lending for property transactions continues to slide and is 86% off the peak (by volume of new mortgages) and Q1, 2010 (the latest data available) show a drop of 31% compared with Q4,2009 (again by volume).

Less than half of all Irish housing is subject to a mortgage (800,000 mortgages versus 2m-odd dwellings).  Stamp duty also appears to be substantially down year on year.  The CSO doesn’t produce information on housing though its average house price series does make reference to the fact that it does obtain statistics on mortgage lending. So it would appear that the number of transactions has dropped considerably. But is NAMA one of the distinct reasons for the drop in transactions?

NAMA has thus far taken over the loans of the Top 10 developers (though it now appears that Paddy McKillen is not in that cohort) in Tranche 1. Tranche 2 had 23 borrowers. Tranche 3 which is to be transferred by September 2010 will apparently have syndicates of investors who engaged in property development. NAMA will ultimately absorb all development loans of €5m+ from AIB, BoI and Anglo and any development loans from INBS and EBS. They will also take over substantial associated loans.  When NAMA takes over your loan you will have a month (or possibly more) to submit a business plan as to how you will repay the loan. NAMA will then decide on the feasibility of your plan but may force you to dispose – decisions on the first business plans are due in the coming weeks.

So here’s the situation. You obtained a loan from a NAMA financial institution to develop your estate. Alas when the properties were being built the bottom fell out of the market so you’re left with empty properties (and partly complete properties or developments) and you have outstanding loans to the bank. The bank haven’t foreclosed because they won’t get their money back in the current market and they mightn’t want to realize the loss in their accounts. And then NAMA appears as a workout vehicle that might hold onto your properties for a few years until the market improves, they’ll possibly restructure your loan, they have up to €5bn to help finish off your development and might be a matchmaker with investors to rescue you. In this situation, who in their right mind would dispose of properties now when they appear to have better prospects holding out for NAMA?

Of course with so many developers putting their faith in NAMA, some or indeed many are going to be disappointed. That €5bn pot is limited and already there are some biggish demands emerging eg the Battersea Power Station development. NAMA mightn’t be able to afford to hold onto properties until the market recovers (NAMA won’t be able to finance holding onto everything and also some markets are unlikely to recover) and investors with cash have a cornucopia of opportunities and given the risks in the Irish economy there may not be a wall of investment cash available.

So when will NAMA unfreeze the market? Sometime during 2011 would be my guess when a sufficient number of borrowers have had their business plans examined and when the reality of the oversupply of property, population change and the finite level of investment and financing available becomes clear.

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In an important revelation, Emmet Oliver and Dearbhail McDonald in the Independent today report that Paddy McKillen’s loans have not yet transferred to NAMA and that “NAMA told Mr McKillen that it would not transfer any of his loans pending the outcome of his judicial review proceedings”.  So if you’re a developer and want another four months to refinance your loans or are unhappy with NAMA being your banker or don’t wish to produce business plans that list all your assets and commercial associations, including the Ultimate Beneficial Owners of interests, then it would seem that a legal challenge to NAMA might give you the breathing space to refinance – none of this is a deliberate reference to Paddy McKillen and his companies, it is an observation of the reported consequence of Paddy’s legal action.

The article headline in the Independent also claims that Paddy will pay NAMA for any losses NAMA suffers from the delay of the judicial review though the article then goes on to say “The promise-to-pay damages issue lapsed this week after NAMA told Mr McKillen that it would not transfer any of his loans” so the reader is left unsure to what extent the original promise stands.

It will be interesting to see how long this legal challenge can last. I recall a challenge by another property magnate, the Duke of Westminster to the UK’s leasehold reform laws which allowed long leaseholders to extend leases and buy their freeholds. The Duke, being one of the country’s largest freeholders strongly objected to this legislative affront to his centuries-old property rights and launched a case which eventually ended up with the European Court of Human Rights who ruled in the UK government’s favour and upheld the leasehold reform laws. How long did the case take to reach a conclusion? Seven years. Doesn’t NAMA have a 7-10 year lifespan?

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