Archive for September 30th, 2010

When NAMA presented its draft Business Plan in October 2009, it showed that NAMA intended purchasing €77bn of loans (at par value) for €54bn. In the June 2010 Business Plan this has changed and NAMA was then planning to purchase €81bn of loans for €40.5bn. With the statement from the Minister for Finance this morning which sets outs the estimated haircuts on remaining tranches and with the news that Bank of Ireland now intends transferring a total of €10.1bn of loans to NAMA (down from €16bn in 2009 and €12.2bn as recently as last month), it seems that NAMA will in fact be spending approximately €34bn buying loans with a par value of €79bn – here are the workings:

Note that the Minister did not provide a forecast for the haircut on remaining INBS NAMA loans. I have used 65% which is a simple average of the haircuts in Tranches 1 and 2. Also the Minister referred to a “final” haircut of 60% for EBS and it is not clear if he was referring to an overall average for all tranches or just the haircut on the remaining tranches.

That NAMA’s purchase costs have come down from €54bn to €34bn in less than 12 months is, I think, a colossal change. It signifies that NAMA is paying less for the loans than was originally planned. More importantly it signifies greater losses at the banks (€20bn of additional losses). It also means that our friends at S&P and elsewhere can revise downward their estimate of State debt relating to NAMA (though unfortunately they will be revising upward the cost of bailing out the banks). It should also reduce the risk of the NAMA project being loss-making.

UPDATE: 1st October, 2010. The Minister’s announcement yesterday that the increase in the threshold of NAMA-eligible loans at BoI and AIB from €5m to €20m will reduce the total par value of loans going to NAMA by €6.6bn – BoI apparently accounts for €2.1bn and AIB accounts for the remaining €4.5bn. Reflecting that reduction in AIB’s loans means that NAMA is not forecast to spend less than €32bn in buying loans – see below for the analysis.

Emmet Oliver in today’s Irish Independent citing “bank sources” suggests that the “final” discount (interpret as discount on remaining loans) to apply to INBS’s loans will be 75%. Factoring that discount into the calculations suggests that NAMA will be paying €31.13bn for the loans. Here are the workings:


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As I write this entry this morning, the yield on Irish 10-year bonds is showing as 6.66% and indeed the devil may be lurking in the detailed workings which support the estimates published this morning. At this point there are a few concerns:

1. Anglo’s remaining €19bn of NAMA loans (at face value) are to be transferred to NAMA by the end of October 2010. We are still waiting for a NAMA reaction to this morning’s announcement by the Minister for Finance, Brian Lenihan and joint statement from the Central Bank Governor Patrick Honohan and Financial Regulator Matthew Elderfield but it seems that the third tranche has been abandoned – that’s the one that was expected to transfer by “the end of September 2010”. Including Tranche 3, Anglo was going to transfer €20.6bn of loans (€9.25bn T1, €6.75bn T2 and €3.6bn in T3) so the implication is that NAMA can undertake due diligence and value some €15bn of Anglo loans in the next 30 days – and Anglo is the bank with poorer loan and security documentation. Frankly it doesn’t appear realistic. But will any subsequent revision to the values materially affect the position? Difficult to say though the EU may reject the valuations outright as not being to the standard approved in the application for EU approval and the relevant EU Decision.

2. Whilst Patrick Honohan has attempted to spread the responsibility for today’s estimates far and wide – “relying on advice from NAMA”, the NTMA, Anglo management, “third party analysis”, ultimately this is a Patrick Honohan production. And to a large extent he has an impossible task in predicting future losses. As anticipated in an entry on here last weekend he has adopted the approach taken by the EU in stress testing its main banks over the summer by adopting a base case and adverse scenario. The application of these two scenarios to the NAMA loans is reasonably straightforward – the remaining €19bn of NAMA-bound loans at Anglo are expected to suffer a 67% haircut and in the adverse scenario a 70% haircut, though the difference of 3% is NAMA’s estimate of the margin of error in the 67%. However the non-NAMA loan loss estimates are to a large extent shrouded in mystery – coming from a mysterious and unidentified independent third party (I’m guessing it wasn’t Peter Mathews!), Anglo management (they’re the people who produced a laughable restructuring plan for the EU in November 2009 and who also predicted total Anglo losses at €10-13bn in March 2010) and the “CEBS base case loss rates”. Will anyone accept these sources as sufficiently credible to accept today’s announcements as final?

