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Archive for September 3rd, 2010

At a minimum, there are suspicions. This entry will examine Anglo’s accounting for its non-NAMA loans and in particular its designation of loans as performing or impaired. Note that this entry is not about Anglo under-accounting for future losses on NAMA loans – at this stage we all know that Anglo is hiding behind IFRS 9 on that score and anyway the €25bn net bailout referred to by Anglo CEO, Mike Aynsley should cover the true NAMA losses at a 58% total average haircut. This entry deals with the non-NAMA loan portfolio at Anglo and will deal with the following questions:

(1) Given that Anglo presently has €37.7bn of non-NAMA loans which will remain with the bank after NAMA completes its transfers and has only designated €14bn as impaired then in the six month period to the end of June 2010 why was no capital paid down on approximately €24bn of unimpaired loans.

(2) Why should the level of impairment on non-NAMA loans be less than on NAMA loans?

(3) What would be Anglo’s additional losses if its non-NAMA loans suffered losses at an average of 58%?

Warning: there are a lot of numbers coming up but the upshot is that Anglo’s designation of non-NAMA loans as impaired, although conceivably valid, may be hiding a large loss of over €10bn. Loss provisions are largely at Anglo’s discretion but designation of loans as impaired should be objective, yet apparently no capital was paid down on non-NAMA loans for the first six months of 2010.

So where to start? Anglo published its interim report and accounts covering the six month period up to 30th June, 2010 earlier this week. The headline loss reported for the first six months of 2010 was €8.2bn but most commentators recognised that this represented an under-reporting of the future losses on the remaining NAMA-bound tranches because the haircut shown was 38%. After all Anglo had suffered an average haircut of 58% on its first two tranches – no-one seriously believes the haircuts on the remaining tranches will be much different but that didn’t stop Anglo maintaining a provision of 38% (34% if you deducted tranche 2 which attracted a 62% haircut) on future losses. Anglo is hiding behind the provisions of International Financial Reporting Standard (IFRS) 9 which allows Anglo to not recognise loan losses at their expected level. But it didn’t exercise commentators too much to work out that Anglo will probably suffer another €4.5-5bn of NAMA losses in the second half – importantly this didn’t really impact upon the suggested Anglo recap of €25bn as it seems that Anglo have been using realistic projections on NAMA losses in arriving at its bailout requirements. But all of this related to the NAMA-bound loans.

This entry deals with the non-NAMA loans. The top of this entry shows the overall summary of Anglo’s lending position at the end of December 2009 and movements on the loan account for the first six months of 2010. Interest receivable is shown under note 3 of page 38. New advances aren’t explicitly shown in the accounts but the management review on page 12 mentions loan advances at €1.1bn – Laura Noonan and Emmet Oliver at the Independent say that is the total for new advances, I’m not sure but let’s assume that interpretation is correct. The total balance of outstanding loans is shown on page 12 of the interim report. The repayments of interest and capital is a calculated number and bizarrely shows a negative, indicating no payment of interest or capital at all and indicates possibly rounding differences. There is nothing in the cashflow statement or elsewhere in the accounts that would seem to disprove the assertion that there were no capital repayments during the six month period. And yet, as the analysis below shows Anglo are claiming that €24bn of the €38bn of non-NAMA loans are unimpaired!

So on to the analysis of non-NAMA loans -on page 2 of the press release accompanying the recent interim report, Anglo say that the non-NAMA (“after NAMA”) loans are €38.4bn though they say in a footnote that this includes €0.8bn of lending associated with the Group’s assurance business and €0.7bn of loans classified as held for sale to third parties.

If one excludes this €0.7bn of loans classified as held for sale to third parties then you get the €37.7bn of non-NAMA loans and under note 35 on page 64 of the interim report there is an analysis of €37 749m in respect of loans and advances to customers which of course includes €766m (€0.8bn as shown in the statement above) of lending associated with the Group’s insurance company.

Anglo have only designated €13 957m of the €37 749m non-NAMA loans as impaired. What makes this look suspicious is that note 35 on page 68 goes on to show that €20 574m of the €26 592m of the remaining NAMA loans are designated as impaired. Why would 77% of NAMA loans be impaired versus only 37% of non-NAMA loans?

