Sale by auction is regarded as being a relatively transparent way to sell property particularly if there is no reserve. It is true that the auctioning business has given us terms like “shill” and “bid shielding” which remind us that perfect transparency might be unattainable but auctions still enjoy relative confidence. An auction can also maximise a sale price as buyers can bid and re-bid to secure the property, and potential buyers can see what other bidders are bidding. On the other hand, you need to be a savvy buyer to bid at auctions because bids are final and any defect in the property needs be considered before making a bid. All in all though, auctions are a decent way to sell property generally when seeking to get the best price and demonstrate transparency.
And right now, the State is auctioning off a reported €14bn of deposits at Anglo Irish Bank (“Anglo”) and Irish Nationwide Building Society (INBS). The auction is being conducted by the National Treasury Management Agency on the basis of directions obtained in Dublin’s High Court on 8th February, 2011 (accessible here and here). Those directions were obtained pursuant to the provisions of the newly enacted Credit Institutions (Stabilisation) Act, a controversial piece of legislation rushed through the Oireachtas just before Christmas. The Act has been criticised for being draconian and undemocratic and grants colossal and unprecedented powers to the government in relation to the private sector (though the main focus of the Act is the banking sector). The Act, for example, allows for court hearings to be held in private and for reporting to be forbidden.
Before Christmas in an application concerning AIB, it was only at the last moment that journalists at the Irish Times learned that there was to be a hearing and legged it over to the High Court just in time to catch the government’s legal team entering the court to seek directions in relation to AIB. The government demanded the exclusion of the journalists and others, and its demand was acquiesced to, and the hearing was subsequently held in camera. The February High Court hearing saw lawyers on behalf of the Irish Times and RTE turn up to press their rights to report the hearing and the hearing was heard in open court. Few details were given though as to how the government was to going to sell an important chunk of property in 100% State-owned financial institutions. It emerged that bidders had to sign confidentiality agreements before being admitted to the auction.
In today’s Irish Independent, we get some details of the still-not-concluded auction. Bidders, we are told, include Irish Life and Permanent, AIB, Bank of Ireland and EBS. We get to hear some of the detail of the auction which appears far from straightforward as bidders are expected to submit bids in a matrix format, that is, a value of the bid, a percentage of deposits bid for and securities nominated to accompany the deposits (which of course are liabilities as they represent money owing by the banks to depositors).
The auction is likely to be concluded later this week according to the paper, all the while citing “sources”. The London Times (subscription required, reporting of article here) reported yesterday, citing “insiders”, that the auction was making good progress and that international banks were involved. There has been no further news from the US District Court for the Southern District of New York regarding a potential fly in the ointment, Fir Tree’s application against Anglo.
Although the headline value of this sale is €14bn, the reality is that €14bn of liabilities are being sold together with €14bn of assets (probably NAMA bonds) so bidding is likely to be for a fraction of €14bn – remember Santander bought Bradford and Bingley’s GBP £21bn deposit book for GBP £150m back in 2008.
A concern held on here is that the auction is being conducted very quickly. According to the Independent again, it was only in the week before the application at the High Court on 8th February that potential bidders had been invited to participate in the auction on condition that they signed confidentiality agreements by 7th February, 2011. It seems that an electronic trading room was set up by the NTMA to facilitate the auction which is being held in private despite the leaks. Has the speed with which this auction has been conducted effectively excluded potential bidders and does the privacy of the auction where the process can’t be observed mean that public confidence suffers? I am reminded of the auction of the 3G spectrum in the UK in 2000 where some GBP £22.47bn (€ 26.5bn) was generated from the sale under the watchful eyes of TV cameras. All transparent and everyone seemed happy. Why the privacy and confidentiality in the sale of (our) deposit books? And if there is to be confidentiality how is it that certain media outlets can report details citing “sources”?
So will this auction yield the maximum price for the State’s assets? Difficult to say but you might question why the auction had to take place so quickly. And the next time the Department of Finance darkens the doors at the Four Courts and seeks hearings in camera or redacted orders, the judge might reasonably ask the government’s representatives if such secrecy makes a mockery of the judicial system if details are to emerge in the press shortly after.
