Is NAMA set to reduce its purchases from €40bn in the June 2010 business plan to less than €30bn (UPDATE €29bn)?

Quite possibly. Here’s what has dropped out of NAMA’s portfolio since the June 2010 business plan:

(1) €6.6bn of loans at Allied Irish Banks (AIB) and Bank of Ireland that are below the new minimum of €20m announced by Minister for Finance Lenihan. Apparently €2.1bn is to come out of BoI’s NAMA-bound portfolio and the remainder, €4.5bn, to come out of AIB’s.

(2) €3.2bn of NAMA-bound loans were to be sold as part of AIB’s disposal of its UK operations. When AIB published its half year results in August 2010 the indication then was that the sale of the UK operation would take place in September 2010. There is no news on the status of the UK sale (though former Finance Minister Charlie McCreevy was reported two weeks ago to be behind a possible bid), but the sale remains a possibility and so does the loss of €3.2bn of NAMA-bound loans.

(3) Anglo’s agreement with NAMA to dispose of €1-2bn of UK and US loans which were previously earmarked for NAMA. This agreement was referred to in the Anglo half year report. Let’s assume for the workings below that €1bn is lost.

(4) Paddy McKillen’s €2bn loans may be lost if Paddy wins his judicial review which is set to start next Tuesday at a special division of the High Court. Although Paddy’s case only relates to €80m of BoI loans, it may act as a test case for the remainder of his loans. It is understood most of Paddy’s reported €2bn NAMA-bound loans are with Anglo.

So factoring the above four points (and assuming Paddy McKillen is successful) into NAMA’s reported portfolio in the June 2010 Business Plan and assuming that Minister for Finance Lenihan’s estimates of future NAMA haircuts are accurate (and assuming INBS which was not specifically referred to yesterday incurs an average 65% haircut) then NAMA will acquire €68.4bn of loans at par value and pay €29.64bn with approximately €1.5bn of that consideration in subordinated debt.

Add back Paddy McKillen’s loans and NAMA will be buying €70.4bn of loans and paying €30.3bn in consideration. It’s a remarkable contraction in NAMA’s financial scale but I would advise against holding your breath for a new business plan.

UPDATE: 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 €28.86bn for the loans (assuming Paddy McKillen keeps his €2bn). Here are the workings:

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30th September, 2010 – a good day to bury bad news. What you might have missed yesterday. See the exhumations here!

It was Jo Moore, adviser and press officer in Tony Blair’s government whose political career came to an end when less than an hour after the second plane hit the Twin Towers on 9/11 she sent out an email saying “it’s now a very good day to get out anything we want to bury”. And ever since I get suspicious on days when major news is broken, and even more so when the timing of major news releases is known in advance. So, what did we miss yesterday? This entry examines some NAMA related news.

(1) It seems that Tranche 3 has been scrapped. As recently as last week NAMA personnel were claiming Tranche 3 would be transferred by the “end of September 2010”. And yet on the morning of 30^th September, 2010 the Minister for Finance announces that NAMA has changed its approach to the tranches and will henceforth transfer one tranche per Participating Institution (PI – AIB, Anglo, BoI, EBS, INBS) with apparently the first tranche, Anglo, due at the end of October 2010. So on the final day of September 2010 when Tranche 3 was supposed to be transferred, the transfer has been put on hold. I believe this indicates there were delays at NAMA, and indeed there have been some rumours of delays due to poor loan and security documentation. NAMA’s failure to issue a press release is poor. So juuuusst as NAMA was about to transfer €12bn of loans in Tranche 3, the pesky Minister for Finance changed the rules. Phew!

(2) Bank of Ireland announced that €2.1bn of formerly NAMA-bound loans would not be going to NAMA. Where are they going, if anywhere? Why are they not going to NAMA? Is this a further contraction in NAMA’s performing loan portfolio (BoI have had the best performing loans thus far evidenced by their top of class 36% average weighted haircuts on Tranches 1 and 2). It is interesting that the EU Decision on BoI’s future which was made in July 2010 has not yet been made public more than two months later. BoI emerged from yesterday’s statements as the only healthy NAMA Participating Institution in the sense that it doesn’t need additional capital. Has some jiggery pokery gone on with the €2.1bn of formerly NAMA-bound loans to enable BoI to meet its PCAR requirements? UPDATE: 1st October, 2010. The Irish Times is reporting that the €2.1bn drop in BoI NAMA-bound loans is a result of the decision to keep loans of less than €20m at BoI, up from the previous minimum of €5m. UPDATE: Connor Brophy has told the RTE Drivetime programme that the discount that would have applied to the €2.1bn would have been 72%. UPDATE: Bank of Ireland has released a statement where it says that the €2.1bn was subject to a provision for losses of €0.8bn but that the €2.1bn has an “impaired element” of €1.6bn. So by not transferring these loans does BoI avoid having to crystallise €0.8bn of additional losses which would presumably need to be shored up with new capital?

