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Archive for January 10th, 2011

There is an aspect to NAMA’s operation and its effect on our money supply which I haven’t seen explored before. Remember all those German pensioners who shovelled cheap euros into the State during the early 2000s? Via their banks which were seeking better rates of interest than were available at home. And those inflows, we now know, ballooned to a colossal total sum. Irish banks then lent the cash to developers, mortgage borrowers and other personal/commercial borrowers. What NAMA is now doing is reversing this inflow by liquidating the loans within a relatively short period of time. The German pensioner is getting his life-savings back from our banks which have converted NAMA bonds to cash at the ECB. NAMA is not offering any new lending (okay there is a theoretical €5bn development fund but in the overall scheme of things NAMA is a liquidation/workout vehicle) and will have liquidated 40% of its portfolio in three years and will be wound down over 7-10 years (NAMA’s lifespan seems to vary every other week between 5-15 years). Those German pensioners are unlikely to lend to Ireland for some time to come (confidence issues) and unless NAMA prompts an influx of foreign capital, we are likely to see domestic deposits and income used to buy NAMA’s assets. The result – our money supply shrinks. And a consequence of a reduced money supply in a common currency union is that our capacity to invest and generate wealth diminishes. And after our 17% drop in GNP (10% drop in GDP) we need desperately need that money to invest our way out of what is likely to be termed a depression in years to come. Not good news at all.

Which brings us onto NAMA 2. The IMF/EU deal concluded before Christmas provides for a major downsizing of the Irish banking sector in the next three years and a prediction on here was that the term “deleveraging” would become a buzzword in 2011 as the consequences of the plans by the banks to shrink their loans:deposit ratio % from an estimated 165% to 100-120%, sank in. The estimate on here was that up to €90bn of loans would need to be removed from the six State-guaranteed banks. On Friday last, head of the National Treasury Management Agency,John Corrigan put the estimate at up to €60bn. Regardless of whether it’s €90bn of €60bn, it will be a significant sum. It should also be said that there appears to be some slippage in the IMF/EU plan, in that the loan:deposit ratio %s were to be determined by the end of December 2010 and that seems not to have happened according to Reuters. Reuters also report the latest loan:deposit rates for several banks (BoI 160%, AIB 159%, ILP 240%).

The moniker NAMA 2 arose in an interview in the Independent last week with our new-ish Financial Regulator, Matthew Elderfield. And on the face of it, I thought it a ludicrous proposal. Not because it might give certainty to a sizeable chunk of non-NAMA 1 lending (that certainty is necessary and has been argued for on here before) but because NAMA 2 was being proposed as a solution to the IMF/EU demand that we deleverage the banks. To illustrate – at present we have a banking system with loans of 165, deposits of 100 and other sources of funding of 65. What our Financial Regulator is suggesting is move 65 of loans from the banks to NAMA 2 so the banks end up with loans of 100 and deposits of 100. The obvious question is who will fund the 65 of loans in NAMA 2. Not new depositors presumably so how does NAMA 2 get us closer to what the IMF/EU are demanding? D-oh!

On the other hand, after NAMA 1 finishes its transfers in the coming weeks it will have some €87-90bn of loans at par value. But that will still leave over €250bn of loans at the six State-guaranteed banks (roughly €70bn commercial property, €70bn other commercial lending, €110bn mortgages and €10bn of personal lending). There appears to be little confidence that these residual loans have been adequately provisioned – remember Bank of Ireland and AIB’s pronouncements on its expected NAMA haircuts of less than 30% in September 2009 (compared to estimated haircuts now of 42% and 60% respectively)? The Central Bank seems to be lining up three companies to assist with the next PCAR exercise – Barclays Capital, the Boston Consulting Group and Blackrock. The IMF has demanded a top-down and bottom-up review of non-NAMA loan provisions as well as off balance sheet exposures (derivatives in my book). So an attractive aspect of a NAMA 2 would be a close examination of some non-NAMA loans.

