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Archive for November 23rd, 2010

“I am determined that NAMA will change the market by using statutory receivers and property receivers, as is the practice in the United Kingdom, rather than traditional receivers who in most property-related cases may not add very much value” – that’s what the NAMA CEO, Brendan McDonagh told the Committee of Public Accounts last week. What he was referring to was the difference between property insolvency in the UK and in Ireland. In the UK you can employ a specialist property insolvency practitioner whereas in Ireland you only get a corporate insolvency specialist – the difference is cost and superfluous service. In Ireland the cost can be upwards of €800 per hour (GBP £ 677) for a corporate insolvency practitioner whereas in the UK you can reputedly get a property insolvency practitioner for a fraction of that. NAMA has confirmed the appointment of a panel of insolvency practitioners and practically all have UK operations:

 

(1) Baker Tilly Ryan Glennon
(2) BDO
(3) Cavanagh Kelly
(4) Chantrey Vellacott DFK LLP
(5) Ernst & Young
(6) Ferris & Associates
(7) FGS
(8) Friel Stafford Corporate Recovery
(9) Gilroy Gannon
(10) Grant Thornton
(11) Horwath Bastow Charleton
(12) Hughes Blake
(13) Johnston Carmichael
(14) Kavanaghfennell
(15) Keenan Corporate Finance
(16) KPMG
(17) Mazars
(18) McInerney Saunders
(19) PKF (UK) LLP
(20) PricewaterhouseCoopers
(21) Smith & Williamson Freaney Limited

Allied to the insolvency practitioners will be the newly appointed panel of property managers whose role is “principally providing property management services (tenancy management, facilities, security, rents and outgoings, development and potential disposals) during an insolvency or receivership process”

(1) Active Facilities & Property Management Limited
(2) Alder King Property Consultants LLP
(3) Allsop LLP
(4) Bannon
(5) CB Richard Ellis
(6) Cherryman Limited
(7) Colliers International UK PLC
(8) Douglas Newman Good Commercial Property
(9) DTZ Sherry FitzGerald
(10) GVA Donal O Buachalla
(11) GVA Grimley Ltd
(12) Hooke & MacDonald Limited
(13) HWBC Ltd
(14) Jones Lang LaSalle Ltd
(15) King Sturge LLP
(16) Knight Frank LLP
(17) Lambert Smith Hampton Group Limited
(18) Lisney Limited
(19) Mason Owen & Lyons Limited
(20) O’Dwyer Property Management Ltd
(21) Osborne King & Megran Limited
(22) Sanderson Weatherall LLP
(23) Savills Commercial (Ireland) Limited
(24) WK Nowlan & Associates Limited

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NAMA and the bailout

It seems that NAMA may on one hand benefit from the imminent bailout as its mothballed €5bn fundraising programmes can be substituted with funding from the EFSF/EFSM/IMF and our friends in the UK and Sweden (and now Denmark). On the other hand it is reported by the Independent today that options are under consideration that might see NAMA’s scope considerably expanded to include

(a) tracker mortgages (these are mortgages which track the official ECB interest rates, currently 1% plus a premium of typically 1-2%. As banks are presently paying 5%+ for funding these mortgages are loss-making for banks)
(b) impaired mortgages, some 5% of Ireland’s 790,000-odd residential mortgages are in arrears for more than 90 days, An estimated 45-60,000 mortgages have been restructured and up to 16,700 mortgages are in receipt of some form of social assistance
(c) impaired commercial lending
(d) land and development lending which is presently not being absorbed by NAMA (>€20m exposures for land and development at AIB/BoI, >€5m at Anglo, in the case of EBS and INBS all land and development loans are being absorbed)

Expanding NAMA’s scope is a theme examined on here previously (here and here for example) because a flaw in the NAMA principle is that it potentially leaves significant impaired loans in banks which would drag on any recovery in the banks, not to mention leave suspicion that unprovisioned loss landmines would remain which might require emergency unplanned injections of State funding. A recent entry on here examined banks’ non-NAMA lending and the summary tables are shown here.

And the breakdown of the non-NAMA loans

NAMA was primarily set up to absorb a particular class of lending – land and development. Land and development assets are believed to have fallen by 75-90%+ from peak in Ireland and plainly that has left many such loans impaired. It was a consequence of the way NAMA does business that “associated lending” is also absorbed – that’s why Paddy McKillen’s London hotels are NAMA-bound (pending an appeal) even though they would not be classed as land and development loans, they are subject to lending and Paddy has some other development loans.

Of course there is other lending in Irish banks – mortgages, credit cards, personal lending. And there is also commercial lending both for property (which didn’t have any land and development element and wasn’t associated with land and development lending) and for normal business. In fact NAMA is only going to absorb some €73bn of loans and that will leave some €250-300bn of lending in NAMA Participating Institutions (PIs – Anglo, AIB, Bank of Ireland, EBS and INBS) which is roughly broken down as follows:

(a) Mortgages – €105bn
(b) Other personal lending – €12bn
(c) Commercial property – €71bn
(d) Other commercial lending – also €71bn

Bloomberg is reporting that NAMA claims not to have been contacted by the government with respect to expanding its scope. However I get the impression that the patience of our friends elsewhere in Europe at the opaqueness of losses in our banking system is wearing thin. NAMA is acclaimed for having realistically valued land and development and associated lending in the banks’ balance sheets even if that has also caused a capital hole. I can understand why some might believe the NAMA process could also realistically value other lending and put an end to the uncertainty of losses in our banks. The government has thus far seen any extension to NAMA’s scope as an unnecessary complication which would slow down the transfer and management of the most badly impaired loans – it may be that the latest twist to the crisis is prompting a review of the official  position.

