Archive for October 4th, 2010

Last Thursday’s announcements aimed at restoring confidence in Ireland’s finances by providing clarity, finality and certainty contained a few paradoxes – the jiggery pokery of increasing NAMA loan limits from €5m to €20m at AIB and BoI was examined here yesterday and the upshot would point to the change being aimed purely at keeping BoI out of majority State ownership. Another paradox was contained in the “accelerated” programme for transferring Anglo’s loans (in particular) to NAMA. According to Minister for Finance Brian Lenihan’s statement : “In order to support the accelerated implementation of the plan for restructuring Anglo into an Asset Recovery Bank and a Funding Bank, the Board have agreed that Anglo’s remaining eligible bank assets will be transferred to NAMA by the end of October and that bonds will issue to Anglo in return on the basis of NAMA’s current estimate of their value. These loans will then be subject to due diligence and valued by NAMA on a loan by loan basis. If any adjustment to their value is necessary, it will be made subsequently. The EU has been advised of this revision to the valuation process for the remaining Anglo loans and I will be making Regulations to provide for it.”

David Clerkin in yesterday’s Sunday Business Post adds a little detail to the revised arrangements and claims that €6bn of Anglo’s €19bn remaining NAMA-bound loans will transfer without any due diligence (no mention is made of valuation, though in Tranche 1 there was a dispute involving 25% of the loans transferred where the banks’ valuers were at odds with NAMA’s valuers).

Now the Minister said the “EU has been advised” and the EC Competition Commissioner Joaquin Almunia issued a statement following the Minister’s statement in which he said “regarding NAMA, the announced changes to the way it manages loans are in line with the Commission’s approval of the NAMA scheme”. Let’s look at the approval. The EU Decision approving the NAMA scheme was issued on 26th February, 2010. The Decision sets out the EC’s understanding of the NAMA scheme and approves it. The procedure approved by the EC for transferring loans from the Participating Institutions (PIs – AIB, Anglo, BoI, EBS and INBS) is set out by the EC in paragraphs 46 – 70. Paragraph 56 is probably most relevant to the issue.

“Whilst it is expected that all the properties securing the eligible bank assets will be independently valued, given the high number of loans, the market valuation process will be performed in two steps.

i. Firstly, each participating institution will provide NAMA with the required data for the top 100 borrower relationship credit positions. NAMA will then determine from these the top 150 borrower relationship credit positions by size of exposure across all participating institutions. The underlying collaterals relating to these top 15019 borrower relationship credit positions will form the “core underlying assets”, for which the valuers will provide Collateral CMVs. The data then collected would form a statistical basis for determining the Collateral CMVs of the remaining underlying assets (the “non-core underlying assets”). The statistical basis would be applied to establish an initial Collateral CMV of the non-core underlying assets, based on which an initial transfer price will be determined;

ii. Secondly, the valuers will prepare valuation reports for the non-core underlying assets over the next 12 months (i.e. post transfer of assets to NAMA in certain circumstances) in order to determine a final Collateral CMV of the non-core underlying assets. Any settlement amount (deriving from any difference between the initial Collateral CMV and the final Collateral CMV of the noncore underlying assets) will be clawed back by NAMA.”

The above paragraph didn’t prompt concern when first made public on 9th April, 2010. But remember at that point, NAMA had told the EU that it expected average discounts of 30%. Since February 2010 the condition of the loans at the PIs has been exposed in horrible detail and we have seen NAMA discount INBS’s loans by 72.4% in Tranche 2 and indeed we know that a significant volume of loans has been transferred for zero consideration. Crucially however, there has been an increase in haircuts between Tranche 1 and 2, and the forecast for the remaining tranches shows a further significant rise in haircuts (the extreme is the 58% relative increase in EBS’s haircut from a weighted average of 38% in Tranches 1 and 2 to 60% in the remaining tranche). So how reliable is the data collected from Tranches 1 and 2? How indicative is that data of the haircuts to apply in the final tranches?

It seems to me that the EU approval was granted in the context of much lower haircuts and before the full horror of the banks’ processes and documentation was exposed. And I think the EU approval was predicated on the assumption that a reasonable estimate of remaining valuations could be produced from an examination of the top 150 borrowers. And after the experience of Tranches 1 and 2 and the forecast final haircuts, I don’t think that is a safe assumption at all.

