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Archive for February 10th, 2011

(short answer is we don’t know but we have some information and might be able to hazard some guesses)

Yesterday will be remembered as an uneasy day in the history of our financial crisis. Although the IMF/EU have agreed to a short slippage in the Feb 28th recapitalisations, it is plain from the language of their statements that they are not pleased and I get the feeling that Minister for Finance, Brian Lenihan brandished a democratic shotgun at them to secure their agreement. But the main source of unease yesterday was NAMA and its cack-handed performance at the Supreme Court (SC). The agency announced that it needed another two weeks to decide whether or not to proceed to absorb Paddy McKillen’s loans. This was disquieting because although the SC only made its determination last Thursday, the possibility should have been considered beforehand by NAMA that the Court might determine that a decision made before an entity has legally come into existence wouldn’t be valid. Sure NAMA might have hoped that the SC would rubberstamp the High Court decision but surely NAMA is prescient enough to have anticipated this negative outcome and more importantly how it would react in those circumstances. Apparently not, and NAMA needs almost three weeks from the SC’s judgment last week to decide its next steps. NAMA was derided by Paddy McKillen’s team for their being “in a bit of a muddle”. The Court was seemingly unimpressed by the request to defer judgment on the remaining strands to the appeal whilst NAMA decided what it wanted to do. The Court made it clear that they would now consider the remaining strands and deliver their judgment irrespective of NAMA’s actions.

But there was further unease with the disclosure at the Supreme Court that there was some €5bn of €20m+ exposures still to be absorbed into NAMA. That include’s Paddy McKillen’s €2.1bn of loans (€0.9bn at Anglo, €0.3m at BoI and €0.9bn at AIB). But what about the remaining €3bn-odd? Who are the other objectors?

The Irish Times reports today on these other developers whose loans are “in suspense”. It says “about €3 billion in loans [is] due from between 30 and 40 other borrowers, according to a source close to Nama. The loans averaged between €20 million and €50 million each and were due from debtors who were not among the most indebted borrowers” – the average developer exposure is €75-100m which means that some of these developers may have total exposures well over €100m.

NAMA don’t generally identify borrowers and unless the borrowers peer over the legal ramparts like Paddy McKillen we are unlikely to know who they are. But we do know the following:

(1) Banks can object to loan transfers using the NAMA Act, not borrowers. If borrowers want to object they need go to court in the same fashion as Paddy McKillen and that hasn’t happened as a search of the Irish court system will confirm (but see below)

(2) Banks will have objected to the transfer of loans to NAMA by reference to section 80 and Chapter 1 of Part 7 of the NAMA Act. In summary banks were supposed to have provided NAMA with lists of loans, NAMA was to serve an acquisition schedule on the banks for each tranche and the banks could then object to the inclusion of the loans. If there was an objection then the matter was to be resolved by an “expert reviewer” appointed by Minister for Finance, Brian Lenihan. And the reviewer’s determination is final. Given the relatively small size of these borrower exposures compared to the average €1.7bn in Tranche 1, I think it fair to conclude that objections were raised by the banks to these smaller exposures in the last quarter of 2010. The objections may have touched upon matters that were the subject of litigation in the Paddy McKillen case so that might be the reason that the expert reviewer hasn’t disposed of these objections.

(3) On Tuesday this week, Anglo unveiled the worst 12-month loss in Irish corporate history but in the detail of their statement, you will find some €1.1bn of loans (at par value) still to be transferred to NAMA. €899m will relate to Paddy McKillen but that will still leave €0.2bn relating to other borrowers.

(4) The most vociferous legalistic-type of objection to NAMA seems to have come from our neighbours in the North. Soon after Paddy McKillen lodged his legal application in July 2010, there were reports from Belfast of a “small but influential cohort of developers.. exploring the possibility of bringing a legal action” They haven’t done so on this side of the border though that would not prevent them taking action in other jurisdictions though I have seen no evidence that this has in fact happened.

(5) The Irish Independent reports that these loans relate to “cherry assets”, that is good quality assets.

So who are the objectors? Well, apart from Paddy McKillen with his €2.1bn of loans, they’re not identified but are likely to be medium-scale with good quality assets and a preponderance likely to be from the North and mostly having loans with BoI, AIB or INBS (EBS had little overseas exposure).

