Archive for November 4th, 2010

Having read the 174-page (many of the pages are blank it should be said) report from the Comptroller and Auditor General (CAG) a few times now, I am still puzzled as to the purpose of the report. As to its conclusions, I can only find reference to one judgment by the CAG which specifically relates to “systems and structures to assist it to govern and manage its operations” and concludes “while these are evolving, the steps taken to date are reasonable and will be kept under review in the course of financial audit”. Whilst the report does contain many snippets of fascinating information not previously available, as a whole it is unstructured and lost. This entry examines the report which was made public by NAMA on 2nd November, 2010 together with an accompanying “summary of findings

At the outset I must say that I have seen more than my fair share of audit reports in my lifetime, financial and systems. They have all set out terms of reference – what they set out to achieve. The terms are usually quite clear because auditors love to restrict their exposure so as to avoid blame (and liability) for matters outside their remit. And after the terms of reference, you usually get the audit approach followed by results and conclusions. Against these standards, what the CAG has produced is reprehensibly poor because

(1) It is unclear and muddled as to what it sets out to achieve

(2) It doesn’t disclose the approach taken to the work to achieve whatever it thinks the objective is

(3) It is fair to say that there are “results” but they seem haphazard and without structure or context. The report is bizarre in the amount of uncontextualised detail it provides.

(4) There is nothing worthy of the term “judgment” or “conclusion”. There are a small number of ad-hoc comments.

(5) There are no recommendations for improvement or tightening of procedures

(6) There are no timescales, either for the work done or future references

At the outset the report says that “its purpose is to give an early account of the process [asset acquisition process] based on documentation examined by my Office of the structure, systems and procedures put in place by NAMA.” The report does tell us what it is not addressing “the systems and outturns are currently being audited as part of the financial audit of the first accounting year of NAMA.”

So that’s it – to give an “account”, to tell a story. Well it has probably succeeded to that extent because what follows is a meandering ramble that touches on aspects of the acquisition process and concludes with the equivalent of the short story ending “and then I woke up and found that it was all a bad dream”. What I extract below are snippets which I think you might find interesting and which contained new information – there’s no particular order or hierarchy to these, pretty much in keeping with the structure of the report.

(1) The Participating Institutions (PIs) at NAMA are as follows

(a) Bank of Ireland and each of its subsidiaries except Bank of Ireland (UK) plc

(b)  Allied Irish Banks and each of its subsidiaries except Bank Zachodni WBK S.A.

(c) Anglo Irish Bank Corporation Ltd and each of its subsidiaries

(d) Irish Nationwide Building Society and each of its subsidiaries and

(e) EBS Building Society and each of its subsidiaries

This is the first time I have seen this list of exceptions. Bank Zachodni should certainly have some NAMA eligible loans which probably aren’t suffering to the same extent as property loans here. However I note that AIB’s operations in the UK which that bank has being trying to flog (unsuccessfully) is not an exception.

(2) Up to May 2010 (why May? No idea) five loans had been referred to the expert reviewer following protests by PIs claiming the loans were not NAMA eligible. There is no information given on the outcome of these reviews.

(3) NAMA engaged a consultancy in 2009 called London Economics to assist with setting out a framework whereby long term economic value could be measured and this firm figures “that the range of implied property price changes (in nominal values) for the period 2010 to 2016 for a combination of commercial and residential property was  Ireland – 17.7% to 28.8%,   UK – 14.7% to 20.3%,   US – 10.5% to 23.7%.” It is not clear when in 2009 the firm was engaged. Following 10% falls so far in 2010 in Ireland’s commercial and residential property markets with the bottom some way off I would have said, that 28.8% upper limit looks ambitious.

(4) Moneys advanced to developers after April 2009 seem not to be subject to haircuts “it was the Minister’s policy intention that no further discount would be applied on the transfer of loans to NAMA in respect of any moneys advanced after 7 April 2009, provided that it could be established to NAMA’s ultimate satisfaction that the moneys were advanced as part of normal commercial banking arrangements” and “Following review of claims and supporting documentation for the loans transferring in the first tranche, NAMA accepted claims totalling €299 million. In accordance with the direction from the Governor of the Central Bank and the Financial Regulator in May 2009, no discount is applied to advances after April 2009 and the full advance is treated as an asset. The amount by which the advances element of the loan balances was reduced by the application of the loan discounts, €126 million, was added back”

(5) Discount rates used to value current market values based on future cash flows ranged from 2.25% to 15.89% depending primarily on loan to value ratios. In simple terms this means that NAMA pays far less for loans which have high loan to values.

(6) Payment of interest on NAMA subordinated debt is only to be made if NAMA has achieved certain unspecified objectives. The interest rate payable on subordinated debt which makes up 5% of consideration is the 10-year bond rate plus 0.75% (a total of 8.42% as I write this). The first interest payment on subordinated debt is due in four months on 1st March, 2011.

(7) NAMA will pay €1.6m over a 10-year period just to have its €5bn development pot lending rated. Even though it is State-guaranteed. This looks like a complete waste of money as the debt would presumably have the same credit rating as State debt.

