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Archive for September 10th, 2010

With an estimated €20bn of loans at face value remaining to transfer to NAMA, Anglo CEO Mike Aynsley today confirms the bleedin’ obvious – that 5% of €20bn equals €1bn. Perhaps by making the figures clear he hopes to add some certainty or margin of error to the losses on the NAMA loanbook at Anglo. However by ignoring the non-Anglo loanbook of €38bn which presently has derisorily low provisions for losses compared with the NAMA loanbook, Mr Aynsley fools no-one. It is understood that NAMA is valuing loans to a standard acceptable to the EU (at least that was the experience of tranche 1) so adopting NAMA’s average haircut of 58% on tranches 1 and 2 to the remaining NAMA tranches is simple arithmetic. The elephant in the room is the 19.9% haircut presently adopted by Anglo for the non-NAMA loanbook. This issue was examined on here recently here and here.

In the interview with RTE Radio, the Anglo CEO confirms that the good bank/bad bank plan was effectively rejected by the EU though the delicate choreography this week by the DoF and Competition Commission and Anglo in avoiding the “REJECT” word, not to mention the “WIND DOWN” term has been enthralling. Mike Aynsley says he expects to stay on with Anglo. Set against rumblings emanating from Brussels about the proposed Funding Bank distorting competition in the deposits markets, Mr Aynsley says (to quote RTE) “it was critical that the Irish banking system demonstrated to foreign customers that Ireland was a safe place to put their money”. Plainly there is some way to go yet before the proposed new structure secures EU approval though Mr Aynsley says that the split should be complete by the end of the year – this is the man that thought the EU would approve the May 2010 Anglo good bank/bad bank restructuring plan by the end of July 2010. As always with Anglo it is worth emphasizing that Mike Aynsley came on board in September 2009 to sort out the catastrophe left by his predecessors.

Coming back to the 5% extra haircut = €1bn extra loss for Anglo, it is not 100% clear from recent briefings what haircut equates to a €25bn net bailout cost. The suggestion from the EU’s decision at the start of August 2010 was that €24.494bn would allow Anglo to complete its transfers to NAMA *and* have some in reserve to cover a valuation shortfall in NAMA bonds. The haircut on Anglo’s first tranche was 55%,  the second was 62% and the weighted average was 58% – what % equates to a €25bn net bailout. Will further funds be needed this year to cover the “fair value” valuation of NAMA bonds which saw Anglo reduce the holding value of its bonds by 9% at the end of June 2010?

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It’s not often that the NAMA CEO talks in public, and when he does there’s usually something newsworthy. He was in action this morning at the Cantillon School of Economics in Tralee – a three-day gathering that addresses through speeches, get-togethers and Q&As the economic issues of the day.

This morning NAMA CEO, Brendan McDonagh gave a speech on the theme of “Different models for supporting banking institutions” along with speeches on the same subject by Trinity College Dublin professors Brian Lucey and Antoin Murphy. There will be a 30-minute panel discussion before lunch.

The only revelation to emerge from Brendan McDonagh’s speech was the fact that NAMA is in advanced discussions to dispose of €500m of property. RTE are headlining a projection in the June 2010 NAMA Business Plan that NAMA achieve a pay down 25% of its loans by 2013 but that’s old news. What makes the €500m disposal interesting is that NAMA has stated in their Codes of Practice that it will comply with the provisions of the Codes of Practice for the Governance of State Agencies (2009) which state

“18.1 The disposal of assets of State bodies or the granting of access to property or infrastructure for commercial arrangements e.g. joint ventures with third parties, with an anticipated value at or above a threshold level of €150,000 should be by auction or competitive tendering process, other than in exceptional circumstances (such as a sale to a charitable body). The method used should be both transparent and likely to achieve a fair market-related price. The anticipated value may be determined either by a reserve price recorded in advance in the State body’s records or by a formal sign-off by the Board on the advice of the Chief Financial Officer (CFO) or, if delegated by the Board, sign-off by the CFO or the Board Audit Committee, that, in its view, the anticipated value is likely to be less or greater than €150,000. In determining market value, regard should be had to accounting standards best practice in Ireland. Compliance with use of Auction or Tendering Requirements”

So if NAMA is disposing of €500m of assets where is the transparency? Where is the tendering process? Where is the auction? Something in my bones tells me that NAMA’s judicial review with Paddy McKillen next month might not be the only judicial review action encountered by NAMA!

If any other gems emerge from Cantillon they will be posted here in this entry. UPDATES from Trinity College Dublin professor Brian Lucey – the NAMA CEO again criticises lending practices – lending 100 people €50bn was a “gross failure of banks boards”,  Brendan McDonagh suggests NAMA is best practice in Europe and that the SPV is only an accounting exercise (let’s hope Eurostat aren’t watching!).