Of course another solution to the need to reduce the loan:deposit ration % could be to increase deposits and perhaps it is the case that in recent weeks the bank-run (aka deposit flight) has slowed, halted or even reversed. After all, Irish banks have

(1) been subjected to domestic Prudential Capital Assessment Reviews (twice)
(2) been subjected to a domestic Prudential Liquidity Assessment Review
(3) been subjected to an EU Stress Test
(4) extensive regulatory oversight from a Financial Regulator with 520 staff and a highly regarded Central Bank governor. In addition we must report weekly to the IMF and ECB on the condition of our banks (and in all likelihood there is daily reporting to the ECB on certain key indicators).
(5) deposit rates which are regarded as high by Euro standards, with one-year deposits paying upto 3.6% (Investec online)
(6) substantial capital backing of 12% Core Tier 1 and our Central Bank governor says that he doesn’t believe the banks even need the €10bn of the €35bn set aside from the recent IMF/EU bailout. So we would appear to have substantial capital firepower backing our banks.
(7) guarantees of deposits of either €100,000 or unlimited.
(8) had removed from their balance sheets what were understood to be the most toxic category of loans, land and development, and in their stead are nice crisp NAMA bonds that are exchangeable at the ECB. Other countries had property bubbles and worse, US subprime mortgage financial products. Arguably we have addressed the toxicity of the worst of our loans.

So why are deposits not flooding into Irish banks? Maybe they are and we will find out in this coming week the end of December 2010 position in our banks but I think if there had been a stampede of deposits entering our banks, the Central Bank governor would have broken with formal reporting schedules to give us the good news.

It is clear that the financial authorities are playing around with potential solutions to the need to downsize our banks. Selling loans and providing insurance against losses was one plan mooted before Christmas which prompted some to say that there were opportunities in Ireland to make out like bandits. It seems likely that deposit flight has continued amidst a lack of confidence in our efforts so far to get to grips with losses in our banks. Proposing a new NAMA without any reference as to where the new capital to fund a new agency will be sourced just seems to undermine that confidence even further. And we must be very careful to ensure that the deleveraging does not result in a catastrophic reduction in our money supply.

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NAMA is quietly building up a tally of companies it has put into receivership (there is an up to date list maintained under the Developers Tab)

(1) Michael McNamara & Company Construction

(2) Radora Developments (associated with Bernard McNamara and Jerry O’Reilly/David Courtney)

(3) Paddy Burke Builders

(4) Paddy Doyle (which includes Arcadia Developments, Mellview Estates, Mellview Properties, Mellview Contractors, Lyndonbarry Properties, Lyndonbarry Estates)

(5) (UPDATE 29th January, 2011) John McCann companies

And of course NAMA is in the thick of it with the liquidation of certain Pierse companies and the Whelan group.

Bad news today for the McInerney group which has been under examinership protection for nearly four months. The Irish operations of the group had been hoping to obtain approval from the High Court of a scheme of arrangement which would have seen a substantial investment from US funding group, Oaktree Capital and NAMA taking a substantial writedown on its loans to McInerney. Unfortunately in the High Court earlier today, the judge, Mr Justice Frank Clarke is reported to have rejected the proposed scheme of arrangement and the expectation now is that a receiver will be appointed to the group’s Irish operations where NAMA will be the biggest creditor. The judge said he would issue his formal ruling in the matter on Friday 14th January 2011.

There is extensive background to McInerney’s examinership here.

UPDATE: 11th January, 2011. It seems that, according to the Irish Times,  McInerney is considering an appeal to the Supreme Court of the High Court judge’s decision to reject the company’s proposed scheme of arrangement. McInerney would appear to have another four days to consider their position before the judge at the High Court formalises an order. The judge yesterday is reported to have rejected the proposed scheme of arrangement because it was “unfairly prejudicial” to the banks but importantly, as reported in another Irish Times article,  the judge seems to acknowledge that the High Court may impose a reduction in debt on a creditor even if secured. The Cantillon column in the paper goes further and says “Mr Justice Frank Clarke said he saw no reason why the courts should not have the jurisdiction to write down the debt of a secured creditor as part of a rescue plan (or scheme of arrangement, as they are known) in an examinership. He said the law allowed the sum due to secured creditors to be reduced in such schemes.” Lastly the Irish Examiner has a decent historical profile of the McInerney operation from its foundation in Clare in 1909.

UPDATE: 14th January, 2011. This case gets curiouser as McInerney has asked the High Court to reconsider its rejection of McInerney’s scheme of arrangement based on what the company claims is new information. The new information is not specified in the Irish Times reporting but it is intimated that it relates to NAMA taking over the loans but surely this has been well-established for several months? In any event the judge, Mr Justice Frank Clarke has said that he will consider the matter and respond next week, particularly whether he has jurisdiction to vary his judgment. An odd episode which will presumably still allow McInerney to appeal to the Supreme Court if the judge confirms his decision announced orally on Monday last. The NAMA banks claim it is an “understatement” that this new move by McInerney has come as a surprise. I bet it did!