UPDATE (1): 24th February, 2011. The Irish Times is reporting that the Minister for Finance has secured orders in the High Court today pursuant to the draconian terms of the Credit Institutions Stabilisation Act 2010 to transfer €9bn of deposits from Anglo to AIB and €4bn of deposits from INBS to Irish Life and Permanent. This news is just now breaking having been subject to yet more reporting restrictions and news blackout. The IT say that the transfers are being executed as a result of the direction orders sought on 8th February, 2011. Having re-read the IT article a couple of times I am still confused if this means that AIB and ILP won the auction or if this is an intermediate move before the deposits are ultimately sold. There is no information on the accompanying assets (thought to be NAMA bonds). No doubt there will be further clarification this evening of what has happened today. UPDATE (2): 24th February, 2011. RTE is reporting that the transfers are the results of AIB/ILP winning the auction though it is being described as a “tender”. RTE report that ILP paid €2.3m for €4bn of INBS’s deposits (remember the deposits were to be transferred with accompanying assets which would have made the net value nil so don’t be surprised that ILP are paying just 0.05% of the book value of the deposits) . There is no mention from RTE of any accompanying assets. UPDATE (3): 24th February, 2011. AIB has just issued a press release in which it says that it acquired €8.6bn of deposits from Anglo – split €5.2bn Ireland, €1.9bn UK and €1.5bn in the Isle of Man), €12.2bn of NAMA bonds (worth €12bn with a 1.5% haircut) and AIB paid €3.5bn for all of this which has a net value of €3.4-3.5bn. UPDATE (4): 24th February, 2011. Reporter Sean Phelan on RTE has just said on the Six-One news programme that ILP bought €3.6bn of INBS’s deposits and received €3.7bn in NAMA bonds (unclear if that is the face value of the bonds or the repoable value at the ECB which is 1.5% less). There is no press release yet from ILP. UPDATE (5): 24th February, 2011. The Department of Finance issues a press statement on the transfers which doesn’t add very much to the details above and indeed there is precious little information given on the auction. UPDATE (6): 24th February, 2011. The Central Bank of Ireland has issued a statement which notes the transfers. No new information, though it is peculiar that none of the releases is making reference to an auction. UPDATE (7): 24th February, 2011. Anglo has issued a statement remarkably devoid of detail which is very interesting as this transaction should have reflected nearly €1bn profit for Anglo. Why? Because Anglo had been discounting its NAMA bonds by ~9% (not 1.5%) and it seems therefore that Anglo made a profit of 9-1.5%*12.2bn = €915m.
UPDATE: 25th February, 2011. The Independent today carries a story with a couple of new details on the sale of the deposits. In what it describes as a “bidding war” it says that there were eight bidders, including AIB and ILP and also named are BoI and EBS. The Independent claims that AIB’s reliance on the ECB for funding “is expected to decline almost immediately” though that seems to ignore the likelihood of AIB repoing NAMA bonds at the ECB. I calculate that the effect of the deposit transfer on ILP will be to reduce its loan to deposit ratio from 257% to 207%. This is based on the ILP accounts to 30th June 2010 (which show deposits at €14.939bn and loans of €38.292bn) and their Interim Management Statement in November 2010 which indicated deposits rose by a net average €150m and assumes loans have remained at their June 2010 levels and the addition yesterday of €3.6bn of loans. In respect of AIB, I calculate that its loan to deposit ratio has decreased from 130% in June 2010 to the 159% reported for Q3, 2010 to 135% now. This is based on the accounts for six months ended June 2010 which show deposits at €59.83bn and loans of €77.608bn, the Interim Management Statement in November 2010 which said that excluding Bank Zachodni which is being sold to Santander, the loan to deposit ratio was 159% and assumes loans have remained at €77.608bn and the loan to deposit rate didn’t change between Q3 and yesterday (big assumption) UPDATE: 25th February, 2011. The NTMA has issued a press release in which it says it is pleased to have attracted “domestic and international interest” in the sale of the deposits though it is unclear if international banks’ interest was restricted to registering for the auction or if they actually bid. The NTMA say that 237 staff will transfer from INBS to ILP and 210 from Anglo to AIB. It is not clear why it takes 237 staff to manage €3.6bn of deposits and just 210 to manage 120,000 accounts with €8.6bn but those are the numbers. Elsewhere Lorcan Roche Kelly explores the mystery of the source of AIB’s €3.5bn in cash used to buy the €12bn of Anglo NAMA bonds and €8.6bn of deposits and suggests that the €3.5bn might be a circular loan involving the Central Bank of Ireland, the ECB, Anglo and AIB. Lastly the Irish Life and Permanent has issued a press statement which doesn’t really add anything to the existing mix.
Hi NWL, You wrote:
“Although the headline value of this sale is €14bn, the reality is that €14bn of liabilities are being sold together with €14bn of assets…”
I’m a little confused by the liability side of this equation. What exactly are the liabilities being sold?
Hi WSTT, if you look at the transaction from a bank’s point of view. They have customer deposit accounts which are liabilities for the bank in the sense that the customers are creditors, that is, the customer has given the bank a deposit which the bank must pay back. On the other side of the balance sheet, banks will have cash to offset the liability. At least they do when the customer initially makes his deposit, but then banks lend that cash out as loans, so the loan the bank gives is its new asset.
And banks have sold the loans which are assets to the bank, to NAMA and in return NAMA has given the banks NAMA bonds. And press reporting suggests that it is these NAMA bonds that the banks’ are auctioning with the deposit books. So in summary, from the bank’s point of view, deposit books are liabilities and NAMA bonds are assets and the likelihood is that Anglo/INBS will sell €14bn of deposit books and €14bn of NAMA bonds.
