Archive for October 8th, 2010

Here is the summary of the statement of Conor O’Malley, director at the Corporate Solutions Group (CSG). Conor is new to me, though he apparently co-founded CSG in 2008 with Shay Dalton. I can’t find a CSG website though there appears to be a page dedicated to the company on the Lincoln recruitment website which says “CSG has worked with Ireland’s leading domestic and foreign owned banks and with their customers, corporations, partnerships and individuals to provide advice and assistance in financial analysis & reporting, debt management resolution, liquidity restructuring and ongoing business management. We have acted separately for the banks, for their customers and for both together.”


Conor’s statement doesn’t add very much to Jim Power’s or Joseph Stiglitz’s but it addresses the issues in its own way. He seems to be the attack dog selected to home in on Professor Dermot McAleese’s affidavit though he does more briefly deal with aspects of the affidavits of Professor Philip Lane, Assistant Secretary at the Department of Finance Anne Nolan and banker Ian Goldsworthy. There are 11 pages but exclude covering sheets and the formalities and there are seven. Here are the main points:


(1) NAMA’s bad reputation: The view taken of NAMA by the markets is that it was set up to manage toxic assets, that NAMA is a “bad bank”. Conor uses NAMA statements to further his claims eg NAMA chairman Frank Daly describing NAMA as “a work out vehicle”, Anne Nolan’s statement about the need for banks to be seen to be “get rid of the class of loans that were most problematic” and indeed head of the OECD Angel Gurria’s statement that “NAMA is designed to restore the banking system to health by cleaning up their balance sheets”. Conor argues that the reputation of good loans is undermined by contagion of the majority bad loans (which have increased inversely to the decline in performing loans from 40% last year to  25% now) and the fact that NAMA has told the world of the very substantial discounts on existing tranches.


(2) The Banking relationship: NAMA’s repayment policies (eg the 25% by 2013) are different to those today in the international banking sector and may lead to forced sales which will destroy value. Conor argues that despite the decline in property prices and NAMA’s contention that the party is over, there is evidence (the UK is cited in particular) of a recovery and that quality assets such as Paddy’s are in demand and are enhanced by a banking relationship. However from the off, NAMA will be looking for a reduction in exposure or indeed an asset sale (and a forced asset sale will result in a destruction in value). NAMA’s 7-10 year lifespan and implied objective of winding loans down over that period places NAMA at odds with a bank. Also Paddy enjoys a distinguished reputation with the banks.


He also argues briefly that Paddy’s loans are not systemic and are well diversified and don’t pose a risk to NAMA banks, and may even render NAMA banks more attractive for sale to a foreign bank. Apparently Philip Lane has suggested that Paddy can refinance his loans elsewhere and Conor’s counter to that is Paddy is trying to do just that without the contagion effect of NAMA’s toxicity.


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What’s going on with REO?

There is still no news apparently on the planning application for the Battersea Power Station in London, one of the most expensive assets over which NAMA has some control. The site has been dormant for nearly 30 years and has been dogged by planning and development issues. However there appeared to be a head of steam behind the latest application to develop the site for residential and commercial use but a decision was expected in August. And yet no news.

Battersea is NAMA-developer Treasury’s most valuable asset. And REO, a Treasury company appears to suffering worrying delays in obtaining agreement to restructure payment terms on some of its debt. According to the company

“The Company announced on 7 September 2010 that the group’s £225 million power station facility with Bank of Scotland plc and The Governor and Company of the Bank of Ireland (on behalf of the National Asset Management Agency) and £37.55 million site assembly facility with Bank of Scotland plc have been extended to 31 August 2011 and all existing breaches been waived.  The agreement was conditional, inter alia, on the Company effecting a compromise by 1 October 2010 with the holder of the £150 million series A and series B loan notes including in relation to all principal and interest.  Negotiations with the loan note holder are ongoing and the lenders under the Battersea facilities have agreed to extend the date for a compromise to be reached to 10 October 2010. A further announcement will be made in due course.”

