Archive for October, 2010

The short answer is “I don’t know” but this is precisely what this modern day inverse of Robin Hood is about to do – take €5.4bn from our National Pension Reserve Fund (NPRF) to buy shares in Allied Irish Banks (AIB and for our international friends again has nothing whatsoever to do with Anglo Irish Bank which is known here domestically simply as “Anglo”), and he is making the NPRF buy the shares at €0.50 each when two days ago, on Friday last they closed at  €0.337 per share meaning that the NPRF will incur a loss of €1,760m from the start. The NPRF was set up to fund future pensions of ordinary citizens from 2025. AIB meanwhile had a market value of €364.2m of which we, the State, own €66.7m (that shareholding is from the conversion of our 8% dividend due on the €3.5bn preference shareholding in May 2010 to ordinary shares). According to the latest AIB accounts (the Interim Report for the first six months of 2010) the bank appeared to have over €4bn of junior (or subordinated) bondholders (note 32 on page 87). As we know, we can legally require these junior bondholders to accept a haircut on their debt. So, why is Brian Lenihan forcing our pensioners to pay €1.8bn to bail out the remaining €297m of private AIB shareholders and €4bn+ of subordinated debt holders? This entry examines the issue.

The history

In 2009 the government passed into law the Investment of the National Pensions Reserve Fund and Miscellaneous Provisions Act 2009. This allowed the government to “direct” the NPRF to make certain investments or underwrite certain share issues. To date there have been two transaction – in 2009 the investment of €7bn (€3.5bn apiece) in AIB and Bank of Ireland (BoI) preference shares and in April 2010 the direction to convert BoI preference shares to ordinary shares as part of that bank’s attempt to raise €3.4bn of fresh Tier 1 capital. Here is the timeline of that investment.

31st March 2009 – Directed investment of €3.5bn in BoI 8% preference shares

12th May 2009 – Directed investment of €3.5bn in AIB 8% preference shares

20th February 2010 – BoI pays the 8% dividend (for 10.5 months) in ordinary shares then worth €250.4m

26th April 2010 – Minister for Finance Lenihan announces participation of the State in the forthcoming BoI capital raising programme and the conversion of some of the State’s preference shares to ordinary shares. The NPRF issued a statement providing a little more detail on what was proposed.

13th May 2010 –  AIB pays out its 8% dividend (for 12 months) in ordinary shares then worth €280m

29th October, 2010 – The NPRF publish their Q3, 2010 performance report in which they confirm the €7bn invested in AIB and BoI in 2009 is now worth an overall total of €6.615*

29th October, 2010 – the following is the performance of world stock markets from 20th April, 2010 (the mid-point of the two investments in AIB and BoI in 2009).

The present decision

“The past is a foreign country, they do things differently there” – So says one of the most famous opening lines in a novel, the Go-Between by LP Hartley. Using the current vernacular, the past is the past, we are where we are, that decision last year to invest in BoI and AIB was, from an investment point of view ill-judged and yielded poor results but it is done. The decision announced in April 2010 to underwrite the BoI share issue was also ill-judged as the shares have collapsed in value. World stock markets had one of their strongest rallies in history over the period of the investment and the NPRF had one hand tied behind their backs as they were forced to invest (“directed”) 1/3rd of their then total funds of €22bn to prop up two banks. All of that is tragic and exasperating for sure, but it is the past and can’t be undone. This entry is about the present and a decision that can be reversed.