And this brings us on to the next aspect of the non-NAMA loans. Why should they have a different risk profile to the NAMA loans? After all these are loans by the same bank, the same lending officers adopting the same lending practices and it was lending to the same type of borrower for the same type of asset. This last point may puzzle some – after all aren’t NAMA loans supposed to be toxic land and development loans which as a class of property lending was supposed to have been most severely affected by the property crash? According to Savills development land has lost 75-90% of its peak value. Commercial property according to IPD  has lost 60% of its peak value and according to Permanent/TSB residential property has lost 35% of its peak value. However take a look at the breakdown of the loans being taken over by NAMA in tranches 1 and 2 in the key tranche 1 and 2 data publication by NAMA (or you might find an entry on here from last week easier to follow). Tranches 1 and 2 had less than 30% land and development – the rest, “associated loans” one must assume,  included hotels, investment property and completed residential property which should be representative of Anglo’s non-NAMA loans.

If one were to assume the same level of loss on non-NAMA loans as NAMA loans, then the additional loss would be over €10bn (ie a loss of €17 729m compared with an existing provision of €7 705m). The tables below show how the €10bn additional cost is derived – tables 1,2,5 and 6 are directly copied from note 35 on page 66 onwards. Unlike the NAMA loans being shown at a realistic level (with 58% haircuts), there would not be capital to absorb these non-NAMA loan losses and a further injection would be required. Which would bring the Anglo bailout up to €35bn net. That would ignore any seed capital for Anglo Newbank and any other short term recoupable injection. It would not be unrealistic to place the gross cost of Anglo at over €40bn.

Table 1 – Anglo’s NAMA bound loans before provision as at 30 June 2010

Table 2 – Provisions against NAMA bound loans as at 30 June 2010

Table 3 – Increasing the provisions to 58% – €m

Table 4 – Increasing the provisions to 58% – %

Table 5 – Anglo’s non-NAMA loans before provision as at 30 June 2010

Table 6 – Specific provisions against non-NAMA loans as at 30 June 2010

Table 7 – Allocating the general provision of €1.3bn pro-rata to the specific provisions

Table 8 – Provision %s after allocating the general provision

Table 9 – Increasing the provisions to be the same % as those for NAMA loans by sector and location

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It could have been a line from Alanis Morissette’s “Ironic” – He won the lottery and died the next day, It’s a black fly in your Chardonnay , It’s a death row pardon two minutes too late, It’s NAMAized Liam Carroll finally getting planning permission for a building intended to house a bank that is now bust to the tune of €22-40bn.

The development at the junction of Dublin’s North Wall Quay and New Wapping Street has stood as an empty shell since 2008 following legal wrangles over contentiously-granted planning permission. On 30th August, 2010 planning authority Bord Pleanala finally granted permission for the 3-block, 8-storey, 27,832 sq metre development with 80 car-parking spaces at basement level. Other than a judicial review application most likely by Carroll’s old nemesis, fellow developer Sean Dunne, the development can now go ahead. There are various documents relating to the planning application and retention application (the latter under reference PL29N.232580 (Reg Ref 4964/08)) available from Bord Pleanala though the decision from 30th August 2010 does not appear to be available yet, so some of the details above may change.

It was going to be the centerpiece in what the Sunday Tribune called a domestic banking centre beside its international neighbour in Dublin’s IFSC. Liam Carroll reportedly spent €250m buying up land to realize his vision. Now the loan backing the development (said to be €40m from Anglo) is reportedly with NAMA and Liam Carroll’s borrowings would not appear to be in the healthiest of conditions following a failed examinership attempt last year. NAMA is at this minute examining his business plan.

So what will NAMA do? The six options for NAMA are highlighted above though the last one, manage, would appear not to be an option for a partly-complete asset and I would suggest that the market for those willing to take an incomplete building and lease it for a number of years would be limited (though not non-existent, after all if the terms are right then it may be to an investor’s advantage to spend money completing a project and then taking a rent roll for a lease number of years).

With a glut of 782,500 sq metres of vacant office space available in the capital according to Savills in August 2010, will there be a market for another 27,832 sq metres if the development were completed as originally intended?  This will be the key determinant of the economic decision by NAMA and from that flows potential buyers or a financial justification for NAMA to develop or demolish (but if demolished, what would be the substitute use – a city farm?). Mothballing would see the retention of this eye sore for years to come, perhaps a decade long symbol of the collapse of the property boom.

Although the Anglo HQ is a high profile asset, NAMA is now being confronted with an array of similar projects. With a limited €5bn development pot (theoretically according to the NAMA Act though there is a concern that NAMA hasn’t put a system in place yet to draw down those funds) and pressure to generate cash, all eyes will be on NAMA as it makes its true public debut -everything up to now has been process, what follows will be what makes or breaks NAMA.

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