NAMA abandons Tranche 3!

Laura Noonan at the Irish Independent today reports that NAMA “will not be going ahead with the third tranche of borrowings, which was due to transfer over on Thursday, and is proceeding on an institution-by-institution basis”.

NAMA itself has not issued a public statement reacting to the announcements on Thursday which significantly affect the scope and operation of NAMA.

It seems bizarre that Tranche 3 has been abandoned on the last day of the month that NAMA had repeatedly said was the month in which Tranche 3 would be transferred. NAMA’s transfers up to now have been dogged by delays which NAMA has mainly blamed on the banks (Tranche 1 was expected by the end of March and was finally transferred on 10^th May, 2010 – Tranche 2 was expected by the end of June but was finally transferred on 23^rd August, 2010).

NAMA is now faced with the task of valuing and undertaking due diligence (on a loan-by-loan basis) of €19bn (at par value) of Anglo loans by the end of October 2010. The forecast haircut on these loans appears to be 67% (compared with 55% in Tranche 1 and 62% in Tranche 2) and on the face of it that would mean the loan security was inferior to Tranches 1 and 2.

Good luck to the good people at NAMA but this seems like an impossible task. And the worry is that the EU will reject the valuations. There is of course provision in the NAMA Act to claw back further sums from the banks if matters come to light subsequent to the valuation. So my guess is that NAMA will transfer the remainder of Anglo’s NAMA-bound loans by the end of October, 2010, and a balancing payment (if necessary) will be paid by Anglo once the final valuations and due diligence have taken place (maybe early 2011). Will markets buy it as giving sufficient certainty to the value of Anglo’s NAMA loans? Who knows but it will probably depend on the level of haircut (higher = more credible) and avoiding leaks from the army of valuers, lawyers, bank personnel undertaking the work (leaks of shoddy due diligence or valuation = less credible).

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Suffering withdrawal symptoms with no more high interest Irish government debt for the next three months? Why not try the €2.5bn NAMA commercial paper programme?

Accompanying the announcements of “final” estimates of rescuing the Irish banking system on Thursday last was the decision to abandon auctions of Irish State debt for the next three months, that is October, November and December 2010. The reason: we have enough cash to last us to “late June 2011” (according to Minister for Finance Brian Lenihan’s statement two days ago) and interest rates demanded at present are too high. According to Zerohedge citing Bloomberg “[Taoiseach Brian Cowen] said that his government decided to cancel bond auctions for the rest of the year because of “turbulence” in bond markets, and the state is already funded into next year. He made the comments in an interview with national broadcaster RTE.” “We are funded until next May,” Cowen said. “There has been such turbulence in the markets, since we don’t require those funds immediately why would we be going to get funds at rates such as 6.8 or 6.9 percent.””

The decision may have come as a shock to the bond markets whose thinking seems to have been along the lines of the National Treasury Management Agency (NTMA, State agency which manages the funding of the national debt) continuing to auction limited amounts of debt to keep in the game and to maintain confidence.

However, the announcements on Thursday seemingly haven’t affected NAMA which is right now seeking to place €2.5bn of euro commercial paper (Irish State guaranteed). There are some basic details of the programme on the NAMA website. NAMA needs the cash to pay back a “recoupable advance” of €250m to the State in October 2010 and to fund its working capital and provide advances to developers to maintain and complete projects – it is understood the demands on NAMA’s funding are considerable. NAMA is also due to announce details of its medium term funding arrangements imminently.

It is hard to see how NAMA can abandon its funding programme. And presumably it will attract the same prices as Irish State debt. So no need to go cold turkey on Irish State debt just yet.

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