UPDATE: 17th January, 2011. The Irish Times carries an historical profile of McInerney focussing on its financial tribulations over the years. I get the sense though that this cat has used up its nine lives and that the news later today at the High Court will not only not be good for the company, but that its claim that the fact some of loans are NAMA-bound and that this constitutes new information, will not be treated kindly by the judge.

UPDATE: 18th January, 2011. The Irish Times reports that the High Court testerday considered McInerney’s request for a revision to the judgment last week in light of what McInerney claim is new information. The matter has been adjourned by the judge, Mr Justice Frank Clarke to tomorrow, 19th January. From this vantage point it is hard to see what the new information is – NAMA has a lifespan put variously between 5-15 years and the 11-year workout by the banks under a receivership seems to fall within that range. Alternately NAMA might dispose of the McInerney business in later years once a recovery was in train. McInerney seem to be claiming that “the company itself believed that the agency was not going to buy the debts.” This has the feeling of dragging out the inevitable but let’s see what Judge Clarke says tomorrow. The present and short-term future for builders in the State is not looking good with reduced demand from the public and private sector, private sector oversupply, generally low sector profitability caused by underbidding and rising interest rates on legacy debt – one of the oldest building companies in the State, fellow Clare-based Tom Hayes Limited yesterday went into liquidation.

UPDATE: 21st January, 2011. The McInerney examinership case gets curiouser and curiouser. In the High Court today the judge, Mr Justice Frank Clarke has agreed to McInerney’s request to revisit his order which was to have ended the examinership and rejected McInerney’s scheme of arrangement. He has instructed the parties to provide written representations by next Tuesday and he aims to deal with the matter before the end of next week.  This latest development is surprising here, because the new information on which McInerney relied for the request for a “re-visit” to the judge’s order – the fact that NAMA will be taking over most of McInerney’s bank loans – was widely known at the start of August 2010. Anyway McInerney continues to enjoy examinership protection for another week, it seems.

UPDATE: 29th January, 2011. The Irish Independent citing “two sources” say that the High Court will next deal with the examinership on 7th February, 2011. Is this now a record for an Irish examinership – interim examinership was granted on 26th August, 2010, confirmed on 13th September, 2010 from which the 70 day protection would have started and to 7th February, 2011 will represent a 145- day period, so much for Irish examinerships lasting 70 days with a possibility of a 30 day extension.

UPDATE: 11th February, 2011. The Irish Times reports that the McInerney examinership saga (day 149) continued at the High Court yesterday and may conclude today. Of note from the IT’s reporting is the shady behaviour by Bank of Ireland with communication from one of its legal services personnel which would seem to be dissembling. BoI claimed, according to the IT article, in November 2010 that McInerney’s loans were to be absorbed  by NAMA in “the next few days”. This was a “stratagem” to hurry McInerney along with responding to an issue, it is claimed. Seems like a good old-fashioned lie to me and if it was representative of BoI’s commercial practices would be a cause for deep concern. Of substance from yesterday’s hearing was the claim from McInerney that the banks (NAMA taking over Anglo and BoI’s loans and KBC pursuing its own loans) will recover in the region of €25m from the €115m-odd loans at par value. There is some flimflam about NAMA’s valuation date of 30th November, 2009 but I don’t see how this is relevant to proceedings but that may become clearer today when the hearing continues.

UPDATE: 12th February, 2012. The judgment from 10th January, 2011 has now been published (that was the one which rejected McInerney’s scheme of arrangement but which was later effectively put in suspense to examine the new information about NAMA’s involvement in McInerney’s loans). Meanwhile the Irish Times reports on proceedings yesterday which concluded with the judge, Mr Justice Frank Clarke stating that he would issue his decision on Thursday next (17th February, 2011 – Day 156 of the examinership) and formalise his order the following Monday (21st February, 2011).  Interestingly the court heard yesterday that the Revenue Commissioners (tax authorities) were no longer objecting to McInerney’s proposed scheme of arrangement. The decision will be handed down at a spacial sitting of the High Court next Thursday in Cork.

UPDATE: 17th February, 2011. Well it looks like McInerney is coming to the end of the road, in its present form at least. In a special sitting of the High Court in Cork today the judge, Mr Justice Frank Clarke again rejected McInerney’s scheme or arrangement that was last ruled upon on 10th January, 2011. The judge found that KBC (the non-NAMA bank in the syndicate owed some €115m) would fare better effectively with a receivership. Interestingly RTE is reporting that the judge found that the NAMA banks would fare better under the scheme of arrangement. The likely next step will be for the banks to seek the appointment of a receiver.

