Paddy McKillen v NAMA – Joseph Belanger expert witness statement

Joseph Belanger might not be a household name but he is a senior consultant with the Brattle Group and prior to that he had a 32-year career in commercial lending, risk-based businesses and fund administration businesses mostly with State Street. Funnily enough one of the most vocal critics of NAMA in Ireland has been Willie Slattery, managing director of State Street Ireland, who has called NAMA “crazy”. Mr Belanger is no stranger to managing client relationships of high net worth individuals and examining loan applications. His expert opinion is that the transfer of Paddy’s loans to NAMA will result in “immediate and lasting adverse economic consequences” to Paddy. His is one of the longer witness statements running to 15-odd pages excluding introduction and recitals. He addresses four main issues:

(1) Paddy’s loans will continue to be serviced and he will meet his debts and BoI have affirmed a good relationship with Paddy. BoI have indicated that expired loans would have been renewed were it not for NAMA. Although there may have been technical default in the sense that expired loans have not been repaid, practice would be to renew these or commence a dialogue between lender and borrower. Payment defaults on the other hand are serious when interest or principal is not paid in accordance with the loan agreement. No formal notice of default has apparently been issued by either Anglo or BoI and it is argued that both institutions would understand the consequence of not issuing such formal notices of default which is tantamount to a waiver or consent. Their action furthermore in not issuing formal notices of default signifies a satisfactory relationship which has lasted 20-30 years.

What confused me about Mr Belanger’s statement was reconciling the claim by AG Paul Gallagher for NAMA that Paddy had not paid expired loans with the claim by Mr Belanger that Paddy was only in technical default. Surely if he hadn’t paid a loan that had expired, he would be in payment default? It seems that the absence of a formal notice of default is what makes Paddy’s loans only technically in default but as I say, I remain confused on that point.

(2) NAMA is not a bank, doesn’t lend or manage relationships and is a work-out vehicle (accelerate payments and terminate relationships) and has extraordinary non-commercial powers. NAMA’s 25% aggregate loan paydown by 2013 is again referenced as is its tough approach to developers as outlined by NAMA.  NAMA’s 7-10 year lifespan cannot serve as a substitute for a long term banking relationship. NAMA’s “extraordinary” non-commercial powers claims Mr Belanger include being able to unilaterally modify a loan agreement, “request” personal tax information, sell foreclosed assets to other government agencies based on NAMA’s valuation without offering the assets for sale to the public and NAMA can claw back from the Participating Institutions a sum of money if circumstances come to light after NAMA has received the transfer of the loan. NAMA, it is claimed, has powers beyond a lender referred to in the original loan agreement.

(3) Paddy’s reputation will suffer if his loans go to NAMA because the industry will take adverse connotations from a relationship with NAMA. A lender sees a borrower in terms of their ability and willingness to repay. Ability alone isn’t enough and reputation particularly colours the impression of willingness to repay. And for good measure Mr Belanger reproduces an exchange between JP Morgan (the man) before the Puji Congressional Committee examining the crash of 1907.

Untermyer: is not commercial credit not primarily based on money and property?

Morgan: No sir, the first thing is character.

Untermyer: Before money or property?

Morgan: Before money or anything else. Money can not buy it…a man I do not trust could not get money on all the bonds in Christendom.

A long term satisfactory relationship, Mr Belanger claims, enables easier lending conditions. Furthermore NAMA’s “bad bank” status and the fact that it has been acquiring loans at highly discounted rates reflecting generally poor quality loans, hurts Paddy because the market might think Paddy “belongs there”. Also NAMA is not motivated to maintain a good reputation in the market place so is not constrained in how it deals with Paddy’s loans unlike a normal lending relationship.

(4) Tenants will act up if they know Paddy’s loans are going to NAMA with a consequential adverse affect on Paddy’s property values. Tenants will try to strike harder bargains if they think Paddy’s in trouble. Paddy will also need devote more management time to refinancing which will detract from the management of his businesses.