On 30th September, 2010 on the big bang day for Irish banking (“Black Thursday” if you wish), the Minister for Finance, Brian Lenihan, issued a statement early that morning which set out some of the detail of total costs of bailing out the banks. The statement had the following reference to AIB “In order to afford every opportunity to AIB to raise as much as possible of the required capital from the markets and to minimise further Government support, it has been decided that this capital requirement will be met through a placing and open offer to shareholders of AIB shares to the value of €5.4bn. This transaction will be fully underwritten by the National Pension Reserve Fund Commission (NPRFC) at a fixed price of €0.50 per share and is expected to be completed in 2010 subject to shareholder and regulatory approval. If necessary, the NPRFC’s underwriting commitment will be satisfied by the conversion of up to €1.7bn. of its existing preference shares in the bank into ordinary shares along with a new cash investment for the balance of €3.7bn in ordinary shares. This transaction structure assumes the sale of AIB’s stake in M&T Bank and disposal of other assets in due course.” And that is it. There was a further statement in the Dail later that day in an exchange on another unconnected issue with the NPRF in which the Minister again stated “In my statement on banking issued this morning, I announced, in order to afford every opportunity to AIB to raise as much as possible of its new capital requirement of €7.9 billion from the markets and to minimise further Government support, that it has been decided the bank’s capital requirement will be met through placing an open offer to shareholders of AIB shares to the value of €5.4 billion. This transaction will be fully underwritten by the National Pensions Reserve Fund. The use of the National Pensions Reserve Fund to recapitalise our main financial institutions on commercial terms is the most appropriate and prudent use of the fund to assist in meeting the financial challenges we are facing”. Later that day, AIB issued a statement which included “A €5.4 billion equity capital raising will be launched during November which will be completed before 31 December 2010.  This equity capital raising will be fully underwritten by the National Pensions Reserve Fund Commission (“NPRFC”) at a fixed price of €0.50 per new ordinary share, which represents a discount of approximately 9.4 per cent to the official closing price of an ordinary share on the Irish Stock Exchange on 29 September 2010.  The capital raising will be structured as a placing and open offer and existing shareholders will be invited to subscribe for all or part of their pro rata entitlements.  New institutional shareholders may also be permitted to subscribe for new shares under the offer.” And that is it. There has not been a peep or murmur from our politicians or media about the fact that we are now about to buy AIB shares and overpay their true value by €1.8bn. It is true that the shares collapsed from €0.40 to €0.337 a share in the past week but the shares have traded at below €0.474 a share since the announcement and we have been staring at a €1bn+ loss since 18th October, 2010.

Is there an alternative? Yes there is and I take you back now to January 2009 when Anglo was nationalized (in the sense that the State took over the bank 100%). The Minister’s statement began “The Government has today decided, having consulted with the Board of Anglo Irish Bank Corporation plc (“Anglo”), to take steps that will enable the Bank to be taken into public ownership. This decision has been taken after consultation with the Central Bank and the Financial Regulator which has confirmed that Anglo Irish Bank remains solvent. Anglo Irish Bank is a major financial institution whose viability is of systemic importance to Ireland. Anglo has a balance sheet of some €100bn with a substantial deposit base which the State is determined to safeguard. The Government has made clear that it will ensure its continued viability. Anglo Irish Bank will continue to trade normally as a going concern, with appropriate Government support as necessary. All Anglo employees remain employed by the company.” AIB is in the same position today. As for Anglo the shareholders lost their money “With effect from 21 January 2009, your shares have been automatically transferred from your ownership to the Minister of Finance’s ownership.” and “An Assessor will be appointed by the Minister for Finance to assess whether compensation should be paid to those persons whose shares will be transferred to the Minister for Finance and, if so, to determine the fair and reasonable amount payable as such compensation. At this time, it cannot be said whether you will receive any compensation or, if you are entitled to compensation, how much you will receive.” This is what should happen with AIB now. In addition, there must be a negotiation with the €4bn+ of junior bondholders whereby they can be forced (legally forced I should add, as with Anglo’s and INBS’s junior bondholders) to take a substantial haircut on their debt. Senior bondholders would be unaffected (for the time being).

The question posed here has been “why is the Minister effectively robbing pensioners to bail out shareholders and junior bondholders”. The answer is probably that the government has a strategy of keeping two “Irish” banks at all costs. Why? National vanity? National security? Legacy? Truthfully I don’t know but it seems completely wrong to take pensioners’ nest egg and use it to prop up private shareholders and junior bondholders. And what is almost beyond belief is the silence from Opposition politicians and the mainstream media.

