Archive for September 9th, 2010

Even though S&P’s classification of €40bn of NAMA loans as part of the national debt prompted unprecedented protestations from the National Treasury Management Agency and Ireland’s Ministry of Finance who characterised the treatment as “flawed” the Economist has produced a projection of Irish debt over the next 5 years and has followed S&P’s classification. This results in the Economist projection that Irish national debt will be 108.8% of GDP in 2010 growing to 121.4% in 2015, a dizzying and dangerous statistic in itself.

Of course just to throw oil on the flames, S&P ignored in their observations of NAMA the €5bn additional debt that NAMA can incur in funding incomplete developments and general working capital. There was news this morning that NAMA has initiated a commercial paper programme which is guaranteed by the government to draw down this €5bn which is legislatively authorised through section 50 of the NAMA Act. If the Economist added in this €5bn we would have debt to GDP of 112%.

The brouhaha surrounding S&P’s classification of NAMA bonds/subordinated debt as part of the national debt prompted a letter from S&P to the Financial Times to explain that it was not regarding NAMA’s loans as worthless, merely that it would regard the bonds as part of national debt until such time as NAMA realised value from the loans. It is understood that this treatment is consistent with S&P’s methods in other countries.

Whether the debt to GDP is 108% or 112% and given there’s a cohort of economists and commentators that feel NAMA will make 25-50% losses (NAMA itself predicts a net present value of plus €1bn), we are clearly in a worrying situation, though as a nation we have worked our way through difficult debt levels before.

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In the High Court tomorrow housebuilder McInerney which is seeking examinership for its Irish operations will present an overview of the environment in which it operates in the State and we know from earlier this week when the Sunday Business Post reported on the affidavit lodged by McInerney, that the company will argue that certain parts of the Irish residential property market are at, or very close to, the bottom. In particular the company sees a more immediate recovery in the traditional semi-detached house in “well located” areas – the middle-class bedrock of the Irish property market.

They are presenting their case at a time of increased turmoil, though with a recent record of a deceleration in the pace of price falls (according to the Permanent TSB/ESRI (PTSB) house prices series, prices fell nationally by 1.7% in Q2 compared with 4.8% in Q1). McInerney say that prices here have dropped by an average of 50% though the decline has not been uniform. That compares with the only official hedonic price tracker in the State, the PTSB house price series which at the end of June 2010 showed a national 36% decline from peak prices (recorded at the start of 2007). Dublin has, according to the PTSB suffered more with a 44% decline compared with a non-Dublin average of 32%.

The outlook from those who’ll stick their heads above the parapet is not good and the most recent predictions/projections are shown below.

McInerney are of course still predicting an overall decline from present prices. The argument is presumably that McInerney’s homes will not be average. It will be a difficult argument given the latest news that annual inflation has returned for the first time in two years with mortgage interest rises being a key reason (reflecting a series of rises in standard and fixed rate mortgages over the past year as Irish banks try to return to profitability amidst higher interest rates demanded by depositors and the money market). This rise in property costs is not reflected in the rental market where prices continue to fall, albeit at an annualised rate of less than 5% and in a market where supply still remains near an all-time high. The interest rate outlook remains uncertain with a rise in ECB rates in the short term unlikely but the possibility remains that banks will raise their rates reflecting increased competition for deposits and more general fears in the money market about Irish bank risk.

Unemployment and the threat of unemployment remain high, and although there is now expected to be a 1% rise in our GDP in 2010 (still a forecast of a 1% decline in GNP), the outlook for jobs in not good in the short term of the next 1-2 years. Net take-home pay is set to be further cut later this year when the Budget is expected to take another €750m per annum in additional taxes and of course the Damoclean sword of property and water taxes hangs above the heads of those considering home ownership. In 2-3 weeks time, the CSO will release its population estimates for April 2010 and the betting is that there will either be the lowest population growth, or indeed the first decline, in 20 years. Against that will be the results of the partial review into vacant housing which is likely to show 80-100,000 vacant homes in estates and the betting is that they are not all located in the Upper Shannon region.