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AIB – 100% State-owned by Christmas? (And remember those 8%-yielding preference shares, our return is now worth just 2.2%)

AIB (that’s Allied Irish Banks PLC for our foreign friends and not to be confused with Anglo Irish Bank which is just referred to domestically as “Anglo”, meaning “English”) is in the wars at the moment. Just over a week ago it was “stunned” to find out from Ireland’s new-ish Financial Regulator that it needed to raise an additional €3bn in capital by the end of December 2010. And that was after the decision to allow AIB keep €4.5bn of €5-20m NAMA-eligible exposures – God knows what the additional capital requirement would have been if AIB was forced to recognise the true level of losses on what are increasing seen as the most toxic development loans.

And to recap, AIB has a capital raising target of €10.4bn in the next 85 days (Davy Stockbrokers in Dublin are saying that the timeline for completing asset sales might be extended to March 2011) and with only a €2.5bn-capital-contributing sale of its Polish operation, 70.5% of Bank Zachodni WBK (subject to approvals and expected to complete in 2011) under its belt, it seems that the State is going to be on the line for most of the shortfall. AIB has a capital raising “plan” that currently looks like this

(a) Sell its 22.4% share in America’s M&T Banking Corporation for about US $2bn. Hopes of a quick sale were dashed during the week when talks with banking conquistador, Santander, broke down.  On Thursday last, the bank announced that it was selling its shares at US $77.50 each valuing the sale at €1.5bn which will contribute €0.9bn to capital, there are suggestions the sale is being underwritten by Morgan Stanley and Citicorp. On Friday, the M&T share price fell to US $76.84 putting in question the demand for the AIB offering. And the euro:US dollar exchange rate hit an 8-month high of US $1.40. Also at this stage AIB can’t in fact sell shares, it can only sell vouchers which will be redeemable for shares if the sale gets shareholder approval. So the sale looks far from certain, and unlikely to be concluded by Christmas and if it is, it’s unlikely to even generate €0.9bn of capital.

(b) Sell its UK operation including the First Trust chain in Northern Ireland (employing 1300 people in 48 branches). When AIB revealed its interim report for 2009 at the start of August 2010, the bank indicated at that date that the sale was expected to complete in September 2010. More recent reports have suggested that the sale has been put back to next year. Unions in the North are opposed to the sale predicting it will lead to loss of jobs and closure of branches. The suggestion is that this sale would raise €1bn. UPDATE 1st November, 2010. Reuters are reporting that the new executive chairman of AIB, former HSBC banking veteran David Hodgkinson has said that the UK sale is now on hold as there has not been any satisfactory bid.

(c) Issue €5.4bn in shares in November 2010 (underwritten by the State). Analysts are already saying the State will pick up 90% of the issue and with an issue price of €0.50 being claimed in Ireland’s Sunday Business Post today, it is hard to see how the State will not end up with 100% of the issue. The AIB share price closed on Friday at €0.40 (off its 5-year low of €0.27 reached in March 2009 but well down from €0.99 at the start of August 2010).

And last week Standard and Poor’s downgraded AIB’s debt by one notch from A- to BBB+, still three notches above junk but just one notch above Anglo. Furthermore S&P’s outlook is negative indicating a future downgrade.

So AIB on Friday last had a market capitalisation of €427m, not far above the €280m 8% annual interest owing on the State’s injection of €3.5bn via preference shares in 2009. If the Financial Regulator’s Prudential Capital Assessment Review (PCAR) means anything then the State will be on the hook for a further €7.9bn injection into AIB in the next 85 days (assuming the €2.5bn-capital-contributing Bank Zachodni deal is approved). The M&T sale will be worth something but it might be well south of €0.9bn and the UK sale is uncertain. And the €5.4bn issue next month is almost certainly going to end up 100% with the State. The State already owns 18.7% of AIB as a result of AIB providing ordinary shares in lieu of interest when the first 8% annual dividend on the €3.5bn injection via preference shares fell due in May 2010. That shareholding was worth just €78m last Friday (representing just a 2.2% annual return on the €3.5bn injection).

So AIB may have €350m of private shareholders today (with the State owning €77m of shares) but without the State ponying up €7.9bn by Christmas or the Financial Regulator abandoning his PCAR, AIB won’t exist as a private entity.

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