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)
Nothing bad I’d wager. The Irish Times reports that Nama are to have €1bn cash after repaying senior bonds ahead of schedule.
What are your comments on the essential conflict between these two stories?
Remember September 2008 when there was some debate about the problems with the banks. Were they experiencing a liquidity problem (a temporary shortage of cash) or an insolvency problem (their assets were worth less than their liabilities)?
In the end it was both. The banks loans were worth less than the deposits/”bonds” and the banks had run out of cash because the money markets had seized up.
So how is this relevant to NAMA? Well, NAMA is insolvent. Its assets (developer loans) are worth some €2bn less than its liabilities (NAMA bonds/subordinated debt). Why? Because property prices have dropped since November 2009 and NAMA paid an average 10% “long term economic value” premium. But NAMA is not suffering a liquidity problem. It/NAMA developers have sold property/loans and NAMA is awash with cash because it doesn’t have to repay the NAMA bonds until 2020 although it did announce yesterday that it would repay €250m in “the coming weeks”.
NAMA is like a Buy-to-Let investor buying a house for €250,000 with a 100% mortgage. The investor rents it out at €1,000 per month and pays €650 a month to the bank on his interest only mortgage, The house drops in value to €200,000. Now the investor is netting €350 per month so he has lots of cash in his pocket. Thing is that at some point he will need repay the capital or sell the house and that’s when his problems start.
NAMA’s problems will take a few years to kick in.
Does the fact that BOI (unconsolidated and unaudited) accounts show a net increase in shareholders equity of some Eur2.349bn for the 2010 year not deserve a teensy weensy mention as being rather good news, for a change. Of this some Eur1.4bn is distributable, hence the ability to fund the pref dividend payment to NPRF.
On the other hand, the imminent need for capital suggests that the NPRF will probably have to stump up a major injection in the next couple of months, unless a miracle happens.
Hi Michael, as BoI is now seemingly central to the future of the banking sector in the State, there will be an extensive entry on here over the next day covering the financial statements published yesterday. Meantime, you might have missed the good news for Anglo examined on here (and practically nowhere else as far as I can see) earlier this week – https://namawinelake.wordpress.com/2011/02/15/a-little-good-news-from-anglo/
Hi Michael, I’m not sure you can read a lot into the capital position of BoI. As you say the equity rose by €2.349bn from €3.865bn to €6.214bn. This increase mostly comprises
(1) Stock issued in May 2010 (nominal of €238m and premium of €1,409m, total €1,647m)
(2) Profit of €1,176m for the year
On the face of it a profit of €1,176m would be fantastic news, except I think there were profits of c€1bn on the redemption of senior and junior debt. There are some who suggest that junior debt should be 100% haircut and senior debt should burden share. So if BoI redeemed €14bn of senior debt and nearly €3bn of junior debt there should have been a far bigger profit.
If any good news in the BoI announcement, teensy or titanic, has been omitted please feel free to remedy the omission.
Peter Bacon (Architect of the Nama disaster) on Marion Finucane show on Sunday morning made some incredible remarks about why he advised the Government that all performing assets and non performing assets were lumped together in Nama. He said that after speaking to three property experts in London (??) the view was that the performing assets were worthless. He also stated that Nama has not worked and it has not created liquidity in the market. Is it not odd that he would equate a office building in Dublin with a one million rent roll, paying interest and capital with a field in Carlow with planning permission for two hundred house paying no interest or capital. He has shown incredible ignorance
today and should never be allowed to advise any Government ever again. God help us all !
Hi NAMAJew, I caught the first hour of the MF show on RTE – I don’t think the podcast is yet available, should be later today (EDIT: Available now here – from 32:20 in http://www.rte.ie/radio1/marianfinucane/). I understood him to mean that both investment and development loans, performing and non-performing should have been placed in NAMA because the impression in the market was that they were all toxic. And NAMA was principally about improving the financial perception of banks by exchanging a doubtful class of lending with nice crisp NAMA notes. I think he said that if NAMA only removed the loan on the field in Carlow (to use your terms) and left the prime property in Dublin and told the market that the banks now had only good loans, the market wouldn’t believe you. And that’s why both performing and non-performing loans were acquired.
Yes I heard him say he had advice from three professionals (I thought in Dublin but the podcast will confirm) who now are close to NAMA (I took that to include John Mulcahy but Peter didn’t reveal identities). He also said that even if the haircuts were 100% then NAMA would still have been a good idea.
EDIT: What Peter Bacon said was that he consulted with “no more than four people” in Dublin who are now “closely associated with the NAMA project”
NWL I will listen to the podcast to verify PB comments. It’s obvious that Nama should have taken all non performing loans with a 100% haircut and left the performing loans with the Banks. We have now ended up in a situation where the performing assets are still dropping in value, a banking system that is in deep trouble and no liquidity in the market. I wonder would Mr. Bacon and his three wise men have made different decisions with hindsight?
Whilst the interst in the Sub Bond can be held for performance reasons, can the same be said for the repayment of the face value of the bond in 2020?
Hi Rob, I have not seen the full terms of the subordinated bonds but on numerous occasions, it has been said especially by Minister Lenihan that should NAMA make a loss at the end of its life, then the subordinated bonds will not be honoured. You might recall the NAMA Business Plan from June 2010 where there were three Net Present Value scenarios for NAMA – a €0.8bn loss, a €1bn profit and a €3.8bn profit. The reason for the lack of symmetry around the central scenario was that if NAMA made a loss then the subordinated bonds would be cancelled and not honoured.
The term sheets for the bonds are here but they do not explain in any detail the conditions for honouring the bonds.
http://www.nama.ie/NAMABonds.php