*Thanks to commenter Scarab for very helpfully providing the breakdown of the €6.615m 30th September 2010 valuation of our €7bn investment in 2009 as follows (I must admit that I am still checking the figures):

Investment in 2009 by the NPRF in AIB/BoI – €7bn

In Feb 2010 BoI paid their 8% dividend to the NPRF with 184.4m ordinary shares.

In May 2010, the NPRF converted €1,662m of preference shares to ordinary shares in the rights issue and acquired an additional 1,715m shares

On 30th September, 2010 BoI shares were worth €0.62 each. Therefore at that point, the NPRF’s investment in BoI was worth a total of (184.4+1,715) ordinary shares at €0.62 each plus the residual preference shares €1.837bn to give a total of €3.015bn

In May 2010 the AIB 8% Preference Share dividend was paid with 198.1m ordinary shares which were worth €0.51 at 30th September which when added to the €3.5m investment gives you a value of €3.601m for AIB.

The total of €6.615bn in the NPRF statement comprises the €3.015bn for BoI and €3.601bn for AIB (€0.001bn rounding).

UPDATE: 1st November 2010. On Irisheconomy.ie it was pointed out that there was a written question by Labour deputy leader and finance spokesperson Joan Burton on 14th October, 2010 (question and answer below). The closing price on 14th October for AIB shares was €0.428 which would have given a loss of just under €800m.

Deputy Joan Burton asked the Minister for Finance if the National Pension Reserve Fund will participate in and underwrite the Allied Irish Banks rights issue at a fixed price of 50 cent per share irrespective of its prevailing market price at the time of the rights issue; and if he will make a statement on the matter. [36866/10]
Minister for Finance (Deputy Brian Lenihan): In my statement on banking on the 30th September last I indicated that AIB is to raise €5.4bn of capital through a placing and open offer to shareholders of AIB. The transaction is to be fully underwritten by the National Pension Reserve Fund Commission (NPRFC) at a fixed price of €0.50 per share and is expected to be completed in 2010 subject to shareholder and regulatory approval. I am advised that it is the normal practice in underwritten transactions that the underwriting price is fixed at announcement.



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One of the NAMA Top 10 developers (and I see marketing itself as “Ireland’s largest property group” on the Treasury China Trust website), Dublin based Treasury Holdings is the key party in two sets of results announced in the last couple of days. This morning, Real Estates Opportunities PLC (REO) announced its results for the six months ending the 31st August, 2010. REO which is 66% owned by Treasury recorded a loss after tax of GBP £45m (€39m) for the six month period – whilst its main UK asset the Battersea Power Station site has increased in value by 1.8% in the six months period to the end of August 2010 (interestingly the UK IPD commercial index increased by 3.5% in the same period) the value of its Irish assets fell by 8.2% though that is mainly down to a weakening of the euro during the period. Other highlights from REO:

(1) NAMA still hasn’t approved its business plan (at 29th October 2010)

(2) It is hopeful of planning permission for Battersea “in the near future”

(3) It still hopes to spin off the GBP £5bn Battersea project into a different company in 2011

(4) It’s is delivering storming results for its Irish rental operation with an annualised rent roll €40.6 million, 92% rent roll prepaid quarterly, 91% of rent subject to upward only reviews, occupancy levels at 95% and arrears of only 5%

(5) Management fees of GBP £1.1m were paid during the six month period to Messrs Ronan and Barrett’s Treasury group.

So not the best set of results but at least losses seem to have largely stabilized. On the other side of the world however, the recently renamed Treasury China Trust, 40% owned by Treasury, has delivered another set of positive results for Q3, 2010 with the following highlights:

(1) Profit after tax of €10.4m (Singapore Dollar 18.675m)

(2) Portfolio Occupancy of 86.9%, up by 3.3% year to date

(3) Real Estate portfolio valuation up 2.5% in the 6 months to 30 June 2010

(4) Completion of USD $480m financing for developments in Shanghai City Centre.