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Lest anyone think otherwise, we should be clear that the bailout now being negotiated is aimed squarely at our banking system. The funding needs for the day-to-day running of the State for the next four years (to the end of 2014) will be some €43bn and we start out with over €10bn on hand, some €14bn in our pension reserve (€24bn less €10bn earmarked for AIB/BoI) and a cornucopia of State-owned assets that can be privatised – we can fund the day-to-day running of the State for the next two, possibly three years. And practically everyone in Ireland accepts that we must rebalance our books which today reflect a level of national expenditure commensurate with a tax-take that collapsed two years ago with the implosion of our property sector – political parties representing 80% of the nation want to reduce the deficit to 3% by 2014 and the other main political party representing 11% wants it reduced to that level by 2016. Nothing extraordinary to see here – many other countries are also rebalancing their books which suffered from the fail-out from events in 2007/8.  In truth there is also the €38bn scheduled repayment of debt but banking crisis aside, our debt levels would simply be rolled over under normal circumstances.

The problem is our banking sector and this entry explores the restructuring presently being considered.  To begin, earlier this year when the EU was granting approval to the NAMA project, they included in their Decision an overview of the State’s banking sector.

The above omits the extensive credit union and post office networks which also provide some financial services. And in addition to the above banks and building societies that serve the usual banking needs in Ireland, there are some 430 financial institutions located in Ireland’s Irish Financial Services Centre (IFSC) including Citibank, Commerzbank and Sumitomo. These financial institutions do not serve Irish society with traditional banking services – they are located in a small section of Dublin (dubbed “Liechtenstein on the Liffey” by its many detractors) because of our tax and regulatory advantages.

So of the above banks active in Irish society in 2008, there has already been some “restructuring” with Anglo, INBS and Bank of Scotland effectively ceasing new operations and winding down. So our banking sector today looks like this

Of the above banks, 100% State-owned EBS is presently being sold with the sale at an advanced stage to one of two bidders – Irish Life and Permanent (parent to Permanent TSB above) and a group dubbed the Cardinal Consortium. Four of the other banks are foreign controlled (Danish, Dutch, Belgian and British). Statements from these banks confirm the negative view they take on the Irish economy in the immediate future and there is risk that these banks may choose to retrench or exit Irish market altogether.

And that leaves Allied Irish Banks (AIB – 18.6% State-owned with the imminent prospect of 94% State-ownership) and Bank of Ireland (BoI – 36.5% State-owned but if the share price stays at the €0.30 level recorded this morning and the next dividend due to the State in February 2011 on the State’s residual €1.8bn preference share investment is paid in ordinary shares then it will be 51% State-owned) and of course Permanent TSB (and its parent Irish Life and Permanent). With respect to BoI it seems a record that the EC approved a restructuring of BoI on 15th July, 2010 and yet more than four months later the decision has not been published. There seems to be some consensus now that AIB will be 100% nationalised by Christmas 2010.  The latest accounts for Irish Life and Permanent (six months to June 2010) show that group having assets of €80bn, liabilities of €78bn and capital of less than €2bn – hardly a strong position and possibly just about able to absorb EBS.

The only “structural” question now seems to be whether AIB will be merged with BoI or will some rump financial institution be cobbled together from AIB and what is lefy of INBS and Anglo and offered for sale to the likes of Deutsche Bank, Santander or BBVA. Alan Dukes, our former Minister for Finance and currently chairman of Anglo yesterday called for the maintenance of “at least two viable banks”. Could we manage with one major “Irish” bank centred around Bank of Ireland with a second-class player in Permanent TSB? Given that our Financial Regulator is reported to now employ 520 people, you might have thought that competition issues with an effective monopolistic operator could be countered.

The other key issues in our banks relate to the accuracy of loss-provisioning and capital adequacy. Our new-ish Financial Regulator, Matthew Elderfield, gave another speech which touched on these issues yesterday. He referred to “overcapitalising” banks so that there could be no challenge to capital adequacy and he proposed that future Prudential Capital Assessment Reviews might have independent third party oversight and that the non-NAMA loans would be subjected to more “granular” reviews. I found this speech disappointing – there seems to have been no independent assessment of non-NAMA losses at a “granular” level – in the case of NAMA loans, once the legal due diligence was undertaken banks were exposed to have had shoddy unenforceable documentation yet there seems not to have been any comparable exercise undertaken in establishing existing non-NAMA loss levels or consequent capital requirements. The Regulator points to the recent mortgage arrears (5.13% of the 790,000 mortgages in the State in arrears for more than 90 days) as being within their stress testing, yet there is no reference to the estimated 45-60,000 restructured mortgages where payment holidays, interest-only payments and other reductions in repayment are standard. Nor to the 16,700 mortgages in receipt of some State assistance. The fear must be that any “overcapitalisation” will simply be swallowed up by new losses. It seems shameful that after a PCAR in March 2010, updated in September 2010 and a European stress test of AIB/BoI that there is still such uncertainty and suspicion about the level of bank losses and capital requirements.

And to repeat, this bailout is really about addressing these bank losses and capital requirements.

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