Archive for February 18th, 2011

News this afternoon from Bank of Ireland with two statements issued to the stock exchange as follows

(1) Announcement including a statement about its payment of interest to the NPRF on the €1.8bn remaining preference shares that our pension fund has invested in the bank (short story, BoI is paying the NPRF €214m in cash on Monday next). And significantly a statement that it will be taking “an impairment charge of approximately €70 million on the NAMA subordinated bonds following the decision by the board of NAMA not to pay the discretionary coupon due on 1 March 2011”

(2) The unaudited accounts for the 12 months ending 31st December, 2010.

The NAMA subordinated bonds referred to above comprise 5% of the consideration that NAMA pays for loans (the other 95% being NAMA senior bonds). The subordinated bonds were only supposed to be honoured in 2020 if NAMA had broken even. As a sweetener to compensate the banks for the uncertainty, the interest rate on the subordinated bonds was the 10-year Irish bond rate (currently 9.14%) plus 0.75%. However the interest too was contingent and according to NAMA’s subordinated debt termsheet.

“On each Interest Payment Date commencing on 1 March 2011 the Issuer* may declare the Interest payable if the Board of the Issuer deems it appropriate to do so if the Issuer is achieving is objectives. Interest not declared in any year will not accumulate.(*The Issuer is the National Asset Management Limited under the authority contained in section 49 of the National Asset Management Agency Act 2009)”

(NAMA objectives 2010, click to enlarge)

So it seems that NAMA is not meeting its objectives. What objectives? There are two “Annual Statements” from NAMA which set out proposed objectives, the 2010 Annual Statement and the 2011 Annual Statement. NAMA came into being on 21st December, 2009. The first payment of interest on the subordinated debt is over 14 months later; it is not clear what objectives for what period are to be assessed. However it seems to me that given the proposed objectives for 2010, that NAMA’s main failing in 2010 will have been the delays in acquiring loans and agreeing business plans with developers. On the latter point it should be said that over nine months after the first tranche was absorbed, it seems that not a single business plan has been agreed by both NAMA and developer (and developer’s wife according to commenter NAMAJew), a business plan consisting of three documents

(1) Memorandum of Understanding
(2) Heads of Agreement
(3) Full Agreement

I wonder what this means for the NAMA CEO, Brendan McDonagh’s potential 60% bonus on top of his €430,000 basic…

(NAMA Objectives for 2011. Click to enlarge)


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News confirmed in Britain’s Property Week today that the saga that has been the sale of Grosvenor/Aviva’s Liffey Valley Shopping Centre in west Dublin to F&C Reit Asset Management and US property investment powerhouse, Area Property Partners has finally collapsed, with the proposed retrospective changes to rents in commercial leases being blamed. I must say that given the recentness of the Labour and FG party proposals to change leases, I would be surprised if this was the main reason for the collapse of this sale, especially since contracts have been drafted and sitting on people’s desks for the best part of nine months (indeed it is over 12 months since F&C/Area were reported to be close to concluding a deal). I am reminded of the decision of TPG Capital/Green Property’s withdrawal from the purchase of the €120m Royal Liver portfolio in Dublin last November, 2010 with the IMF/EU bailout being blamed. I wonder if there is a general uneasiness about making any major property investment at present (yes, Google paid €450+/psf for Montevetro but that company is here to stay and their acquisition is less about property investment than supporting its company’s operations).

And it’s not been a good week for Aviva with sources claiming that another long-awaited sale, this time of Aviva’s holding in the AIB Bankcentre in Ballsbridge worth c€75m, has also fallen through. The property has leases in place with more than 10 years extant, and no doubt the FG/Labour manifesto pledges on commercial rents will not have helped the prospects for a sale.

I think there is now a genuine fear amongst the property community about the prospects for commercial property over the next year. Rents were already declining by 20% annualised before Labour/FG launched their manifestos. The presence of the IMF in the country, the anaemic economic outlook for the next two years, poor domestic growth prospects and a general oversupply were already weighing on the industry but the Labour/FG proposals seem specific which generally means there’s greater chance of enactment once in power. The SCS claims the proposals will lead to a 20% decline in prices. I would have said it will be more. And whilst the industry might have justifiably claimed a slight recovery in some sectors this year, if the proposals are enacted then no property investment will be safe, prime or non-prime, Dublin or provincial.

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With NAMA managing €4bn of loans backed by property in Northern Ireland, the performance of the differing property sectors is of some interest. The NAMA Long Term Economic Valuation Regulation does not refer to any separate price series for the six counties, though the Halifax and Nationwide Building Societies do periodically refer to the UK-regional performance of property, including in the North. The Nationwide reported that for full year 2010 prices in the North dropped an average of 8.9%.