(5) The company is making dividend payments

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Remember those two investments of €3.5bn apiece made by the National Pension Reserve Fund (NPRF) in our two main banks, Bank of Ireland and Allied Irish Banks? Remember that these investments were in preference shares in both banks, paying a princely 8% per annum? Of course the pesky EU forbade those two banks paying out the 8% dividend in cash so we acquired ordinary shares instead  – 198,089,847 ordinary shares from AIB on 13th May 2010 then worth €280m (8% of €3.5bn) and 184,394,378 ordinary shares from BoI on 20th February, 2010 then worth €250.4m (7.2% of €3.5bn because BoI made the distribution over a month before the anniversary of the investment). If you’re of a nervous disposition, look away now because below are the current values of those dividends – yes we received less than a 2% return from AIB and 3.1% from BoI.

So the NPRF which was set up to manage pensions for future generations of our citizens is achieving an average return of 2.5% on €7bn of the €22.3bn total funds under management by the NPRF at the end of 2009. And whilst the €3.5bn invested in BoI is relatively safe for the time being, the same cannot be said of the €3.5bn in AIB which may suffer some deterioration in value. So an average of a 2.5% return then, during a year when globally stock markets rebounded in spectacular fashion – see below. I have used the mid-point of the two investments as the starting point – 20th April, 2009.

Now it is true that some have seen value in Bank of Ireland at these price levels. On 11th October, 2010 (when Bank of Ireland had a trading range of €0.63-0.68), analyst Gary McCarthy at UK brokerage Collins Stewart was talking up the stock with the not unrealistic notion that as the best capitalised of the domestic banks, it should be best placed to take advantage of any upturn with its dominant position in the market place. Two weeks later we are nearly 20% off that day’s mid-prices though it is fair to say that bank shares are volatile at present.

That the €7bn was unwisely invested by reference to 20-20 hindsight is one thing – that we are contemplating using more NPRF funds to prop up the banks is truly worrying – particularly to cover AIB. The government might say that without the banks there won’t be an economy for our pensioners to enjoy their pensions, but that would imply that we are willing to conceal the true cost of the bailouts and put in jeopardy the pensions of this generation.

UPDATE: 29th October, 2010. I am reminded that the NPRF has “agreed” (been “directed” more like) to underwrite the forthcoming AIB share issue. From AIB Investor Relations “A €5.4 billion equity capital raising will be launched during November which will be completed before 31 December 2010.  This equity capital raising will be fully underwritten by the National Pensions Reserve Fund Commission (“NPRFC”) at a fixed price of €0.50 per new ordinary share, which represents a discount of approximately 9.4 per cent to the official closing price of an ordinary share on the Irish Stock Exchange on 29 September 2010. “. With a price of €0.34 today, the NPRF will not only be picking up all the shares but will be realising a loss from Day 1 of €1.728bn. Actually this is probably the bigger story.

UPDATE: 30th October, 2010. The NPRF last night issued its Q3, 2010 performance report which shows that the €7bn investment in AIB and BoI is now worth €6.615bn. It is unclear how the investment has gone negative. The Independent today reminds us of the €1.8bn loss that will be made on Day One of the AIB share issue.

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It’s enough to make you want to go home and put the duvet over your head. Alan Dukes, Anglo’s chairman since June this year is reported by RTE to have today called for another NAMA to be set up to act as a receptacle for banks’  remaining distressed loans once NAMA has concluded its work. The five NAMA Participating Institutions will still have some €70bn of commercial property lending (including some land and development, eg sub-€20m at AIB,BoI, sub-€5m at Anglo), a significant proportion of which will be impaired. Alan wants these impaired loans transferred to a new NAMA organisation.

It is gobsmackingly incredible that focus is now turning to the non-NAMA loans. It is bewildering that these issues had not been considered in the context of Anglo at the start of September 2010 when the Minister for Finance Brian Lenihan announced the Asset Recovery Bank and Funding Bank split (and by the way, reports this morning indicate that nearly eight weeks after that ministerial announcement, the new Anglo plan (that’s version 3.0 after v1.0 was ridiculed and v2.0 never even made it to a formal decision by the EU) still hasn’t been prepared –  according to the Independent this morning “the Government and the bank are currently working on a plan to submit to the EU Commission and Finance Minister Brian Lenihan claims it is likely to get the support of the commission”)

The subject of the PIs’ residual loans has been the subject of several entries on here (examples here and here). Calls to have NAMA absorb these residual loans have been dismissed as being an “unnecessary distraction”.