3. Whilst today’s announcements cursorily dealt with Anglo’s loans, what about assumptions on derivative losses, bondholders burnings, NAMA bond discounts, NAMA subordinated debt discounts and other potential areas of profit or loss.

4. With respect to INBS, omitted from any of the announcements is the estimated haircut or discount on future NAMA bound loans and there is little detail to support the €5.4bn that is going into INBS (€2.7bn in May and €2.7bn imminently). However €5.4bn is within the ranges previously openly discussed by commentators as the probable level of capital needed by INBS.

5. Allied Irish Banks PLC (AIB) was famously required to come up with €7.4bn of capital by the end of 2010 and in order to achieve that target, AIB was to sell its Polish operation (Bank Zachodni), its US operation with regional lender M&T Bank Corporation and its UK operations. The Polish sale has been achieved subject to shareholder approval but there seems to be delay with the remaining two disposals, particularly the UK operation which as recently as August was predicted to be sold in September 2010. Any shortfall in the €7.4bn capital was to prompt either a public issue by AIB or a further State injection. We learn today that the Central Bank estimate that AIB needs a further €3bn of capital (€10.4bn in total but that will reduce by €2.5bn if the Polish transaction is approved). So the State could be on the line for up to €7.9bn of additional capital if the US and UK sales are delayed or fail and AIB does not seek a public issue. An additional issue with AIB is whilst the haircut now being adopted by the Central Bank for future AIB tranches (60%) is high compared to the weighted average on Tranches 1 and 2 (48.5%). However there is no suggestion that non-NAMA loans have been subjected to any realistic assessment of likely losses and remember that AIB has an estimated €48bn of non-NAMA commercial lending of which about a third relates to property. So could AIB’s losses be far from final?

6. Bank of Ireland: A couple of days ago on here we looked at the Bank of Ireland loans to McDaid Developments (Ireland) Limited – GBP £42m of loans that are reported to be exposed to 85% losses. Although Bank of Ireland has been top of the class in Tranches 1 and 2 with the lowest haircuts (36.2% weighted average) and the statements this morning apparently confirmed that BoI was alright for capital even with a 42% discount, is 42% enough? Also, like the other banks, BoI seems to have been less than realistic in reporting its non-NAMA losses. So is capital requirement of BoI at the already invested €3.5bn final?

7. The Educational Building Society (EBS): This is a tiddly building society and its loan book is dominated by relatively good performing residential mortgages. Its weighted average haircut in Tranches 1 and 2 was 37.9%. Apparently the estimates today used a “final” EBS haircut of 60% and that no further capital is required (beyond the near €900m already announced presumably). Whilst EBS might not be final (and concerns have been recently raised here about its provisions), because it didn’t extensively lend on commercial or development property, its losses will be limited. So although it might be back for further capital, it is likely to be in the €ms.

So the purpose of today’s announcements was to bring finality and certainty to the cost of the financial crisis. In absolute terms, it most certainly doesn’t do that. But is the information published sufficient to address the concerns of lenders to Ireland? The yield on 10-year bonds is 6.6% so the announcements have not immediately had the desired effect. My guess is that the announcements don’t go far enough and there is unlikely to be any significant fall in lending costs and that indeed they may rise once the horror of the estimated final NAMA haircuts sink in.

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From the Minister for Finance Brian Lenihan’s statement this morning.

1. Loans of less than €20m not being transferred in respect of AIB and BoI (€5m remains for Anglo and presumably the no-lower-limit remains for INBS and EBS)

2. NAMA debtors to drop from 1500 to 850

3. NAMA to abandon tranches, replaced with one remaining tranche per Participating Institution (PI – AIB, Anglo, BoI, EBS, INBS)

4. Anglo tranche to be transferred by end of October 2010

5. Loan-by-loan due diligence to continue

6. EU consulted and advised – no mention of approval

7. Loss of sub-€20m loans at AIB and BoI to reduce NAMA portfolio from €80bn at par value to €73.4bn

8. Large increases in estimates of haircuts remaining tranches – Anglo 67%, AIB 60%, BoI 42%, EBS 60%, INBS – not shown (why?)