This average drop reported by the Nationwide for last year in the North is supported by the 7.7% annual decline reported in the latest University of Ulster/Bank of Ireland quarterly house price series published this morning in respect of quarter four of 2010. It’s worth referring to this price series because it analyses the local market in Northern Ireland by region and property type in far more detail than the Halifax or Nationwide.

The report analyses prices by property type and region. There is a mixed picture with terraced property dropping 21% year-on-year and apartments increasing by 7%. And amongst the regions in the North, Mid Ulster declined by 25% whilst Belfast is down by just 4%. Transactions are decreasing with only 684 transactions examined in the report for Q4, 2010 compared with 795 for Q3, 2010. Prices increased 0.1% between Q3 and Q4, 2010 but are down 40% from peak (45% according to the Nationwide).

The average price of a house across the North is now GBP £149,795 (€178,870), whilst in Belfast it’s GBP £157,766 (€188,388). By comparison, in the Republic according the Permanent TSB/ESRI house price series for quarter four, 2010 the average price nationally for the 26 counties was €174,570. In Dublin the PTSB/ESRI average was €237,480.

The outlook for residential property prices in the North is mixed. Budgetary cuts imposed by Westminster, increases in VAT, likely base rate increases by the UK’s Bank of England to combat inflation that is now above 4% and deleveraging by banks reducing mortgage availability will all act to press prices downwards. On the other hand, with prices some 40-45% off peak, the North seriously pursuing a low corporation tax environment and being more competitive (labour, property, etc) than the Republic with less red tape, the economy may see a recovery which might cascade down to the residential property sector.

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Or to put it another way, will it pay in cash or ordinary shares or a combination of the two? A brief and general recap:

(a) On 31st March, 2009 the National Pension Reserve Fund (Ireland’s rainy day fund) was directed by the Department of Finance to invest €3.5bn in Bank of Ireland (BoI) preference shares yielding 8% interest per annum.

(b) On 19th February, 2010 BoI announced that it was paying the preference share dividend in ordinary shares because the EU had forbidden it make dividend distributions in cash whilst in receipt of State-aid. That restriction is understood to have expired on 31st January, 2011 (“The Irish authorities commit that BOI will not make discretionary payments of coupons or exercise voluntary call options on hybrid capital securities from 1 February 2010 to 31 January 2011” – Para 133, EU Restructuring Decision July 2010). The distribution in ordinary shares on 22nd February, 2010 resulted in the NPRF acquiring a 15.7% interest in BoI’s ordinary shares.

(c) In May, 2010 the NPRF exchanged ~€1.7bn of its preference shares for ordinary shares in BoI as part of the bank’s attempt to raise new capital. Along with the ordinary-shares-in-lieu-of-cash dividend payment from Feb 2010, this brought the NPRF’s stake in BoI up to 36.5%. One of the terms of the exchange was that the interest payable on the remaining preference shares would increase from 8% to 10.25%.

(d) Just before Christmas, BoI went along to Ireland’s High Court to get special permission to make future dividend payments from certain capital reserves. The Court granted permission.

(e) BoI’s shares are trading this morning at €0.38. The average for the past 30 days is €0.36 approximately.

So in the next couple of days, the NPRF is due a dividend of some €214m (roughly three months of €3.5bn at 8% and nine months of ~€1.8bn at 10.25%). If the dividend is paid under BoI Bye-Law 6 (I)(4) in ordinary shares at €0.36, the NPRF’s shareholding will increase from 36.5% to ~47%.

The recapitalisation of BoI required under the IMF/EU bailout with a target date of 28th February, 2011 has been abandoned and is unlikely to take place before the results of the ongoing stress tests/PLAR/PCAR reviews are concluded and analysed by the new government.

So how will BoI deal with this preference share dividend?

As it’s Friday, I’ll leave you with exclusive footage of NPRF employees in training to perfect their technique for obtaining payment from BoI.

UPDATE: 18th February, 2011. BoI has just issued a statement to the stock exchange stating that €214.5m will be paid in cash to the NPRF next Monday, 21st February. The bank has also issued unaudited accounts for the 12 months ending 31st December 2010 and have stated that deposits have reduced and the average NAMA discount has been 44% (though that may decrease once €0.9bn of additional NAMA-eligible loans (€300m for Paddy McKillen I guess and €600m for other objectors, I’m guessing). There will be some €4.1bn of sub-€20m loan exposures to be transferred once the NAMA (Amendment) Bill is enacted. The subordinated debt that comprises 5% of the consideration that NAMA has been paying the banks will not earn BoI any interest on 1st March, 2011 which indicates that

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