The problem is that the Minister for Finance is seeking to put a final cost on the bailing out of the banks as quickly as possible. But simply moving volatile loans whose values are unknown and nigh impossible to infer from Tranches 1 and 2 is only going to move the black box from Anglo to NAMA, and the market will understand that there is substantial risk associated with the black box. Not only that, what is being proposed now cannot support the NAMA principle of cleansing banks of a toxic class of loan asset and replacing the asset with certain-value security if in the next 12 months NAMA may claw back additional and substantial sums from the banks.


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To start with, I’m not inciting any sort of criminal act, just drawing attention to the vast wealth and earnings that will be on display at the High Court tomorrow when Paddy McKillen’s judicial review case kicks off. The hearing is to consider Paddy’s application for a judicial review and if the application is accepted, then there will be a hearing that is pencilled in to last for two weeks. Whilst a number of the participants’ salaries is not yet known, no doubt some of the gaps will get filled in as the case progresses. The dedicated “Paddy McKillen versus NAMA” page has now been moved to the TAB above where you can find all the background to the case together with the most up to date news and the NAMA Business Plan tab has been moved to the About tab.

The parties

Paddy McKillen (wealth of GBP £66m – €78m, according to the 2009 Sunday Times Rich List – the man himself keeps a low profile and his annual income is not known)


(1) NAMA – affidavits on behalf of NAMA CEO Brendan McDonagh (salary €500k+ according to the Sunday Tribune) and NAMA’s Head of Tax and Legal, Aideen O’Reilly (salary unknown) and Head of Portfolio Management, John Mulcahy (salary unknown – his 11 former fellow directors at Jones Lang Lasalle were paid an average of €373,416 in 2009 according to the latest JLL annual report).

(2) Attorney General, Paul Gallagher SC (salary unknown)

(3) The State – according to the NTMA this morning the national debt stands at €87bn though this excludes €12bn of NAMA bonds and subordinated debt guaranteed by the State and also the €2.5bn NAMA State-backed euro commercial paper programme aimed at providing working capital and development funds to NAMA’s developers. Kidnapping the State mightn’t be so wise.

The legal teams

Paddy’s men

Counsel Michael Cush, Brian Kennedy, Shane Murphy and John Gleeson

Solicitors Eugene F Collins

For the State, the AG and NAMA

Counsel Brian Murray, Maurice Collins

Solicitor David J. O’ Hagan

The salaries are unknown but the Independent, citing “well informed sources” said that when the current Attorney General, Paul Gallagher, accepted his new role he took a €1.5m cut in his income. Now Paul Gallagher may have been regarded as the best of the bunch but annual fees of over €1m would not be extraordinary for better counsel.

The witnesses

(1) Joseph Eugene Stiglitz (economist, salary unknown, his 1/3rd share in th 2001 Nobel Prize for economics was worth about €400,000)

(2) Jim Power (economist at Friends First in Ireland, salary unknown)

(3) Michael Cragg (Professor of Economics at Columbia University, salary unknown)

(4) Joe Belanger (Economics consultant at the Brattle Group, salary unknown)

(5) Ciarán Ó hOghartaigh (Professor of Accounting at University College Dublin,  salary range for a professor at UCD is €107,964 – €146,022)

(6) Connor O’Malley (UK banking consultant, salary unknown)

(7) John Trench (“workout guru” at British company Risk Reward, salary unknown)

The State, AG and NAMA

(1) Matthew Webster (HSBC Global Head of Real Estate Financing, salary unknown)

(2) Ian Goldsworthy (HSBC Head of Real Estate, Global Banks and Marketing,  salary unknown)

(3) Philip R Lane (Professor of International Macroeconomics at Trinity College Dublin, the salary range for professors at TCD in 2010 is apparently €113,604 – €145, 952)

(4) Dermot McAleese (Professor of Political Economy at Trinity College Dublin, the salary range for professors at TCD in 2010 is apparently €113,604 – €145, 952)

The judges

Mr Justice Nicholas Kearns (salary €275,000)

Mr Justice Peter Kelly (salary €243,000)

Mr Justice Frank Clarke (salary €243,000)

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One of Ireland’s oldest building companies, McInerney Homes, is back in the High Court at 2pm today to learn whether the plan for survival submitted on Friday last by examiner Billy O’Riordan of PwC, is promising enough to persuade the judge, Mr Justice Frank Clarke to allow the examinership to continue. The case is by no means assured for McInerney who seemed to have submitted an optimistic outlook for residential property in the State when they were granted conditional examinership on 13th September, 2010.