(8) Possibly the most useful inclusion in the report (apart from some cost figures) is the sample valuation of a loan shown in Annex A on page 50. This calculation introduces some new concepts like the valuation of state-aid, payment for derivatives and adding back haircuts on advances made after April 2009. This calculation will be the subject of a separate entry.

(9) If Euribor rises to 3.8% then NAMA will have negative interest income (ie the amount it pays out on its bonds and subordinated debt will exceed what it receives on performing loans). This is after NAMA has entered into interest rate swap agreements, without which the tipping point would be 2.22%. To buy this security NAMA forgoes some interest receivable below 2%.

(10) Over 10% (85 out of 766) of loans in Tranche 1 were disputed by NAMA and were subsequently valued upwards. This despite the PIs’ valuers having a duty towards NAMA. 20 of the 766 loans were valued downwards.

(11) Sums paid to third parties will be the subject of a separate entry.

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In a dramatic development at the High Court this morning, NAMA-bound developer and third biggest construction company in the State (after Sisk and McInerney), Pierse Contracting has applied to the High Court to be placed in liquidation. The company is presently afforded protection from creditors by virtue of its interim examinership.

There is an entire post devoted to the Pierse examinership on here and one of the most puzzling aspects about the examinership, the prominence of a single €16m debt owed to Pierse by fellow NAMA-developer Gerry Gannon in the context of debts over €300m owed by Pierse, has emerged this morning as the judge questioned why there had been little reference in the examinership to an intercompany debt owed to Pierse of some €70m.

The judge, the redoubtable Mr Justice Peter Kelly, has also questioned, according to the Irish Times, the estimated deficit of €200m in a liquidation and is now seeking to discover if the company has traded whilst being insolvent, something that might have ramifications for the company’s directors. There appears to be some confusion over related party loans which may also have serious consequences.

The hearing will resume at 2pm today. Pierse has some 211 employees (down from a peak of 700 and the 300 claimed on the company’s website) and a wide network of contractors and was reported to be expecting turnover of €100m in the 12 months to April 2011. It has suffered from the downturn in construction, particularly in the public sector. This entry will be updated as the case continues today.

UPDATE: 4th November, 2010. RTE is reporting that Judge Kelly has agreed to the appointment of a liquidator to the group and has ordered that certain allegations about the company’s lending and solvency be investigated during the liquidation process. The company has been at the receiving end today of some sharp criticism by the judge. The company’s employees are put at 109 by RTE and the company owes what is described as “colossal sums” to creditors (previously reported at €310m). As WSTT says below in the comments there are likely to be knock-on effects from this company’s demise.

UPDATE: 4th November, 2010. There have been a few enquiries via the contact form about the situation of employees in Pierse following the events today. Citizens Information set out some information as to your rights as employees in a liquidation.

UPDATE: 5th November, 2010. The Irish Times carries perhaps the better reporting on yesterday’s events. Simon Coyle of Mazaars has been appointed liquidator of Pierse Contracting and Pierse Building Services. The barrister representing Pierse yesterday, Rossa Fanning SC, is reported to have told the court that the company owed 2-3,000 unsecured creditors a total of nearly €52m and that they would be unlikely to see any payment in a liquidation. Whilst the directors of Pierse were painted in a glowing light just one month ago with claims that they had put their own money into the company and hadn’t buried their heads and had cut costs to the bone, there were some dark suggestions yesterday about the company’s activities and Judge Kelly has ordered these activities to be investigated in the liquidation. The Irish Examiner meantime provides a listing of the directors of the two companies in liquidation as follows : “The directors of Pierse Contracting are Fearghal O’Nolan, Ti Aisling, Brighton Road, Foxrock; Charles Norbert O’Reilly, Mount Prospect, The Court, Brennanstown Vale, Foxrock; Gerard Thomas Pierse, Villa Christina, Torca Road, Dalkey, Kieran Duggan, Foxrock Manor, Leopardstown, Dublin and Martin Murphy, Porterstown, Ratoath, Co Meath.” and “The directors of Pierse Building Services are Mr O’Nolan, Mr O’Reilly and Adrian Burke, Portersgate Court, Clonsilla, Dublin.”

UPDATE: 6th November, 2010. The fall-out from the collapse of Pierse continues with the Irish Times today reporting that contractors and subcontractors that worked with Pierse may now fold as a result of their debts with Pierse going bad. It is reported that Pierse has €51m of unsecured creditors, mostly subcontractors and they are likely to get nothing from the liquidation whilst the secured creditor Bank of Ireland may secure a large part of its debt.  In addition to threatening the survival of other companies, Pierse’s liquidation will also delay the completion of a major waterworks scheme in south Dublin – the €48 million Boherboy Water Services Scheme which is 90 per cent complete and was due to be finished in the first quarter of next year.

UPDATE: 8th November, 2010. Neil Callanan at the Sunday Tribune has apparently seen the schedule of works that Pierse was involved in until recently and it includes a €38.2m office complex for Wexford County Council, a €30.4m water supply plant for South Dublin County Council,  a €12.6m water supply scheme for Dun Laoghaire Rathdown County Council, a €52m contract to develop four schools due to be completed in December 2011 and a €55.7m contract for a motorway service station project.

