Archive for December 7th, 2010

The PBN Property group has just published its accounts for 2009 and included an up-to-date commentary on the group’s standing. It confirms that some Bank of Ireland loans have transferred to NAMA. In addition the Belfast Telegraph claims “loans from Anglo Irish Bank and Allied Irish Bank are currently on a NAMA disposal schedule” – it’s not clear what this means but may mean NAMA is selling on loans that the agency has acquired that relate to the PBN Group. NAMA is forbidden by law from selling loans back to the borrower.

The company delivers a withering assessment on the current state of banking in the Republic, claiming (with very good reason it must be said) that the group had been assured that banks operating here were well capitalised (according to the former head of Ireland’s Financial Regulator body, Pat Neary in 2008, Irish banks were the best capitalised in Europe) only now to find that there is very little or no credit available and indeed banks here seem to be so distracted with dealing with the consequences of bad loans that the don’t have the time to review new business plans.

The PBN Group (controlled by Paddy Kearney, Brian McConville and former Anglo NI boss, Neil Adair) has a distinguished history of developing commercial property (eg Clarion Hotel in Carrickfergus, The Shore shopping centre in Carrickfergus and Carryduff Shopping Centre in Belfast) and residential property (eg  The Demesne in Carryduff and Woodland Manor flats in South Belfast). NAMA expects to take on €4bn of loans that relate to Northern Irish property (and a further €1bn of loans advanced to Northern Irish borrowers secured on property outside Northern Ireland)

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  • €90bn of loans to be sold by Irish banks
  • Discounts offered
  • State guarantee in case of default by borrowers
  • Underpinned by a €35bn IMF/EU bailout paid for by Ireland’s citizens
  • Unknown consequences on Irish economy

Before NAMA was established, a common criticism was that it would become a bailout for developers, particularly those tied to a government that shovelled tax and regulatory benefits their way for almost a decade. NAMA is now nearly one year old and the jury is still out on how effective it will be in pursuing developers for their debts, though NAMA ironically benefited last week from the CIF-commissioned report which accused NAMA of pursuing “every red cent” owed. NAMA has taken legal action against one development consortium so far (Paddy Shovlin and the Fitzpatrick brothers) and has indicated it may initiate other recovery actions through NAMA Participating Institutions where the NAMA-bound loans haven’t yet transferred. Plainly though, the issue is controversial and if the general public see developers walking away from debts when they have the wherewithal to repay them, debts which have forced the State to bailout the banks, then there will be scandal and outrage.

Another criticism of NAMA was that it would dispose of property in an underhand way which benefited “Insiders” and that others wouldn’t get a fair crack at the whip. NAMA has issued a Code of Practice and an additional commitment to comply with the Code of Practice for the Governance of State Agencies 2009, in an attempt to assuage fears in this area. The NAMA Code deals with the disposal of loans themselves. Now some parts of the general public might see the sale of loans as something confined to the criminal fraternity – a drug pusher sells the debts of a few punters up the line to a drug baron who has more clout in pursuing the debts for example. But selling loan books is a common commercial practice across the globe though we probably are not too used to it in Ireland. Regardless though NAMA has a Code of Practice which sets out how it will effect the sale of a loan. Of more interest is the sale of real property. NAMA doesn’t have a Code for this but it has said that it will comply with the Code of Practice for the Governance of State Agencies 2009 which tries to ensure that sales maximise income for the State and are as transparent as possible. There is a gap in NAMA’s operating rules however in that real property may also be sold by the borrower/developer under the auspices of NAMA (proxy sales) – other than a general commitment to maximise income NAMA doesn’t have a code to deal with this situation. So the famed (and seemingly stalled) sale of Derek Quinlan’s car park on Audley Street in Mayfair doesn’t have a code of practice associated with it as the sale is by Derek Quinlan though under the auspices of NAMA.

But at least NAMA has some ground rules and codes for disposing of the loans and property which it has bought using public money (or more accurately bonds guaranteed by the State). The banks have no such codes and yet they will shortly be the recipients of vast sums of additional public money – up to €35bn (€2bn today for deleveraging, €8bn early next year for capital with a further €25bn waiting as a contingency in the wings) and that €35bn is on top of €46-52bn which had already been committed. Although the recent agreement with the IMF/EU with respect to the banks is contained in a secret side letter, in general terms it is understood that the banks are to “deleverage” over the next three years. And one of the ways in which it can do that is through selling parts of their loan books. The chart below illustrates the latest position of the loans and deposits in the six State-guaranteed banks and indicates that there will need be a reduction of some €87.5bn in lending.

The Irish Examiner report today that JC Flowers in now expressing strong interest in acquiring Irish banking assets – it seems that the loan books may be for sale at a discount AND a government guarantee in case the borrowers default (“heads you win, tails I lose” indeed!). And JC Flowers is not the only interest party. There are rumours that the vultures are literally landing today to open discussions with the banks about acquiring their loan books. What is frustrating is that there doesn’t appear to be any agreed protocol for dealing with these sales and the word has gone out around the world that the Irish are selling assets at a discount with a State guarantee for full value. Sure who wouldn’t want a piece of that action? And how much might be on the table? Given the reported requirement to reduce the loans:deposit ratio % from 165% to 100-120% (from 15-160% to 110-120% according to the Financial Times) there may be €80-90bn of loans up for grabs. Sold on at a discount with a State guarantee. To quote NakedCapitalism “other financiers are likely to make out like bandits on what looks certain to be an unduly rapid sale of bad bank assets”

But vulture funds and others buying Irish loan books might be just one aspect of what appears to be a potential scandal. Another way to deleverage is for the borrower to redeem their loans and the door now seems open for borrowers to offer to redeem their loans at a discount. To be clear, the five NAMA Participating Institutions will have some €70bn of non-NAMA commercial property loans and €70bn of commercial lending on their books once they have completed the transfer of their NAMA loans. So you may have a property investor who didn’t touch land and development lending but has a lot of commercial property subject to loans and they might be able to negotiate a discount on their lending (a) in return for early redemption or (b) where a loan is impaired by offering to use unencumbered assets to reduce the debt.

And the last point is this. There are some in Ireland and beyond that think that we as a State ceded our monetary policy to Europe when we signed up for the euro. Monetary policy simplistically encompasses interest rate setting and money supply (to remember the distinction between monetary policy and fiscal policy, I always use the mnemonic MIM for monetary policy denoting Monetary-Interest Rates-Money Supply and STAB-f for fiscal denoting Spending-Taxation-and-Borrowing-fiscal). After all the ECB sets interest rates and we converted our punts to euros when we joined up a decade ago. But in truth we do retain quite a lot of control over our money supply through the regulation of credit for example. However it seems that our money supply may be at severe risk of contracting if Irish banks must deleverage €90bn of lending, particularly to financiers who might simply be interested in seeing the loans repaid and will have no interest in new lending. €90bn is a lot to take out of our economy which has a present day GDP of €160bn.

So with secret side letters and an absence of protocol for disposing of loans, we are at risk of being robbed blind. With €90bn-odd coming out of the economy, what confidence do we have that the consequences have been examined?

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