As has been noted here before, examinership (which is an Irish invention but closely modelled on US Chapter 11) is becoming more difficult to secure particularly for construction and property development companies. McInerney claim that 100 jobs depend on being allowed to complete the examinership process that might see banks paid 60c in the euro and US fund (and sometimes “vulture fund”) Oaktree Capital injecting a reported €10m into McInerney in Ireland (and a further €30m in McInerney in the UK which is not subject to the examinership proceedings).

The case has relevance for NAMA as two NAMA Participating Institutions (PIs – Bank of Ireland and Anglo) have loans of a reported €70m outstanding with McInerney. Although NAMA was blamed by McInerney for its immediate woes which saw a sudden withdrawal of facilities in August 2010, NAMA is apparently adopting a neutral stance on the examinership application though the syndicate of banks (AIB, Anglo and non-NAMA Belgian-controlled KBC) who are owed a reported total of nearly €115m (including interest) are against the examinership. The paradox of NAMA being neutral and the banks whose loans are NAMA-bound and on which NAMA has substantial input courtesy of the NAMA Act has been examined on here before (links at bottom).

McInerney’s future will be placed in immediate jeopardy should the examinership protection be withdrawn by Judge Clarke this afternoon. Whilst it is not certain, the banks may seek to appoint a receiver to recover their debt.

There are background entries on the McInerney examinership here and here and here and here and here. Updates here later – the betting on here is that examinership will be withdrawn. UPDATE: RTE is reporting after the hearing today and says that the judge, Mr Justice Frank Clarke is allowing the examinership to continue with a further review on 2nd November 2010. Good news for McInerney though plainly the judge is closely monitoring the progress of the examinership. UPDATE: 5th October, 2010. Barry O’Halloran at the Irish Times seems to have best report of the case today and says that on 29th October, 2010 an updated progress report is to be submitted to the court by 29th October, 2010 with examinership extended to 2nd November 2010 and a full hearing on 5th November 2010 – the status of the examinership between 2-5th November, 2010 is unclear. Also of interest is that the accelerated loan transfer programme at Anglo will mean that NAMA have more direct control over the €30m Anglo loan to McInerney at the start of November 2010. BoI have a reported €50m outstanding to McInerney and that will presumably transfer to NAMA by the end of this year though the NAMA Act grants NAMA extensive influence over NAMA-bound loans even when they sit with the banks.

UPDATE: 2nd November, 2010. The Irish Times today reports that there will be a haring on Friday next 5th November, 2010 to decide if the examinership should continue another 30 days to bring the period to the maximum generally allowed in Ireland of 100 days. The examiner is reported to have delivered an rescue proposal to the court last week and a hearing is scheduled for Friday.

UPDATE: 3rd November, 2010. Mr Justice Frank Clarke will consider extending the examinership period for a further 30 days when the court next deals with this matter on 5th November, 2010. The Independent today reports that there is a little bit of fuss between McInerney and the banks over valuations of McInerney property. Apparently McInerney has written down the value of the property by 50% (no context given – from peak? from purchase? what property?) but the judge is today to examine a “confidential” report supporting McInerney’s valuations. McInerney’s examiner William O’Riordan is also looking for some privacy in his talks with potential investor Oaktree. The banks say that Oaktree’s reported investment is “palpably inadequate”. So McInerney, safe until Friday but what next? The Irish Examiner also reports on the case today.

UPDATE: 4th November, 2010. At the High Court today the judge, Mr Justice Frank Clarke, declared (according to the Irish Examiner) that ” the haircut taken by the banks on their debts [in an examinership] cannot be more severe than if they went to the receivership barber”. The judge declared himself unhappy with an “unsatisfactory report” from the examiner. The case faces a key hearing tomorrow when the judge is being called on to decide if he should continue the examinership for a further 30 days. I would say that the signs aren’t good from McInerney’s point of view.

UPDATE: 5th November, 2010. RTE is reporting that the judge dealing with the matter, Mr Justice Frank Clarke, will decide on Monday next 8th November, 2010 whether to continue the examinership for a further 30 days. There seems to be some issue with the present value of McInerney’s assets with claims that they have lost 1/3rd of their value in the last three months alone. From what I could gather the valuations (and indeed projections for recovery) at the start of September 2010 looked optimistic and was surprised that the Commercial Court granted the examinership in the first place.

UPDATE: 8th November, 2010. RTE is reporting that in the High Court this morning, the judge Mr Justice Frank Clarke agreed “with considerable reluctance” to a continuation of the examinership until 3rd December 2010. In what may turn out to be a precedent if true, the judge agreed to continue the examinership because, in the negative, there was not sufficient evidence to convince him that McInerney didn’t have a chance of restructuring. To the best of my knowledge the usual test has been in the affirmative, that is that examinership is only granted where is evidence that the company has a reasonable prospect of recovering. Regardless the company now has another 25 days (30 days from last Wednesday when the matter was heard and adjourned so that further information could be produced). I don’t think anyone is betting that the company will succeed in restructuring in particular because banks who are owed the most have adopted a negative stance towards the examinership and will probably reject any offer and seek immediate receivership.