UPDATE: 26th November, 2010. The annual accounts for Pierse Contracting have been published which cover the year to April 2010. The Irish Times reports that turnover fell from €328m in 2009 to €207m in 2010 and indeed Pierse appeared to be forecasting revenue for the year to April 2011 at €100m. There were some €75m of intercompany loans, that is that Pierse lent money to a group companies including €40m to  Redmayne “owned by Pierse Contracting directors and some members of their families” and it is now suggested that these intercompany loans will not be repaid.

UPDATE: 29th November, 2010. The Irish Times reports that two banks owed money by Pierse have successfully appointed receivers to the businesses –  Bank of Ireland (owed about €35m and appointed David Carson, corporate recovery partner with accountancy firm Deloitte as receiver) and Bank of Scotland (owed an estimated €15m and appointed David Hughes and Luke Charleton of  Ernst and Young as receiver).

UPDATE: 27th June, 2011. The Sunday Business Post reports that the liquidator has submitted his report to the Office of the Director of Corporate Enforecement. The report was ordered by Judge Kelly who expressed concerns about the operation and finances of the company. Elsewhere there is to be an auction of Pierse office and miscellaneous equipment on Wednesday this week 29th June – details here. There’s not a great deal of detail provided and the auction excludes heavy equipment which was reportedly auction earlier in the year but the photographs paint a sad picture of what remains of a once-great company.

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It seems almost inappropriate on a morning when bond markets are effectively signalling that Ireland must seek EU/IMF intervention for the stated cost of the financial crisis and the spiralling budget deficit, to be reporting on one small aspect of part of the solution to the crisis. But life goes on. It seems that 2011 will have a huge burden of expectations to satisfy – not only are we to see GDP which will have fallen by an expected 11% between 2008-2010 turn positive to a modest degree, not only is it the year when Ireland takes action (or will have action taken for her) to tackle the budget deficit in a serious way but it is also now the year when it is expected that some liquidity will return to the commercial property sector.

John Moran, managing director of  property giant and NAMA valuation-panel member Jones Lang Lasalle (JLL) pens a piece today for the Irish Times in which he reflects on the state of the commercial property market. He laments the paralysis in banks and NAMA (not too much it has to be said but then again JLL will depend on good relations with banks and NAMA to survive and prosper in the years to come). He takes a couple of pot shots at rivals presumably who are hawking property that cannot be sold. He seems comforted by what he sees as an abundance of US, UK and other cash waiting for a home in Irish commercial property and he is confident that in 2011 banks and NAMA will open the sluices to deliver quality and quantity onto the Irish market.

The commercial market in Ireland is in a precarious position. Though transactions are substantially up on 2009 (51% for the first nine months, according to John) and the most recent indices from JLL and rival index SCS/IPD both point to the pace of falls softening, it should be said that both indices point to rent dropping at 20% per annum annualised – this in a country where the vast majority of commercial rent agreements provide for upward only rent reviews (it was only from 1st March 2010 that such terms were banned by the government for new agreements entered into after that date). Any economic recovery which would underpin commercial property rents and capital values is also uncertain though there appears to be a consensus at present that there will be positive GDP growth in 2011 despite the scale (€6bn according to reporting today) of the adjustment in the forthcoming Budget on 7th December, 2010.

So perhaps time to hibernate for a couple of months by which time the current horrors and paralysis may have passed.

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Minister for Finance, Brian Lenihan, yesterday rejected recent calls (including on here) for AIB to be fully nationalised and for deals to be cut with junior bondholders. Just over a month ago, at the start of October 2010, he said that “Let’s be clear about this. AIB is not going to be nationalised in the way that Anglo Irish Bank was.” He appeared to maintain that stance yesterday with Bloomberg and stressed that AIB will “honour its debt obligations”.

It would appear that the markets are not so sure with AIB shares closing yesterday at €0.32 and Bloomberg report the pricing of credit-default swaps on AIB’s subordinated debt suggest there is a 62% chance of default in the next five years. Recent rumblings at the centre of Europe over burden sharing with bondholders and the less than sure-footed handling of the crisis domestically continue to weigh on AIB. The €3bn provision for losses on €81bn of non-NAMA lending at the end of June 2010 certainly doesn’t inspire confidence in AIB’s future.

Minister Lenihan claims that keeping the bank in nominal public ownership (even if it is 95%+ State-owned) improves the prospects for a return on the existing €3.5bn investment from the pension reserve and the proposed additional €3.5bn investment. An alternative suggested on here was to fully nationalize AIB along the same lines of Anglo’s nationalisaton in 2009 which would probably see the total destruction of ordinary share value, negotiate with the junior bondholders in the same way that Anglo is at last now doing (20c in the euro is Anglo’s “take it or leave it offer) and only then consider placing additional funds from the pension reserve at risk.

It is still unclear why the State needs a duopoly of “Irish” banks when we have at last a well-resourced Financial Regulator that could address competition concerns and with a prospect of new entrants in the Irish economy in coming years if the correct decisions are made today. If the Minister has in fact a vision of the banking landscape that he would like see realized, perhaps he might share it and provide some justification for his position.

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