Daniel Barr, Head of Bank Support at Riksgälden, The Swedish National Debt Office says that the Swedish banking crisis resolution was much simpler than NAMA. He says the Swedish response was prompt, transparent and focussed on the long term cost to the taxpayer.  The Irish guarantee is more extensive. Sweden recovered most of its investment in the banks and its asset management agencies (Securum/Retriva).

Panel discussion in full flow. Brian Lucey praises NAMA staff but suggests it’s the wrong solution to some problems. The alternative suggests Prof Lucey was capitalism! Antoin Murphy calls for council of economic advisors. What that? Something like the UK’s independent central bank monetary policy committee and its new office for budget responsibility? Prof Murphy also supports the guarantee though acknowledges harsh budgets for foreseeable future.

UPDATE 11th September, 2010: A number of reports on the Cantillon appearance by the NAMA CEO. The RTE €500m of property near sale story gets significantly altered by the Independent who say the property will be disposed of at auction. The Independent also reports that NAMA is considering action against 12 developers owing €300m. The Independent claims this is NAMA’s first recovery action. I am a little puzzled as to why all the Irish papers missed the High Court application by NAMA at the start of August 2010 against Paddy Shovlin – silly season so couldn’t be ar*ed to consult court records? Meantime the Irish Times gives an update on developer business plans which is worrying because it seems NAMA is making very slow progress. NAMA has not yet posted Brendan’s 25-minute speech at the Cantillon School on its website.

UPDATE: 15th September, 2010. NAMA has now released Brendan McDonagh’s speech.

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Okay, the question is slightly tongue-in-cheek. After all, the NAMA principle was to cleanse banks of a class of loan which had been particularly hard hit by the bursting of our property bubble and replace those loans whose values were uncertain though on average far less than their face value with nice clean exchangeable NAMA bonds (State guaranteed and exchangeable at the ECB for cash). That was the idea.

Of course from the off, NAMA was offering 95% of consideration to the five financial institutions in NAMA bonds – the remaining 5% was in subordinated debt which would only be honoured if NAMA made a profit. So even near the beginning there was a question mark hanging over the 5% subordinated debt. Luckily the subordinated debt pays 10-year Irish government bond rates plus 0.75% (currently giving you almost just over 6.6% in total) which might go some way to sweetening the loss of the actual face value of debt itself should NAMA make a loss in the next 9 years.

But what about the NAMA bonds that make up 95% of the consideration for the loans. According to independent banking consultant Peter Mathews, the bonds were only worth 80% of their face value and I am referring here to his response at the Oireachtas Finance and Public Service Committee hearing in July 2010 when he said “If they wish, they can get a loan of approximately 80% of the face value of the bonds from the ECB. An interest rate of 0.5% above the ECB rate has to be paid on such a loan. That is what the banks will have to pay for the loans they will get after they offer the security of the bonds.” That seems to conflict with the ECB’s own position which is that the bonds can be exchanged for cash equivalent for 98.5% of their face value – the link to the ECB is here and thanks to the user eoin on the irisheconomy.ie blog here is an easier to read summary is here. And indeed that is how AIB and BoI have valued the NAMA bonds, applying a 1.5% discount to their face value. However as noted by Simon Carswell in today’s Irish Times, Anglo has applied a 9% discount to the NAMA bonds. This comes from the recent Anglo Interim Report for the six months ending 30 June 2010.

Note 11 (page 43 of the Interim Report) “During the period the Bank transferred loans to NAMA with a gross value of €9,924m (before provisions for impairment of €2,461m), and related derivatives with a fair value on date of disposal of €182m. Of the nominal consideration received, €4,451m, or 95%, comprised Government Guaranteed Floating Rate Notes, with the remaining 5% comprising Callable Perpetual Subordinated Fixed Rate Bonds. The senior floating rate notes are classified as Government debt securities at amortised cost (note 22) at an initial fair value of €4,056m. The subordinated bonds are classified as available-for-sale financial assets (note 20). The initial fair value of the subordinated bonds on acquisition was €121m.” (the face value of the subordinated bonds was €234m).

Note 22 on page 51 states “The Bank has determined the initial fair value of these notes as €4.1bn. As market prices are not currently available for these

securities, in order to determine an initial fair value the Bank has used a valuation technique, based on a discounted cash flow methodology, which references observable market data. The valuation approach adopted takes into consideration the coupon attaching to the notes, the yield on comparable Irish sovereign bonds, the extendible feature of the notes at the option of the issuer and the indicative repayment dates contained in the NAMA business plan. It is possible that an alternative valuation approach could give rise to a range of values that are higher than the current approach. The Bank may reassess the approach adopted when preparing the annual report for the year ended 31 December 2010.”