To conclude, it still amuses me that banks that are 100% owned by the State (in the case of Anglo, INBS and EBS) or majority-owned or effectively dependent on the State can stymie the operation of another state agency, NAMA. Anglo still has €0.2bn of NAMA-bound loans on top of Paddy McKillen’s which are apparently “held in suspense” for example and is 100% owned by the State. You might have thought that the DoF could deal with these matters without the need to seek an extension to deadlines from the European Commission. And that is the last source of unease which arose from disclosures yesterday – NAMA is going to miss the February 2011 deadline to complete asset transfers. And if their seemingly-lackadaisical approach to Paddy McKillen’s loans is anything to go by, it might be some time before these €5bn of loans are absorbed. And given the NAMA (Amendment) Bill is also in suspense pending the outcome of the general election, it seems likely that it will be several months before NAMA completes all of its acquisitions including the sub-€20m exposures.

UPDATE: 13th September, 2011. The Irish Independent today reports on a speech delivered by the NAMA CEO at the CIF four-day seminar in Dublin and says “it is understood NAMA has written to a range of developers in the last week telling them their loans must go into NAMA, despite their objections. About €2.6bn of loan transfers were objected to by developers, but most of these have been rejected.”

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Yesterday’s decision announced by Minister for Finance, Brian Lenihan that the next injections of capital into the banks would be deferred to after the general election on 25th February has been attacked as a political stroke by opposition politicians (for the non-Irish audience a “stroke” is akin to “pulling a fast one”). The decision will effectively push the next injections well into March 2011 because the next Dail is only due to meet on 9th March, 2011 (and that is set in stone by order of the Taoiseach when dissolving the Dail). And given the likely outcome of the election (a FG/Labour coalition) there may be some horsetrading to be still resolved by 9th March. You would expect €7bn, potentially, of state spending to be given a high priority but it could well be later in March when the injections take place.

Was it a political stroke? I think yes, but I don’t think it was primarily aimed at undermining the Opposition. It has been known since early January that the Department of Finance and the NTMA have been seeking an extension to the February 2011 deadline but that they have been rebuffed by the Central Bank of Ireland and the ECB/IMF. The request for the extension is believed to really be about extending to Bank of Ireland every opportunity for private capital raising which might avoid majority state control. And behind that position is the principle that Bank of Ireland, at least, should survive outside state control and be a leading participant in any future banking landscape in Ireland. That position does not coincide with the CBI’s which is more relaxed about BoI being foreign owned and controlled. And that position was reflected in the detached language used in the CBI statement yesterday. But it seems the Minister got his way or at least secured more breathing space for Bank of Ireland. And by throwing his hands in the air with this “mandate” business he was able to save some face.

The obvious question prompted by the Minister’s Damascene conversion to democratic consensus is if the government doesn’t have a mandate to inject €7bn into the banks then what mandate does it have to (1) auction off c€14bn of deposits at Anglo/INBS (2) sell off EBS (3) decide to exclude €4.6bn of associated lending to be transferred to NAMA with sub-€20m land and development loans (4) increase CBI ELA by billions to replace fleeing deposits (5) repay hundreds of millions to bondholders – surely these current decisions should have been (or in some cases should be) deferred for consideration by the incoming administration?

We are expecting a statement later today from Bank of Ireland regarding the debt-swap of the so-called Canadian bonds (€300m at par value where BoI has offered a debt-swap which would see a 56% haircut or €168m capital accretion if there is 100% take-up). I expect we will see some initiatives in the coming days from BoI to privately (that is, outside state control) fund the remaining ~€1.4bn capital requirement. It will be riveting to see how the forthcoming payment of preference share dividends is made to the NPRF.

UPDATE: 10th February, 2011. The end of February deadline might be back in play as there are reports that Minister Lenihan has said that if the two main opposition finance spokespeople (Michael Noonan in FG and Joan Burton in Labour) write to confirm they want the recapitalisations to take place, then they will take place now (source: tweet from Sunday Times reporter Sarah McInerney this afternoon saying “Lenihan says if leaders [corrected to say finance spokespeople] of two main opposition parties write to him to confirm they agree with recap of banks, he’ll go ahead with it now.”. Reuters is reporting that Michael Noonan from FG has suggested it would be preferable to execute the next injections after the bank stress tests which are expected to be completed by the end of March 2011. Interestingly the AIB press statement yesterday evening echoed this when it said “The short delay may also allow time to consider the outcomes of the Prudential Capital Assessment Review, which is being undertaken by the Central Bank of Ireland and is expected to be completed by the end of March 2011”. It seems to me that the banks and the government (and the putative administration after the general election) now want a one-month extension to the IMF/EU agreement. And it would seem the CBI/IMF/EC/ECB want the existing deadlines to remain.

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