In the normal course of events if someone was selling you an asset AND a liability both worth the same amount, you wouldn’t pay anything. But because some bidders might be able to use the NAMA bonds to generate more than say 3% per annum then they can see that they will make a profit (if they are only paying the depositors 3%). Or banks who have reduced loan to deposit ratio targets might also see value in buying the deposits.
Surely though, the NAMA bonds are discounted and worth less than the deposits?
A €100 NAMA bond can apparently be exchanged for €98.50 cash at the ECB. And it is at €98.50 that AIB and BoI have booked the value of NAMA bonds. So in that sense there is a discount which the banks would need make up. You raise an interesting point though because Anglo has discounted the bonds by ~9% which reflects what Anglo thinks the bonds are worth on the open market. It is not clear to me why NAMA has done this as surely Anglo can still repo at the ECB. As I recall Anglo specifically refused to provide more information on its discounts.
I suppose the key point though is that the NAMA bonds have been discounted and Anglo certainly has more than €10bn at net book value, that is after the ~9% discount, of the blighters. I believe INBS has more than €4bn also at net book value. And it is these NAMA bonds that are reportedly the assets to accompany the deposit book liabilities.
Indeed, rather than setting a price for deposits, what the auction is finally going to do is set a market price for bank assets. How much book value will accompany the 14 bn of deposits? Given the relatively small impairments that Irish banks (even the nationalised ones) have reported on their non-NAMA assets and the ludicrous valuations on the NAMA bonds (how long will they be worth 98.5%? How long will they remain eligible collateral for ECB repo?), one could be forgiven for thinking that close to 20bn in book value assets will be required.
Hi Yogan, Rob S and WSTT,
Regarding the NAMA bonds, excellent questions WSTT and the mystery of Anglo’s (and maybe INBS’s who haven’t produced financial statements since the ones for year ended 31/12/2009) treatment of NAMA Bonds remains – it was examined in some detail on a previous entry (link below) and records what Peter Mathews (FG candidate for Dublin South, two below the cut in this 5 seater constituency according to Paddy Power this morning but still in the race – http://www.paddypower.com/bet/politics/other-politics/irish-government?ev_oc_grp_ids=398451&AFF_ID=92728) said in the Dail. Personally I did not understand why Anglo chose the Irish 10-year bond rate to discount the value of NAMA bonds whereas AIB and BoI chose 1.5%.
https://namawinelake.wordpress.com/2010/09/10/are-nama-bonds-becoming-toxic-why-is-anglo-discounting-their-value-by-9/
As regards roll-over, according to the NAMA bonds termsheet (available here http://www.nama.ie/Publications/2010/SeniorNotesTermsheet.pdf ) “Notes will be issued on each acquisition date and on each maturity date if the Issuer elects to physically settle existing Notes with new Notes. Any such new Notes will be issued on the same terms as existing Notes (other as to maturity which may be up to 364 days from the date of issue notwithstanding that the existing Note may have had a shorter maturity).”
Of course it is not clear what assets Anglo & INBS will transfer with the €14bn deposits book liability and they may sell non-NAMA loans, provide cash, a branch or two, bonds held by Anglo/INBS in other banks. But yes we should get clarity on values.
And Rob S, yes Irish banks are screaming out for anything that will reduce the loan to deposit rates from an average of 160% now to about 100% in 2013 which is an IMF target. IL&P has the highest loan to deposit ratio of 240%.
Why would NAMA bonds trade on the market for less than they can be exchanged for at the ECB? Would that not set up an unbelievable arbitrage?
P.S. Are the bonds cashable at any time or have they specific dates?
They are rolled over every six months (every year?). It is not clear who gets to call that, but I believe it is NAMA.
PPS. “Scuse the ignorance. This is not my area at all. I’d ask Peter Mathews only he’s busy trying to become a politician :-)
I wonder, surely we want these desposits to go to a domestic institution for deposit ratio/funding purposes but how do you ensure this is the case of the auction is open to EVERY credit institution regulated in Ireland by the CB?
Only irish insititutions would want to bid for these deposits becuase as pointed out above the assets accompanying them will probably largely be Nama bonds. No foreign bidder would want to take on more irish exsposure provided by these bonds. Even the repo with ECB is risky as the foreign bank is on the hook if the value of the collateral (ie Namam bonds) deteriorates
@yogan
“Rolled over” or capable of encashment?
Per NWL’s link to the termsheet it is settled by the issuer (NAMA) either with new notes or cash at their discretion annually.
Anglo’s move makes sense in treating them as the longest duration Irish sovereign debt, since, in effect, that is what they are.
[…] […]
@Scampers
Maybe so.
Rumours are that there were 8 interested parties (whether this meant 8 bids or not..) and some of these were supposedly international.
[…] su AIB, un articolo in due parti che fa un po' di dietrologia… A very Irish auction (Part 1 of 2) NAMA Wine Lake A very Irish auction (Part 2 of 2) NAMA Wine […]