(3) The INBS bailout has risen from Central Bank Governor Honohan’s claim of €2.5-2.7bn in May 2010 and €3.2-4bn in August 2010 to €5.4bn today. And this is before the EU has responded to the INBS restructuring proposal submitted in June 2010. That INBS’s bailout has gone from a maximum of €4bn in August 2010 to €5.4bn, without explanation (and remember the 72.4% haircut on INBS’s second NAMA Tranche was known in mid-July 2010), six weeks later is gobsmacking.

(4) Allied Irish Banks (AIB) announced the “stepping down” of the two men at the top of that organization, managing director Colm Doherty and executive chairman Dan O’Connor. Minister for Finance Lenihan refused to reveal any details of severance packages in the Dail despite the fact, as the Opposition put it, the State now effectively controls 90% of AIB. Still lingering in the national conscience is the €1m bonus payment made to the departing former INBS CEO, Michael Fingleton who has subsequently danced a dance with the State, as INBS’s owners, over whether he would return the money or possibly give it to chairity.

And lastly it seems Ciaran Cuffe has failed to issue his review of ghost estates promised for September 2010.

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Anglo hasn’t even submitted its restructuring plans to the EC yet – Commissioner Almunia reacts to the announcements yesterday

The European Commissioner for Competition, Spaniard Joaquin Almunia is an important figure in determining the cost and configuration of our banking bailout. It is his Commission that approved the EU Impaired Assets Scheme, NAMA, Bank of Ireland’s restructuring (decision in July 2010 is not publicly available yet). His Commission also rejected Anglo’s restructuring plans (twice effectively but he has only gone public once). He is presently mulling over INBS and EBS’s plans. However in his statement yesterday reacting to the Minister for Finance Lenihan’s statement on the bail-outs he lets slip that he hasn’t seen the details of the Asset Recovery Bank – Funding Bank split – “once the Commission receives the details of the plan, it will proceed rapidly towards taking a final decision”.

It was on 8^th September, 2010 that Minister Lenihan announced the split of Anglo, following his meetings with Commissioner Almunia in the preceding days. The impression given was that the split was awaiting EC approval. And yet it seems that three weeks later, the EC has not even received those details.

It is possible of course that the delay has been in getting NAMA to provide an estimate of the discounts on the remaining Anglo NAMA-bound loans or that the work of Anglo, the Central Bank, the “independent third party” needed to be undertaken so that losses on non-NAMA loans could be assessed. To me this displays a woeful absence of contingency planning (that the Anglo v2.0 restructuring plan submitted in May 2010 would be rejected, that regardless of Anglo’s future a credible estimate of Anglo’s losses on both its NAMA and non-NAMA loans would be required). And so here we are, three weeks after Minister Lenihan announced the split and still working on the details.

Yesterday’s press release from Sr Almunia had a few other interesting snippets –

(1) “I will of course follow this process [AIB’s recapitalization plans which are subject to EC approval] very closely. I have no doubt that, as in all previous cases, the collaboration between the Irish authorities and the European Commission will be satisfactory.” In other words AIB’s future is far from certain and whilst the collaboration  between Ireland and Brussels might be “satisfactory”, it has not been perfect in the sense that Minister for Finance Lenihan has broken State-aid rules on at least three occasions in the last 12 months when he gave written undertakings in respect of Anglo (twice) and INBS without EU approval.

(2) “Regarding NAMA, the announced changes to the way it manages loans are in line with the Commission’s approval of the NAMA scheme” The announced changes still require NAMA to undertake due diligence on a loan-by-loan basis. That NAMA is going to value and undertake due diligence on at least €15bn of Anglo loans in the next 30 days is, on the face of it, not credible. Plainly the race is on to get certainty on Anglo’s final cost but if the work undertaken by NAMA is undermined by expediency then no-one (including bond investors) is going to believe the valuations and will await EU approval of the valuations which might take months.

(3) “I note positively that Bank of Ireland will be able to continue the restructuring process without further recourse to State resources.” Something interesting happened yesterday morning as the MSM went into a frenzy with the quickfire succession of announcements. Bank of Ireland announced that it now expected its NAMA-bound portfolio to total €10.1bn (compared to €12.2bn in August and €16bn in late 2009). That’s a major change. Has BoI disposed of loans elsewhere to boost its capital position and avoid State resources? This topic will be returned to shortly.

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