UPDATE: 18th February, 2011. The likely next step will be for the banks to seek the appointment of a receiver? It seems that the next step might be a McInerney appeal to the Supreme Court, at least according to the Irish Times which reports on the matter here and here. It is being reported in the Independent that the judge is allowing both sides to make further submissions on Monday next 21st February, 2011 (Day 160 of McInerney’s examinership)

UPDATE: 22nd February, 2011. The Independent reports on proceedings in the High Court yesterday. The judge, Mr Justice Frank Clarke said that the examinership would end on Friday 25th, February,  2011 at 2.30pm (Day 164 of the examinership) unless there was an appeal. The judge stated that Oak Tree Capital had engaged in an abuse of court process by increasing its financial injection offer by a reported €6.6m after the court had made its decision. What next? An appeal by McInerney is a possibility or if examinership is allowed to expire on Friday it is likely the banks will seek to appoint a receiver.

UPDATE: 25th February, 2011. Although the mainstream media is not yet reporting on outcome of the hearing today it seems that there is a motions hearing scheduled for next Friday 4th March 2011 at the Supreme Court before Mr. Justice Hardiman, Mr. Justice Finnegan and Mr. Justice O’Donnell at 11am which suggests that McInerney is appealing and is probably seeking a motions hearing to continue its examinership protection pending the appeal. More later…

UPDATE: 26th February, 2011. It is confirmed by the Irish Times today that next Friday’s motions hearing at the Supreme Court is both to seek leave to appeal the decision of the High Court to reject the scheme of arrangement and to seek the continuation of examinership protection pending the outcome of any appeal. The Irish Times says that next Friday will mark Day 190 of the case, I make it Day 173 by reference to the granting of full examinership (as opposed to interim examinership). The relevance of the ordinal is that examinership in Ireland is commonly said to grant protection for 70-100 days and clearly in this case the clarification of the High Court decision and the appeal is going to run a coach and four through that period.

UPDATE: 4th March, 2011. Paul McMahon on the Irish legal website at extempore.ie is reporting that McInerney’s appearance at the Supreme Court today involved the working out of the directions/logistics of the appeal which Paul believes will be heard in the first half of April, 2011. Paul claims that the parties have themselves agreed a stay on the examinership pending the outcome of the appeal.

UPDATE: 5th March, 2011. The saturday newspapers take a slightly different take on the appeals (plural). The Irish Times says it was the Supreme Court yesterday that granted a stay extending the examinership pending appeals and say there are two appeals – McInerney’s which is understandable enough as the company is appealing the decision to reject the scheme of arrangment which would have allowed it avoid receivership but it seems the banks are also appealing the decision by the High Court in January 2011 to revisit its initial rejection of the scheme of arrangement, although the revisit did not result in an effectively different decision though it did open the door to NAMA being disadvantaged in future if a NAMA developer sought examinership as a way to resolve its debts.

UPDATE: 5th April, 2011. The High Court has made its decisions in the McInerney case from January 2011 available here and here and here. We are still waiting for a date for an appeal hearing at the Supreme Court and nothing seems to be in the diary. Meanwhile the Irish Times reports the major news that McInerney operations in the UK have been placed in administration (remember the examinership only applied to Irish companies in the group). The companies affected are reported to be McInerney Group Limited, McInerney Homes Limited, Alexander Developments (North East) Limited, Lancing Homes Limited, Gold Homes (The Wave) Limited, William Hargreaves Limited and Bowey Homes Limited. KPMG is the administrator. The announcement from McInerney is here.

UPDATE: 6th April, 2011. There is reporting in today’s Irish media about yesterday’s appointment of an administrator to some McInerney UK companies. The Irish Times reports that US investor Oaktree is still lurking in the background and interested in investing in both the Irish and UK operations. And separately that it was two UK banks, Lloyds and Royal Bank of Scotland that orchestrated the administation procedure. Interestingly the Irish Times claims that the examinership appeal to the Supreme Court by McInerney in Ireland will take place at “the start of next month”. The Irish Independent reports that yesterday’s action in the UK has resulted in 14 job losses there and that the seven companies affected employed 161 staff.

UPDATE: 8th April, 2011. The appeal has been set down for hearing for three days at the Supreme Court from 4th May, 2011 at 11am with a case reference “77 & 81/11”

UPDATE: 4th May, 2011. Case is to open at the Supreme Court this morningat 11am before Mr. Justice Fennelly, Mrs. Justice Macken, Mr. Justice Finnegan, Mr. Justice O’Donnell and Mr. Justice McKechnie. The case is scheduled to last for three days.