UPDATE: 19th November, 2010. With just two weeks remaining before the examinership period expires, RTE is reporting that McInerney has decided to de-list itself from the Dublin and London stock exchanges. The company claims the listings are “no longer in the best interests of company or its shareholders as it is no longer in a position to meet its continuing obligations for listing”. The betting must be that McInerney will be placed in receivership on 3rd December, 2010 unless some substantial rabbit can be pulled from the hat.

UPDATE: 30th November, 2010. We should find out by the end of this week (3rd December, 2010) the shape of McInerney’s future. Meanwhile the High Court has published its determination with respect to the initial application for examinership which was strenuously opposed by the banking syndicate of Bank of Ireland, Anglo and KBC. The determination seems to me to betray a degree of partiality and benefit of the doubt by the judge, Mr Justice Frank Clarke, who judged that Oaktree, “a substantial realistic and skilled investor” would only be pursuing a deal if McInerney had indeed a prospect of survival in some form.  Given the smaller unsecured contractors and McInerney’s workforce, I would tend to have sympathy for the judge offering McInerney every opportunity within what has been a 100-day period of the examinership to work out a deal which might see some future for the company. Alas the betting is that that receivership will beckon on Friday.

UPDATE: 3rd December, 2010. This update relates to the news last week that a liquidator (Billy O’Riordan of PwC who has been acting as examiner) has been appointed to two of the five McInerney companies that were originally granted examinership protection – McInerney Construction (Holdings) Ltd, and McInerney Contracting Dublin Ltd which were mainly involved in contracting out work and managing investments in subsidiaries. Examinership has been lifted for a third company, McInerney Holdings plc, which is now capable of paying its way. Therefore the examinership protection now only applies to two companies – McInerney Homes Ltd and McInerney Contracting Ltd. We wait to hear their fate today.

Also from last week, the Irish Times reported that the scheme of arrangement for the two McInerney companies still subject to examinership had the support of most of the creditors (by number) though it seems that the banking syndicate (Anglo, Bank of Ireland and non-NAMA KBC) are set against the scheme and believe that they might recover €90m of the €113m owed under a “slow burn” receivership.

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The study initiated by Planning Minister Ciaran Cuffe in April 2010 and which was due to be published in September 2010 is now to be published, according to today’s Independent, “in the coming weeks”.

The study of course has a limited remit. According to Professor Rob Kitchin at the National University of Ireland at Maynooth (NUIM) : “I would expect the DEHLG house count to come in well under the 120K rate (probably nearer the CIF rate). It only has reference to post-April 2007 housing estates where there is vacancy above 10%. It therefore a) excludes estates where vacancy is below 10%, b) excludes unoccupied/unfinished one-off housing, c) it assumes that estates started prior to April 2007 are both finished and have occupancy levels above 90%. There are lots of houses in pre-2007 estates that are empty; the same with one-offs. Irishpropertywatch.com reports about 115K houses for sale in state and 20K for rent. In other words, it’s a partial survey and we’ll need to wait for census 2011 for a fuller picture”

According to Treacy Hogan at the Independent (who seems to speak with confidence), the report “will” show 2700 ghost estates (up from 600-odd roughly estimated by Professor Kitchin and others) and less than 100,000 vacant dwellings (down from the headline 250-350k estimates from DKM, NIRSA and UCD, though these would not be fair comparisons as you’re not truly comparing oranges with oranges). And surprise, surprise many estates suffer from sewage, water and road access problems.

Now that the dwellings have (to an extent) been counted and the problems analysed, the next stage will be to decide what happens with the estates. And the term “demolition” seems to get worryingly frequent mentions in Treacy’s article today. NAMA is also reported to own the lion’s share of the ghost estates, though it is unclear to what extent last Thurday’s announcement raising the minimum limit of loan exposures at AIB and BoI to €20m will remove some of these estates from NAMA’s control and return them to AIB and BoI.

It seems as if the plan is to first publish the report and then decide on the future of ghost estates. As mentioned on here previously (for example here and here and here) it is a concern if estates will be demolished without first being offered to the market that might be able to make innovative and economically beneficial use of what would normally be valuable national infrastructure.

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