And today, ratings agency Fitch seem to be going head-to-head with REO by claiming that the €375m Eurohypo loan (secured on REO properties) may fail to repay in 2013. “The agency expects the loan to fail to repay at its scheduled maturity” says Emmet Oliver in today’s Independent citing Fitch. And yet REO say the loan can be repaid with excess funds in a reserve account.

And to conclude with the near-farcical: one of the men behind Treasury Holdings, the colourful Johnny Ronan is reported today to have been told by NAMA to cease making charitable donations from a company owned with litigation sensation Paddy McKillen.

UPDATE: 11th October, 2010. REO has announced an agreement of sorts with the holder of the series A and B loan notes which allows interest and principal payments to be deferred to May 2011. The company says that it will furnish details in due course. It is unclear from the announcement whether this agreement is conditional and requires the approval of the banks (and NAMA).

“The Company is pleased to announce it has signed an agreement (the “Agreement”) with the loan note holder which defers all principal and interest payments due until 31 May 2011.  The Agreement also confirms the basis of a wider compromise arrangement, contingent upon the completion of detailed documentation and approval of the Banks, the loan note holder, the holders of the Company’s 7.5% convertible unsecured loan stock and the zero dividend preference shares issued by the Company’s wholly-owned subsidiary REO Securities Limited and REO’s ordinary shareholders.  A further announcement setting out the agreed financial restructuring terms will be made in due course.” The owner of the series A and B loans is identified by Fox News as Oriental Property Limited (associated with Victor Hwang, and from whom REO acquired Battersea in 2006 for GBP £400m).

UPDATE: 12th October, 2010. Britain’s Telegraph reports that Wandsworth Borough Council is “scheduled” to make a decision on the planning application “next month”, that is November 2010.

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Last Monday, the Central Bank Governor Patrick Honohan appeared on the underrated Vincent Browne show on TV3. In addition to the bank guarantee and the budget deficit, Vincent quizzed the Governor on NAMA’s valuation date and the level of provisions for losses on non-NAMA loans. A transcript of the relevant portion of the interview is shown below.

Whilst professing that he is not a property expert, the Governor said he “had been told” property prices were down here “a little” since last November 2009 (the date chosen by NAMA pursuant to section 73 of the NAMA Act by reference to which the Current Market Value of loans are assessed) but that they were up in the UK (accounts for 20-30% of NAMA loans depending on definition and who you talk to) and US (part of the 6% Rest of World NAMA loans which includes China, Central Eastern Europe, US, Canada). Ireland of course accounts for 67% of the loans and it is here that both commercial and residential prices have continued to slide considerably since November 2009. There have been entries on this topic on here before (eg here and here) but the upshot is that NAMA would save €2bn+ if it were to change the Valuation Date to today for the remaining NAMA tranches.

Although no figures were exchanged in the interview, Vincent did suggest changing the Valuation Date to today and Patrick responded by claiming that historical valuations would have to be changed and that the rules had been set with the EC. Of course the obvious question is why not change the Valuation Date for future tranches only (amounting to €45bn+ loans at par value) and save €2bn+ on these loans.

I myself are growing colder on the idea of changing the Valuation Date because any increased loss will be borne by the banks and we own 100% of Anglo, EBS and INBS and effectively own AIB and were it not for the jiggery pokery with changing the €5m loan limit to €20m for AIB and BoI, I believe we would effectively own more than 50% of BoI also. So changing the Valuation Date might be robbing Peter to pay Paul because we own NAMA and the banks. Changing the Valuation Date would also delay the NAMA process. Still by not changing the Valuation Date we are gifting BoI shareholders perhaps hundreds of millions of euros, and we are hobbling NAMA to an extent because it will have to make up more ground to break even. Perhaps Patrick has more important things to be excited about.

Here’s the transcript

Vincent Browne: Patrick, one of the questions that is looming before us all now is have we reached rock bottom as far as the banks are concerned or is it possible that things can get worse because you have underestimated the value of the assets backing the loans or overestimated the value of the assets backing the loans.