9. Separate to the Minister’s statement, Bank of Ireland are reported to be now forecasting total NAMA-bound loans at €10.1bn which compares with €16bn in October 2009 and €12.2bn as late as August 2010. Why has the total apparently reduced and does it signify performing loans again slipping through NAMA’s fingers.

10. Laura Noonan reports in the Irish Independent that NAMA will now look after the top 150 borrowers who owe €50m or more – apparently this has been confirmed by a NAMA spokesperson.  I guess Capita will now be looking after 700 borrowers (down from 1,400 just a day ago).

Updates and analysis here later.

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UK House Prices up 0.1% month on month

The Nationwide Building Society has this morning published its UK House Price data for September 2010 together with its more detailed Quarter 3 House Price Review. The Nationwide tends to be the first of the two UK building societies (the other being the Halifax) to produce house price data each month, it is one of the information sources referenced by NAMA’s Long Term Economic Value Regulation and is the source for the UK Residential key market data at the top of this page.

The Nationwide says that the average price of a UK home is now GBP £166,757 (compared with GBP £166,507 in August and GBP £162,764 at the end of November 2009 – 30th November, 2009 is the Valuation date chosen by NAMA by reference to which it values the Current Market Values of assets underpinning NAMA loans). Interestingly the average house price at the end of September 2010 being GBP £166,757 (or €193,438  at GBP 1 = EUR 1.16) is only 4% below the €201,364 which the Permanent TSB/ESRI said was the average nationally here at the end of June 2010.

With the latest release from Nationwide, UK house prices have risen by 2.5% since 30th November, 2009 the date chosen by NAMA pursuant to the section 73 of the NAMA Act by reference to which Current Market Values of assets are valued.

Recent forecasts for the UK housing market have not tended to be good. Whilst Capital Economics has produced yet another headline-grabbing prediction of a 25% decline in the next 2-3 years, most commentators are suggesting an easing of prices. The EU bank stress tests published at the end of July 2010 suggested a base case of no change in UK residential prices in 2010 which would mean an 2.87% fall in prices between now and the end of the year. The UK economy is showing surprising resilience – figures in August 2010 showed GDP grew by 1.2% in the second quarter and the British Chamber of Commerce in August forecast the economy would grow by 1.7% in 2010 and 2.2% in 2011. However savage cuts are in prospect for the UK’s public service and in October 2010 these cuts will be outlined in some detail, supply has been bolstered by the abolition of HIPS (akin to BER certs) in June and which had cost about £300. Mortgage lending in the UK fell in August 2010 as did the number of homes sold.The Royal Institution of Chartered Surveyors (RICS) have also suggested that more sellers are returning to the market but that there are fewer would-be buyers, suggesting declines are in prospect.

UPDATE: 7th October, 2010. With the sensational headline “largest monthly decline on record” the Halifax today produced its September 2010 numbers which saw a fall of 3.6% though this brings the Halifax into line with the modest annual increase shown by rival the Nationwide Building Society.  The Nationwide generally produces its numbers before the Halifax each month and is the source for the UK residential data at the top of this page.

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The Central Bank has issued a joint statement by the Central Bank Governor, Patrick Honohan and Financial Regulator, Matthew Elderfield, two of the more respected men in the Irish regulatory system and relatively new appointments (September 2009 for Patrick and January 2010 for Matthew). The statements deal with the costs of bailing out Irish banks.

It is not clear if the €29.3-34.3bn for Anglo is a gross cost (with some of it being recouped in the future) or a net cost (ie the gross capital required might be more but some will be recouped giving a net of €29.3-34.3bn).
With Allied Irish Banks plc (AIB), the €3bn is additional to the €7.4bn capital that the bank needed raise by December 2010. Given that there are severe doubts that the bank could have raised the €7.4bn itself without tapping the State to make up the shortfall, then the likelihood is that the State is going to have to pony up €3-6bn for AIB (no word on the sale of the UK operations and the US MTN sale seems to have stalled).

There is reference in the press release to an accompanying statement. And the devil will be in the detail. This entry will be expanded later today when the “accompanying statement” is published.

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