So I think McInerney will have its work cut out tomorrow, though of course house prices will be but a part of their presentation. NAMA is apparently opposed to the McInerney examinership and I suppose a ballsy argument by McInerney is that NAMA’s success is predicated on a recovery in prices so what’s good for the goose etc. Lastly I am reminded of the judge’s summing up in the examinership case of the Fleming property group earlier this year when he described the company’s plans as an “aspiration based on hope”. The judge dismissed the Fleming examinership – will McInerney fare any better?

UPDATE: 10th September, 2010 : According to RTE McInerney’s “business plan presented to the court predicts zero growth in house prices for the first two years followed by 2%, 3% and 5% in the following three years. The opposing banks have described the company’s projections as optimistic.” The case continues and there may be a conclusion later today. Senior counsel John Hennessey is representing McInerney. Mr Justice Frank Clarke is hearing the case.

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Although NAMA has produced in the last few days an update on NAMA bonds and subordinated debt issued (effective 1st September 2010), the agency has not issued any details of what the Independent today is calling a commercial paper programme aimed at raising a reported €2.5bn of the €5bn legislatively available to NAMA in the NAMA Act. This comes not a moment too soon as NAMA is due to repay €250m to the State in October 2010 which had been advanced to the agency in May 2010 and of course NAMA has business plans dealing with up to €27bn of assets (at original loan values), a portion of which will be backed by NAMA and will require funding.

Our friends at S&P, who appear well briefed on the programme, have already reportedly assigned an A- rating to the paper but assert that the paper is government guaranteed. The article further describes the funding programme as short term in that facilities need be renewed every 270 days.

It is hoped that NAMA will make a statement on the programme in due course as it is material and apparently involves further state guarantees. Updates will be carried in this entry. Now I wonder if S&P are going to revise upwards their estimate of the cost of rescuing the financial system by €5bn …..

UPDATE: 10th September, 2010: It is being reported that UBS will be managing the commercial paper funding programme. No official announcement from NAMA yet.

UPDATE: 15th September, 2010: NAMA has issued a statement back-dated to 2nd September, 2010. The statement confirms that the Minister for Finance has indeed guaranteed the CP, that it’s for €2.5bn with issuance ranging from one month to one year and is intended to provide working capital and asset finance where “there is merit in the business case of particular assets”.  NAMA says that it expects capital and interest repayments to cover coupon payments on NAMA bonds (and subordinated debt presumably) and NAMA overheads. NAMA does not reveal the interest payable or discount on the Commercial Paper – other details on the programme are contained in a NAMA overview. NAMA say that details of a medium term funding programme will be published in Q4 of 2010.

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The headline in the mass media yesterday should have read “Anglo to be wound down”. Instead it outlined a convoluted split of Anglo though the upshot appears to be that the asset recovery bank (ARB) is to be sold or wound down over an unspecified period of time and the funding bank (FB) will have a lifespan totally dependent on the lifespan of the ARB – in other words the new plan is a wind down. Was the State trying to protect the sensibilities of Anglo chairman Alan Dukes who had set his store in a good bank/bad bank split or trying to display an impression of sophisticated analysis and decision-making to a market that has been hammering the yields on Irish debt in the last three weeks? Of course there may be more detail forthcoming, there is apparently a departmental Q&A about the new proposal but it is still not available from the Department of Finance website (nor indeed from Anglo or the European Commission). A reliable user on the irisheconomy.ie blog posted what he said was an official Q&A. So the following cannot formally be attributed to the DoF at present but it is likely to be in due course

“Q.10 Why not put all the bad loans in NAMA?