Overall this seems like a strange approach, not just by reference to it differing to the approach at AIB and BoI but because the ECB does seem to give some certainty as to the values. Discounting the subordinated debt by only 48% on the other hand may be optimistic given the speculation as to NAMA’s lifetime profitability.

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Dr Michael Somers, former head of the National Treasury Management Agency and a man with a considerable reputation addressed the Fine Gael gathering in Waterford yesterday and although his presentation has not been made public, FG deputy party leader Dr James Reilly has been telling journalists about what was said.

James tells the Independent that Michael Somers told the gathering that NAMA was employing 380 people at a cost of €140m. Though what is probably meant by this is NAMA is employing directly some 90 people and the banks have dedicated NAMA teams (numbering 90 staff alone in Anglo according to the Interim Report last week). There are an unknown number of people receiving fees from NAMA in valuing loans, derivatives and undertaking the legal due diligence – the panels for these services show 100-odd firms engaged. As to the €140m, the draft NAMA Business Plan projected due diligence fees in the first year of €165m. However I think it is worth pausing and considering what a huge undertaking NAMA is, and again should Anglo’s non-NAMA loans be valued and bought by the existing NAMA superstructure rather than set up a completely new entity in an Asset Recovery Bank.

On the subject of the new Anglo restructuring plan (Version 3.0) Michael Somers appears to have been critical saying that there is a duplication of effort with having two asset management organizations. Of course he has been critical of NAMA in the recent past – at the MacGill Summer School in August he stated that a better option for dealing with the financial crisis would have been forcing the banks (“strong-arming” was the term he used) to deal with their own problem loans. He is reported as saying yesterday that there was “confused thinking” on NAMA and Anglo.

Of course because Dr Somers’ speech has not been published we are relying on Dr Reilly’s version of what was said, and as a political animal there is naturally the potential for spin. But the key point, the existing NAMA structure for valuing and buying loans is in place and operating and to date it has valued and transferred €27bn of loans at face value (with €16bn being approved by the EU) – the government should seriously consider expanding NAMA’s scope in the version 3.0 Anglo restructuring plan.

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According to reports earlier this year, NAMA was demanding 1,000 separate items of data for each individual loan transferred to the agency. The banks complained but NAMA held firm even though this resulted in delays to the process as due diligence was carried out on loans. It also resulted in NAMA applying higher than expected discounts to loans – the record thus far has been the 72.4% applied to INBS’s tranche 2 and overall NAMA has applied an average discount of 52% to the tranches considerably up from the 30% envisaged in October 2009 (according to Anglo’s interim report for 2010 last week, a significant number of loans were indeed acquired for nil value).

NAMA did signal at the conclusion of tranche just over 2 two weeks ago that it might relax somewhat the data requirements for future loan tranches. And today the Independent is suggesting that Anglo’s remaining loans might be acquired at a “block discount” so that the Financial Regulator can report Anglo’s capital needs in October. If true, these reports could herald a panic-prompting recklessness and could put the NAMA project at risk.

The EC is ultimately approving the valuation of loans from the five financial institutions to NAMA. They took three months to approve the first tranche. Their approval of the second tranche is not at all guaranteed as a result of continuing declines in the property market and a seemingly higher proportion of non-performing loans which might give rise to a need to increase the enforcement provision NAMA is entitled to charge the financial institutions.

If NAMA acquires the remainder of Anglo’s loans (€20bn at face value approximately making up ¼ of the entire NAMA portfolio based on face values) at a block discount without undertaking the necessary due diligence then this will mean there will be a risk the EC reject the valuations and NAMA has to go back and do the work “properly”. The EC might also get a little fed up with the notion of NAMA being an independent body yet plainly reacting to a political expedient. The Department of Finance has exhibited several signs of uncertainty and panic this week as they grapple with a hammering of Ireland’s financial system (exemplified by the rise in borrowing rates) and the EC’s rejection of the second Anglo restructuring plan. The announcements on Wednesday had the whiff of panic, and these new rumours of fast-tracking Anglo’s loans don’t seem thought out. At a minimum if the loans are fast-tracked at a “bulk discount” then whatever resultant capital requirement declared by the Financial Regulator will be understood to be dependent on EC approval. It will also at a minimum undermine confidence in NAMA as there will be suspicions that the loans have been acquired at too low a discount – many commentators are speculating that the discounts will increase as progress is made through the tranches as there is a feeling that the smaller borrowers will have more toxic loans. So if the objective of the Financial Regulator’s exercise is to give “absolute certainty” on the cost of Anglo, plainly fast-tracking loans without due diligence which will then be subject to scrutiny and revision by the EC will not accomplish that aim.

The seas being navigated by the Department of Finance today are stormy even by the standards of the past two years. All the more reason for a steady hand at the tiller and for the ramifications of any changes to NAMA’s method of operation to be carefully considered.

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