UPDATE: 29th October, 2010. Simon Carswell in the Irish Times today claims that Alan Dukes confirmed to reporters outside his formal presentation to the Leinster Society of Chartered Accountants Ireland that a plan has in fact been sent to the European Commission – “the bank had sent the European Commission the revised Government plan for the creation of the funding and asset recovery banks out of Anglo, he [Alan Dukes] said” This is at odds with the Independent report yesterday morning (see above) – perhaps the plan was sent sometime yesterday afternoon!It seems to me having read Simon’s article that Alan Dukes is not exactly settled on the Asset Recovery Bank and Funding Bank split and that he is still clinging to some future for Anglo, possibly as a capitalised receptacle of other distressed loans but with some new lending capability. That Alan Dukes is recognising the scale of problems with non-NAMA loans (and I estimate these non-residential mortgage property loans to be €70bn+ and that includes the €6.6bn of €5-20m land and development loans that will not remain with AIB and BoI following the Minister’s decision to increase the threshold for those two banks only) is to be welcomed, although it is bizarre that it is only happening at this late stage. But that there seems to be uncertainty about Anglo’s future shows a lack of planning.

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Our governor of the Central Bank, the formidable Patrick Honohan, delivered a speech to the Institute of Certified Public Accountants yesterday. In it he summarised for the umpteenth time the background to our financial crisis but extracted the role that accounting has played, and bemoaned how badly we have been served by practices which failed to look beyond the balance sheet date. It seems a little cowardly though that he didn’t go further in his speech and call for the immediate implementation of an accounting standard, International Financial Reporting Standard 9 (IFRS 9), which will be mandatory from 2013 onward but is discretionary until then.

The accounting business (or profession if you must) as a whole decided when the global financial crisis kicked off that its practices were unsuitable for valuing loans in environments had led to enormous losses which were not signposted in financial statements. Loans had been valued by reference to International Accounting Standard 39 and in 2009 accountants introduced a replacement that might be more fit for purpose, IFRS 9, which allows for more realistic valuations. IFRS 9 will become mandatory from 1st January 2013 and until then offers some discretion which each of the five NAMA Participating Institutions (PIs – AIB, Anglo, BoI, EBS and INBS) has opted to take advantage of. From the interim report for each of the five PIs (except INBS which didn’t produce interim figures so its full year 2009 results are used) here are the % loss provisions for the remaining tranches at 30th June 2010, the discounts on Tranche 1 which was completed in May 2010 and the final estimate from Minister for Finance Brian Lenihan in the Dail on 13th October, 2010.

So we have the above fantasy accounting from banks which does not give a “true and fair view” of losses and this fantasy is only a couple of months old in all save INBS’s case and was allowed by the governor who has been in post since September 2009. Of course the governor might think that now is not the time to bring forward the crystallisation of losses. If that were to be done, then the likelihood is that Bank of Ireland would tip over into majority State control. So it seems the governor’s speech lacked the courage of its convictions.

Elsewhere in his speech he claims that NAMA “agreed to conduct a sample review of the full range of tranches” before providing the estimated haircuts that were announced at the end of September. Sadly it may take up to 12 months after the last tranche is transferred before we know how productive that exercise was and how realistic the final estimated haircuts have been. Aside from the berating of accounting practices, the speech might be best remembered for criticising the Stability and Growth Pact for not being helpful in dealing with shocks to the system.

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The Nationwide Building Society has this morning published its UK House Price data for October 2010. 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 £164,381 (compared with GBP £166,757 in September 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). Prices in the UK are now 11.6% off the peak of GBP £186,044 in October 2007. Interestingly the average house price at the end of September 2010 being GBP £164,381 (or €188,003  at GBP 1 = EUR 1.1437) is only 5.4% below the €198,689 which the Permanent TSB/ESRI said was the average nationally here at the end of September 2010.