UPDATE: 5th May, 2011. The case opened yesterday and gets attention in most mainstream media today. First up, the Irish Times reports the claim by McInerney that the banks (whose strings are presumably being pulled by NAMA as the loans appear to be NAMA-eligible) are simply interested in “running the company into the ground” and it was the banks that unceremoniously “pulled the rug” from beneath the company last August 2010. Of more legal relevance is the claim that the only non-NAMA bank, KBC, would not in fact be unfairly prejudiced by the scheme of arrangement. There is better reporting in the Irish Independent which explores the prejudice issue which seems to be the main thrust of the appeal. Reporting in the Irish Examiner is probably the most comprehensive but the kernel is about the KBC-being-prejudiced issue and the claim the banks are only interested in “running the company into the ground”

UPDATE: 9th May, 2011. The Irish Times reports that the appeal hearing concluded on Friday last 6th, May 2011 and that judgment was reserved. Typically we will wait a month or two for that judgment. The three banks which are collectively owed some €115bn have objected to the examinership and their case was presented by Maurice Collins SC, who claimed that the banks would recover more effectively with a receivership. There is a further strand to the banks’ case and they seek to have an unusual decision by the High Court in January 2011 to re-visit the case when NAMA’s role in the proceedings was clarified.

UPDATE: 22nd July, 2011. The Supreme Court in Dublin has today handed down its decision in the appeal case and has, by a 3-2 majority,  rejected the appeal, thereby lifting McInerney’s examinership protection and paving the way for the appointment of a receiver by the two NAMA Participating Institutions. The directors of McInerney are disappointed and claim the decision is a rebuff to Foreign Direct Investment in Ireland – their statement doesn’t appear tro be online yet but is reported by RTE. The Supreme Court decision has just become available in two parts here and here. There will be analysis here over the next day.

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Previously NAMA CEO, Brendan McDonagh’s salary has been reported to be €500,000 per annum. Yesterday, Ireland’s Sunday Business Post, without citing sources, claimed that his actual salary was €430,000 per annum and a bonus of up to 60% on top. The newspaper claims details of the salary will be published in the National Treasury Management Agency annual report later this year. Should the NAMA CEO be awarded a full 60% bonus, that would bring his salary to €688,000. Not bad for a 42-year old accountant with a quasi-civil service career history at the ESB and NTMA. On the other hand NAMA will have €90bn of loans (at par value) under management in the next couple of months and the last time I looked, the heads of comparable property funds held salaries in the €millions.

It would be very interesting to see the performance metrics used to determine the NAMA CEO’s 60%-max bonus. Profitability of the agency? Mightn’t that encourage hoarding of assets and the sale of low-lying fruit? Recovery of loans but by reference to what NAMA paid or the loan’s par value?

Whilst NAMA claims not to set individual developers salaries, there appear to be credible claims that in practice maximum developer salaries are implicitly being set in the €192-200,000 range. NAMA has asserted that it has cut developer “overheads” by 50% but it is for the developer to decide how to deliver a project within the overall allocation. Some developers have produced business plans which included more substantial salaries – €1.5m in one case, which according to NAMA chairman, Frank Daly “didn’t get past first base”. Of course sooner or later the salaries and rewards of NAMA developers will get into the public domain, perhaps through company reporting and we will then see the rewards on offer.

Developers waiting for sympathy from the public for their reduced circumstances will be waiting some time, such is the general outrage at the consequences of the financial crisis and the role of developers (as borrowers whose debts are now in trouble and necessitating bailouts for the banks from the pockets of the nation). €170,000-a-year part-timer, Frank Daly at NAMA has suggested that it might be patriotic for developers to work for nothing and others have suggested the minimum wage. That’s all very well but what moral high ground does NAMA occupy when it is paying its CEO a guaranteed €430,000 per annum and a bonus of up to 60% on top?

Of course NAMA didn’t cause the financial crisis and is tasked with addressing an element of the crisis. So that differentiates NAMA from its borrowers. On the other hand, some developers with non-recourse loans or ring-fenced corporate limited liability have the option of telling NAMA to get lost whilst they move onto other projects that might keep them in the lifestyle to which they were at one time accustomed. That’s the uneasy truth.

And because it’s very popular, I leave you with the latest version of the public sector salary league showing those whose salaries are more than the Taoiseach’s. The list isn’t exhaustive and I expect that several officers of quangos and indeed others like the Attorney General should be on here but alas their salaries appear not to be in the public domain.

(Click to enlarge)

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