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Archive for September 8th, 2010

Lenihan decides Anglo Irish to be wound down!

The Minister for Finance, Brian Lenihan, has just issued a statement to the effect that Anglo is to be split into two – an Asset Management company and a Funding Bank. The Funding Bank will not provide any new lending and will simply manage customer deposits, a scenario which is likely to see the bank wound down (this isn’t stated in the release but is a likely consequence). A new detailed proposal is being submitted to the EU.

In his statement today the Minister has acknowledged the work done by Anglo’s management and their preferred option of a good bank/ bad bank but has clearly rejected their proposal. It is worth differentiating what is presently proposed by the Minister from what was supposedly proposed by Anglo’s management. Anglo is to be killed off – the asset management arm will be sold or wound down over time. The so-called Funding Bank is effectively a dead bank as it will not be engaging in lending and seems that it will be more akin to a post office (without the branch network) and as such it is puzzling what its purpose will be – perhaps the DoF will add flesh to the bones. An indication of the lifespan of state involvement in the asset management company would also be helpful.

Patrick Honohan, the governor of the Central Bank has been tasked with producing a credible estimate of the cost of the new structure – effectively he has to produce a credible estimate of the true loss on the non-NAMA loanbook. It is in all likelihood going to be substantially more than the €25bn upper limit he suggested in Beijing a month ago with the betting that it will be over €30bn.

Unfortunately we still have INBS and to a lesser extent EBS to correctly cost. And there is the not insubstantial question of whether AIB will meet its capital requirements. Today might be a brave attempt to regain the initiative in sorting out the country’s banking crisis but the devil in the detail of what is being proposed and residual INBS-EBS-AIB concerns are likely to maintain the pressure on the government for better resolution of the final costs and the resulting landscape.

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It came as a surprise earlier this year that NAMA was given a €250m “recoupable advance” authorised by the Department of Finance. This was in addition to the €49m state investment in the NAMA special purpose vehicle and €51m of private investment in the same. When responding to Richard Bruton’s question in the Oireachtas which prompted the revelation of the €250m advance (though the next day it was confirmed in the May Exchequer Statement) Minister for Finance Brian Lenihan said “The second [payment to NAMA – the first being the €49m capital payment to the NAMA SPV] was an advance of €250 million, which must be repaid to the Central Fund by 31 October 2010, to provide the Agency with a liquidity buffer to meet working capital demands pending the establishment of its own funding programme”. So next month NAMA is expected to repay €250m.

Of course NAMA was required to pay on 1st September, 2010 the coupon on its NAMA bonds and a rough estimate is that it needed to pay €29m (see below). The €29m is probably an underestimate as it appears NAMA has been transferring tranches in, erm, mini-tranches and the dates shown are the dates when the total tranche has been declared transferred. Luckily for NAMA, the first coupon on the subordinated debt is only payable on 1st March 2011 – I say luckily because the subordinated debt has quite a nasty rate of interest at the 10-year government bond rate – that’s the one that’s at 6.1% today – plus 0.75% – if banks are getting 7% per annum on subordinated debt for 10 years then not having the debt honoured at the end if NAMA makes a loss might not be such an issue.

NAMA of course has been incurring its own operating costs and has given some support to projects that have been taken over through the tranche transfers. In NAMA’s draft Business Plan (page 12) the estimate for operating expenses in 2010 was €240m. Although the June 2010 Business Plan showed a considerable reduction in costs over 10 years there was no split by year so let’s assume the €240m is still valid equating to €20m per month or €100m for the 5 months from the date of the first quarterly accounts.

We simply don’t know how much NAMA has spent in supporting property backing the loans transferred so let us park that. The terms of NAMA’s investment from private investors are not known though before the EU approved the third party investment RTE reported that any investment would receive an annual dividend capped at the 10-year Irish bond-rate (currently over 6%) but that would be dependent on NAMA’s performance and it is not clear if there is any interim payment.

Of course NAMA should also have been receiving income, interest payments on loans taken over and possibly repayments of capital. NAMA has talked about requisitioning developers’ rent rolls so that rent from tenants is paid directly to the lender (NAMA). We do not have either a definition of performing loans or indeed an up to date estimate of those that are performing (it went from 40% in the draft NAMA Business Plan in October 2009 to 33% at the Oireachtas hearing in April 2010 to 25% in the June 2010 Business Plan (page 4)) but let us say for arguments sake that performing means interest is repaid on loans as it falls due. What about capital repayments? We simply don’t know, and we can perhaps park that question. NAMA may also be repossessing and selling assets but it seems too early for that and in any case NAMA’s Code of Practices commit NAMA to complying with the Code of Conduct for the Governance of State Bodies (2009) which would mean that disposals would be publicly notified.

So it would seem for now that NAMA was probably able to make its first coupon payment last week though that depends on the definition and quantification of performing loans above and that capital repayments from borrowers have covered advances by NAMA to support projects. However will NAMA be able to repay the €250m recoupable advance by 31st October, 2010? The key at this stage will be getting NAMA’s €5bn development pot operational so that the “working capital advance” can be repaid to the government and further development can be undertaken without NAMA needing an advance from the public purse.

UPDATE: 9th September, 2010. The above entry contains corrections to the original post where the interest payable was incorrectly shown as €290m (the corrected equivalent is €29m) and the interest receivable was incorrectly shown as €450m (the corrected version is €45m).

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It’s not known if yesterday anyone from NAMA wandered up the road and over the bridge to witness the opening of the magnificent new Convention Centre on Spencer Dock. The new and architecturally iconic addition to Dublin’s Docklands was built at a cost of €380m and will be leased from developer, NAMAized Treasury Holdings, for the next 20 years after which time ownership will pass to the State. According to the Independent, the Taoiseach was there to cut the ribbon (or press the button) alongside cabinet colleagues Mary Hanafin and Dermot Ahern as they all basked in the glow of one of the positive remnants of the Celtic Tiger.

There was an amusing moment when what you’d think was an unwelcome guest made an appearance – the colourful Johnny Ronan, one half of the duo controlling Treasury. The Independent says that Bertie Ahern was the only politician seen to be prepared to go up and say hello to the man who was instrumental in creating the building they were all oohing and aahing at. Developers are still personae non gratae it seems in all but the periphery of government circles and the last thing Brian Cowen needs is a recorded handshake with one of the stars of the boom that collapsed into a bust paid for by all.

I wonder what any NAMA attendees would have made of the building. Were there any jokes about making sure they went before crossing the Samuel Beckett Bridge to the opening – a reference to the problems Treasury has had with a sewage pumping system which was not installed as planned though they have now been given an extension to rectify the matter. Regardless,  Treasury also  confirmed yesterday an extension of loan facilities by NAMA and others until August 2011 dependent on Treasury-controlled Real Estate Opportunities PLC (REO) negotiating agreements with other creditors. It’s not much of a news story in itself as REO had previously flagged in its annual report that NAMA had approved an extension of terms and a waiver of breaches of covenant subject to some bureaucratic formalities. It remains to be seen how REO’s other creditors will view the company’s viability – two weeks ago REO announced a suspension of certain debt repayments and it was far from clear the level of support given to the decision by all creditors.

Meanwhile there is still no news  on planning permission for possibly NAMA’s most expensive asset (by reference to purchase values of the assets by the developers) – the Battersea Power Station redevelopment. It was expected in August with the betting that it would be granted, though for a site that has been derelict for almost 30 years planning  permission is by no means a sure thing.

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