With the latest release from Nationwide, UK house prices have risen by 0.99% 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. The NWL Index has declined to 911 meaning that average prices of NAMA property must increase by 9.8% for NAMA to breakeven on a gross basis.

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 1.41% fall in prices between now and the end of the year. The UK economy is showing surprising resilience – figures released earlier this week showed GDP grew by 0.8% in Q3 following a 1.2% spurt in Q2. Last week’s spending review proposed massive cuts to public sector employment and brought home the far-from-certain position of the UK economy. Supply of property for sale has been bolstered by the abolition of HIPS (akin to BER certs) in June 2010 and which had cost about £300 and the Royal Institution of Chartered Surveyors (RICS) has also suggested that more sellers are returning to the market but that there are fewer would-be buyers, suggesting declines are in prospect.

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I’m between two minds on the health of the hotel sector. It is undoubtedly suffering from poorer bookings and overcapacity in the sector has been an identified problem for a few years now. The industry body, the Irish Hotel Federation (IHF) is giving the impression it is fighting for the very survival of its members during the downturn, and it has come out with a predictably self-interested pre-Budget submission. As with CIF yesterday, there’s nothing in itself wrong with that, and remember the hotel sector, along with restaurants, provide 6% of all employment (8% of female employment) and the sector has been a solid contributor to the economy.

The reason I’m in two minds is that although some hotels are producing losses, others are profitable (consider a few examples here and here and here). Local authority charges, water and energy costs and the minimum wage are all pressures on the sector in light of reduced demand for rooms, greater competition and a shortage of reasonably-priced credit. Last week, a hotel marketing firm Select Hotels reported a doubling in turnover during the past year. The company represents 24 independent hotels in the State and brings together a specialised marketing service which is shared amongst the member hotels. So whilst it is accepted that some hotels are facing very difficult challenges, it does seem that some have adapted and can still turn profits, even with existing local authority charges which seem to be a particular bugbear.

The hotel sector is particularly worried about the drying up of reasonably priced credit lines. The withdrawal of Bank of Scotland (Ireland) from the market came as a major blow as that bank had established itself in the hotel sector. However the Irish Small and Medium Enterprises Association (ISME) reported a month ago that credit conditions did seem to be improving for small and medium businesses. And of course hotels have the Credit Review Office which seems to be dealing with a tiny workload which indicates also that credit conditions are improving. Lastly, the IHF use their statement to again implore government to ensure NAMA is “to be operated in a way which does not distort the operation of the hotel market either through below cost prices of NAMA operated hotels should this arise or inappropriate disposal of assets”.

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It is hard not to suspect that Bank of Ireland is in a shockingly perilous state at present. We are waiting more than three months now for the publication of the EU Decision on the bank’s restructuring (the Decision was announced on 15th July 2010 and as is usual the Decision was to be vetted for confidential information before publication – that this vetting has taken over three months is prompting suspicion about the content of the Decision). The bank last week announced a sale of its subsidiary, Bank of Ireland Asset Management, for €57m to US financial services giant, State Street. Apparently the sale was a condition of the EU granting approval of State-aid and its wider restructuring proposal but because we haven’t yet seen the Decision it is not clear why the disposal was necessary. Last week also saw the bank place GBP £300m of 3-year debt at an interest rate of 5.75% which of course excludes issue and other costs including payment for the State-guarantee. According to BoI’s interim report for the first six months of 2010, the bank has an interest margin (simplistically the difference between the interest rate it must pay for its finance versus what it achieves on its lending to customers) of 1.41%.  If BoI is borrowing from the market, as it did last week, at 5.75% then it needs to lend that out at 7.16% to maintain its June 2010 lending margins. And those margins are below the long term averages of at least 1.75%. September 2010 also saw a bizarre decision by Ireland’s Minister for Finance, Brian Lenihan, to raise the threshold on BoI loans to be transferred to NAMA from €5m to €20m. This has the effect of deferring a crystallisation of the true level of losses on these loans and consequently causing a capital hole that might necessitate the State providing additional capital which would tip State-ownership from 36.5% today to over the 50% mark and majority State control. Tough times for Bank of Ireland.