As matters stand Regulations currently in force restricts the transfer of eligible bank assets to loans secured on development land and property under development with a minimum threshold of €5 million in the case of Anglo. While the Regulations could be changed it appears more appropriate to retain the non NAMA assets in the Recovery Bank. To transfer these assets to NAMA would require a review of the scope of NAMA, the structures and the approach to take account of a wide range of diverse assets. . It would also require EU approval to put the entire loan book into NAMA which could delay matters further. NAMA is also a very sizable institution and increasing its size in the context of the economy would not be appropriate. At this point it appears the most appropriate solution to retain the residual loan book in a Recovery bank.”

This response is plainly inaccurate in some ways and is misguided in others:

1. Although there is an operational minimum threshold of €5m in respect of loans that NAMA will take over from AIB, Anglo and BoI (there is no minimum whatsoever for INBS and EBS), this is not a legislative matter, that is, it is not enacted in either the NAMA Act, either of the two NAMA Regulations or the one NAMA Order. It is simply an internal matter for NAMA and is only referred to once officially in the draft Business Plan on page 8.

2. NAMA’s concern with “development land and property” has been examined on here many times in recent weeks. In short the loans taken over in tranches 1 and 2 had less than a 30% land and development element – the rest were completed hotels (and chains), “investment property” and residential housing where there was no development element. These would be classed as loans “associated” with development loans. So NAMA is already getting into the wine collection, helicopter, hotel management, office leasing, retail, bar and restaurant businesses (to name a few assets associated with the top 10 NAMA developers). NAMA already has a “wide range of diverse assets” under its control.

3. NAMA has already reduced in size. BoI is not transferring €4bn of loans originally envisaged in the draft Business Plan, AIB is selling its UK operation with €3.2bn of NAMA loans, Anglo is apparently selling €0.7bn of loans and Paddy McKillen is fighting to keep €1bn-odd of loans out of NAMA. So NAMA’s size is now €9bn less than it was apparently. Why not add €38bn of non-NAMA loans from Anglo. It is hardly a great expansion in NAMA’s size.

4. If the EU needs approve a change in NAMA’s scope then why not include that in the proposal that went to the Commissioner yesterday? Or send an addendum today?

5. The NAMA principle was to relieve banks of a class of asset considered particularly toxic. However at this advanced stage it is clear that the five NAMA financial institutions will have significant and impaired residual non-NAMA loans once NAMA has completed its transfers. Perhaps a general enlargement in NAMA’s scope is needed now though of course that could run in parallel in NAMA seeking a specific change in respect of its role in Anglo.

6. Rather than have another board of management, new directors, a new professional fees gravy train (particularly with initial proposals and setting up) why not seek to have the ARB incorporated into NAMA from the outset.

Yesterday’s announcement had all the hallmarks of a knee-jerk bouncing, Minister Lenihan’s plainly unsuccessful meeting with Commissioner Almunia on Monday, an assertion that €38bn of Anglo’s non-NAMA loans could be valued in eight weeks by the Central Bank when it has taken the NAMA superstructure nine months to value €27bn of loans is plainly fantastical. And of course there is still the question of INBS-EBS-AIB preventing clarity despite the assertion that this proposal will provide “absolute certainty”.

NAMA is operating – we will see in the not-too-distant future if it is operating successfully. Why not use that established structure to remove the headache of founding a new asset recovery “bank”.

UPDATE: 9th September, 2010. Further evidence of the ad-hoc nature of what was announced yesterday comes from EU Competition Commissioner, Joaquin Almunia, whose brief official statement is available here. In it he says “I welcome the clarification by the Irish Finance Minister on what would now be the Irish preferred option regarding Anglo-Irish. I view this new option positively as it would deal better with the distortions of competition. However, a number of important aspects still need to be clarified, and a new notification received, before the Commission is in a position to finalise its assessment and to take a decision” In other words the restructuring plan submitted in May 2010 is rejected, an option tangentially referred to in that plan is now the new preferred option following Brian Lenihan’s meeting with Commissioner Almunia on Monday/Tuesday this week and the Irish government has now to produce a restructuring plan (Version 3.0) to submit to the EC for consideration (third time a charm!).

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