Patrick Honohan: Well, I think the estimates that were announced last week are much more comprehensively based than the preliminary numbers that were talked about in March, there’s a lot more work behind them. In March we had done quite a lot of work on BoI and AIB on the non-NAMA loanbook, we had the first tranche of NAMA haircuts. Now we have a lot more information and we have done a lot of digging into the non-NAMA element of Anglo so there’s a lot more information. I have been using the expression it gives us as much certainty as can be reasonably expected at this time, it’s not an exact science there’s always an element of uncertainty, we don’t know how well the economy will pan out in coming years, we don’t know how well the banks will manage their loan portfolios, we need to get both of these elements right to improve what’s out there in terms of estimates.

VB: One of the things that people are concerned about I think and tell us if it’s true is that property values are being valued at November last year, is that so?

PH: Yeah, I’m not so excited about that. It’s true that the NAMA property values are based on a November 2009 benchmark and prices have come down a little bit, they’ve gone up in the UK and US I’m told. Probably in net terms they’re down a little bit. I’m not so-, there are a lot of protections put into the NAMA procedure since everybody was talking about it this time last year as potentially a bailout for bank shareholders. I think now that more of the discussion is now on the side of thinking that NAMA has been quite conservative in its property price estimates. [I’m] not a property price expert so can’t get too excited by that.

VB: But basing it on November 2009 prices seems crazy to most of us because we know from our own experience that property prices have declined significantly since then.

PH: Yeah, here and gone up in the UK and US. Look, those rules were all established at the beginning of NAMA, a lot of European Commission rules and procedures built into it, part of that, that’s the reason why these valuations have taken so long they’re done meticulously according to a whole set of rules, not all of which you might find exactly sensible, but in taking one thing with another they’re supposed to be valued as at November 2009, take it or leave it, that’s the rule.

VB: not all of which are exactly sensible, oh my God that’s really scary stuff, what?

PH: You have to work according to fixed procedures, this is a pretty good procedure.

VB: Choosing November 2009 seems ridiculous.

PH: Which date would you prefer?

VB:  Now!

PH: Now? And so we’d take back the NAMA bonds that were given out in March, recalculate them and do it again. No we can’t do that.

VB: What about the loans, loans above, only those above €5bn, eh €5m, are going to NAMA. What about the loans less than €5m, for instance the mortgages, for instance all the loans taken out by small businesses in dire trouble?

PH: This is called the non-NAMA book and estimates of loan losses in that territory have been done on the basis of looking at the different elements of different banks portfolio, looking at their experience to date, looking at experience in other countries that have had serious problems of this type, adding a margin of error. So those haven’t been neglected either and what we at the Central Bank and Financial Regulator have done is add an allowance on top of what the banks themselves have been trying to convince us is an adequate loan loss provision.

VB: What allowance have you made in respect of mortgages, for instance, how many mortgages are expecting are in trouble and won’t be repayable?

PH: The answer to that is a provision of 5% losses of the total mortgage book was allowed as a provision in March. Is that big enough?

VB: Is that enough

PH: Now you’ll tell me that nearly 5% are already in arrears but that doesn’t mean that the total amount will be lost, there’s a difference between loans in arrears and loans that aren’t but that’s the overall provision

VB: that’s all, only a 5% discount?

PH: It would be massively higher than anything that would have been experienced before. Is it enough? I don’t know for sure that it is enough, I don’t know for sure that it is enough , but it’s it’s an allowance which we think is a reasonably accurate estimate of what might happen.

VB: how about loans to small businesses, many of them go out of business day after day?

PH: Yeah there are big loans, much bigger loan (indistinct analyses, losses?) I don’t want to go into it element by element, this is a very old story, this is last March we’re talking about.

VB: We want to know now what is the rock bottom story on the banks and if you’re taking guesses with regards to all this stuff that seem implausible then we have reason to be worried

PH: I’m telling you that it is not an exact science, I’m telling you that we have put the best people in the country to try to get the most accurate –

VB: Who are the best people in the country that know about property prices?

PH: You’re going to tell me that they’re the same people who got it so wrong before .

VB: No I’m not, you may as well go out and ask someone in the street. Sure nobody has a clue

PH: People do know what the property prices are at present, what you really want to know is whether the prices will come much further down, come back a little bit, stay lower, these are all the elements that are going into the calculation

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