And today the bank is reported to have announced a new debt placing, this time for €500m repayable in 2 ½ years. It is not entirely clear from the Irish Times story and indeed there is nothing on the Bank of Ireland website or it would seem any stock exchange notification to confirm the interest rate payable on this borrowing (the Bank of Ireland investors website seems to constantly link to “pages not available”) – the Irish Times say “410 to 420 basis points more than the benchmark mid-swap rate, according to two people with knowledge of the sale” and “euro-denominated financial bonds due in one to three years and bearing a rating equivalent to the Irish government’s AA- at Standard and Poor’s pay an average spread of 130 basis points”.  German 3-year rates are trading at 1.22% this morning so I would expect the rate offered here to be that plus 4.15% or 5.37% in total. Factor in issue costs and the price of the State-guarantee and you are possibly looking at over 6%. Depressingly this new debt needs to be State-guaranteed, and of course our State bond debt is trading at near record levels (6.6% on 10-year bonds as I write this) which might part explain the high interest rates.

That Bank of Ireland is borrowing at levels which would seem to place annual interest well over 6% seems like commercial madness. When its Standard Variable Mortgage rate is 3.4% here (and just 2.99% in the UK), when businesses expect to be able to borrow at Euribor + 1-3% (roughly up to 4% today), it is plainly madness for Bank of Ireland to seek debt at such high interest rates unless it’s being shovelled into credit cards or personal finance. Unless it has no choice but to borrow at these rates. And that is why Bank of Ireland may well be in a very perilous state today.

UPDATE: 28th October, 2010. Simon Carswell at the Irish Times seems to have better information on the debt issue.  No notification yet to the stock exchange or announcement from BoI, so let’s assume Simon is correct. The debt issued was €750m, not €500m as reported by the Irish Times yesterday. The interest rate on the debt is 5.9%  (not 5.4% which was my interpretation yesterday of what the Irish Times had reported) which presumably excludes issue and other costs including the cost of the State guarantee.  The issue was oversubscribed 1.3 times at €1bn and apparently buyers are widely spread, so this is not an ECB or closed sale, it’s the real McCoy. The bloody great elephant in the room with the pink tutu on gving a rendition of  The Prodigy’s “Firestarter” is that this debt is totally uneconomic and highlights just how perilous a position BoI has reached.

UPDATE: 29th October, 2010. Whilst the markets are making their own minds up on BoI (currently trading at €0.50 a share), the media continues to ignore the pink tutu-wearing, Prodigy-impersonating singing elephant in the room – that borrowing at 5.875% excluding costs and State-guarantee fees in a euro market where mortgages and business loans are sold at 3-4% is madness. The FT (free registration required) concentrates on the process of the sale – originally it was to be for €500m but demand at €1bn pushed the offer up to €750m. There were 68 accounts which bought the debt and most were from continental Europe (with only 35% in the UK and Ireland – oddly enough there don’t seem to have been any other buyers from North America or the Far East). “This deal demonstrates Bank of Ireland can access the market and that’s been one of the critical concerns about the sector” said a chap from Deutsche Bank. It demonstrates far more than that I think.

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It seems that there has been a lot of negativity about NAMA around these here parts recently – is NAMA facing a cash-flow crisis, the abandoning of Tranche 3, lack of transparency in the disposal of assets (and the apparent absence of any code of practice for the disposal of property by proxy), general delays and under-resourcing. However it should be pointed out that this blog is neutral on NAMA and has drawn attention to apparent successes such as its first apparent disposal in the UK. And three months ago, we reported on the thumbs-up that NAMA was receiving from senior finance professionals in the State, when the last quarterly Deloitte survey was published. The Deloitte survey for this quarter published yesterday paints an entirely different picture.

A balance of just 3% of chief financial officers (CFOs) in the State think that NAMA will restore lending, down from a balance of nearly 60% three months ago. Now this still means that more CFOs think NAMA will restore lending than not but the collapse in confidence is striking. Deloitte implicitly attribute it to bigger than expected haircuts and Paddy McKillen’s legal challenge (and remember to be on tenterhooks next Monday 1st November at 10am when the judgement is scheduled to be handed down, though don’t be surprised if there is an appeal lodged before 11am). I think the results shown by Deloitte are a fair reflection of the growing awareness that four of the five banks are so undercapitalised now that they are incapable of significant lending and as evidenced by the 5.75%+ rates that Bank of Ireland had to pay last week in its debt placing which incidentally was State-guaranteed, banks are not able to use the certainty of NAMA bonds to attract additional funding at economic rates. What NAMA is doing, and doing pretty well by most accounts, is placing true values on some loans. That should have some value but in the context of the big picture and what NAMA was set up to do, it might be time for a review of the project.

Elsewhere in the Deloitte report, there is evidence of a slight improvement in sentiment towards NAMA restoring credibility in the banking sector which may puzzle some in light of the previous paragraph. However, I believe this merely reflects the fact that NAMA is putting credible values on a large proportion of banks’ lending. Cemeteries are full of graves with credible people, and banks may well end up with broadly believable balance sheets (non-NAMA and sub-threshold NAMA loans apart) but that doesn’t mean they won’t effectively be dead. This part of the survey is also significant as it shows those CFOs previously on the fence and undecided about the issue now tending to be negative.

The reports deals with far more than NAMA of course and makes for interesting reading. One final NAMA-related item is sentiment towards commercial property valuations. Whilst the previous quarter indicated CFOs were concluding that commercial property was beginning to reach its true value, this quarter indicates that CFOs are again of the view that commercial property prices are distinctly overvalued. Not a good omen for those who wish to see commercial property prices stabilise or increase – CFOs will after all be at the heart of any major decision affecting their company’s property strategy.


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The Construction Industry Federation (CIF) has made its pre-Budget submission and is suitably self-interested as you would expect from any special interest group. And nothing in itself wrong with that – construction still accounts for 7% of all employment in the State (nearly 12% of all male employment) and the sector has traditionally been a solid contributor to the national economy. The key proposal in the submission calls for the abolition of stamp duty on residential and commercial transactions because, according to the Independent, “persisting with a high transaction tax when there are no transactions makes no sense, either from the economy’s or the Exchequer’s perspective”. An entry on here last week examined recent years’ receipts and the tax will contribute an estimated €210m to State coffers this year.

But you have to wonder whether a 6% commercial rate stamp duty for most transactions or a 7% residential rate on transactions over €125,000 will deter many buyers. After all 58% of mortgages granted in Ireland by Irish Banking Federation members in the first half of 2010 were to First Time Buyers who are largely exempt from  stamp duty for most purchases at an entry level. It is not clear how many vacant new homes are less than 125m2 but again these will generally be stamp duty exempt. CIF say that there are “no transactions” which is of course untrue. Stamp duty receipts are on track to generate €210m this year which is considerably down from peaks of €3bn in 2006. Of course the cheaper property becomes the more likely there are to be transactions and the abolition of the tax might help. But you would have to ask whether it is stamp duty or the wider economic catastrophe (credit drought, falling property values, unemployment, negative or low growth, the shadow of the IMF) that is stopping transactions at present – the opinion on here is that is the latter. And for what it’s worth if stamp duty were to be extended (and not abolished) there is evidence that it may increase takings into State coffers because First Time Buyers who make up the most significant cohort of mortgage-based purchases would be captured.

It is bewildering why the CIF pre-Budget statement didn’t concentrate on the State’s failure to spend its existing capital budget on projects this year which would have long term value. There may be more than ministerial dithering in spending the capital budget this year (like we simply mightn’t be able to afford it) but public pronouncements from ministers indicate delays as opposed to cut-backs. Not only are these delays costing jobs but they are preventing the creation of infrastructure, such as schools, which has long term economic benefits.

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