Archive for February 25th, 2011

A very Irish auction (Part 2 of 2)

This is the second part of an entry which examines the sale of Anglo Irish Bank (“Anglo”) and Irish Nationwide Building Society’s (INBS) deposit books. Part 1 examines the background and much of the reporting of yesterday’s announcements of the conclusion of the sale. This entry examines a few puzzles:

(1) Why has Anglo remained silent on the €1bn profit it made on the transaction? Anglo did indeed make a profit of c€1bn on the sale because it had made a provision of ~9% against the value of NAMA bonds (I’m NOT talking about the subordinated NAMA bonds which comprise 5% of NAMA consideration for loans and will only be honoured if NAMA breaks even). The fact that Anglo had made a ~9% provision is captured in the accounts for six months ending 30th June 2010 and also its preliminary announcement of full year 2010 results two weeks ago. AIB value the €12.2bn of NAMA bonds that it bought yesterday to accompany the Anglo deposits at €12bn (that is with a 1.5% discount). Therefore Anglo made a book profit of €915m (~9% – 1.5% * €12.2bn). If any other company in the world made a €1bn profit on a transaction they’d be yelling it from the rooftops but there hasn’t been a mig from Anglo and the matter is ignored totally in the Anglo press statement.

Now it is a fact that AIB and Bank of Ireland made 1.5% provisions against the nominal value of the NAMA bonds they had received for their loans that were acquired by NAMA. The reason for the 1.5% is that the NAMA bonds can be exchanged at the ECB for cash at a 1.5% discount. It is not clear why Anglo made a ~9% provision but that bank seems to have used the yield on the Irish 10-year bond to discount the bond and has asserted that a ~9% discount reflects the open market value of the bonds.

(2) Where did AIB get €3.5bn in cash to buy Anglo’s deposits and NAMA bonds? Lorcan Roche Kelly has produced an explanation based on information from “reliable sources” which basically asserts AIB did not have the cash but that they obtained an advance from the central bank system to pay for the Anglo deposits/bonds and will now use the bonds to repay the advance. AIB has not announced any significant funds raising exercise recently.

(3) Was there really an auction? I realise this may sound as paranoid as doubting the moon landings in 1969 but consider the following

(a) The press releases from the NTMA, Central Bank of Ireland, Department of Finance, Anglo, AIB, ILP or INBS make no reference whatsoever to the term “auction”
(b) AIB says that it paid €3.5bn for Anglo’s deposits and NAMA bonds. That looks like an exact €3.5bn because elsewhere in the press release it refers to numbers as “c” for circa, for example it says that c €5.2bn of deposits related to Ireland. There is no “c” preceding the €3.5bn consideration. Which implies to me that AIB bid an exact €3.5bn, that is €3,500,000,000. What sort of auction deals in increments of €100m or €500m?
(c) The NTMA announcement says that there was “interest” from domestic and international banks.  Elsewhere it is reported that eight banks were involved in a “bidding war” but the source for the “eight” is not given. Now “interest” and “involvement” might have been restricted to replying to the letters sent out to all deposit taking financial institutions operating in the State at the start of February, 2011. Any “interested” financial institution then had to sign a confidentiality agreement and it is unclear how many did. And it is unclear how many bids were generated during the sale process.

(4) Why was it so important that this sale be completed on the very last day of the outgoing administration’s hold on the levers of power (notwithstanding the fact that Fianna Fail could theoretically be returned to government after today’s election)? Laura Noonan muses in the Irish Independent today “announcing AIB as a winner also sends a very clear signal that the Government sees AIB as a continuing institution” and “it’s hard not to wonder if the outcome wouldn’t have been different if Enda “we must save Bank of Ireland” Kenny was already running the country” though she concludes her musings by wondering if yesterday’s sales were the simple result of AIB and ILP submitting the best bids. Just over two weeks ago, Minister for Finance Brian Lenihan announced that he was abandoning the recapitalization of the banks agreed with the IMF/EU with a deadline of 28th February because he didn’t believe he had a mandate. And he threw down the challenge to Fine Gael and Labour that if they wanted the recapitalizations now they could write to him to that effect. Which they didn’t. Yesterday’s proceedings were orchestrated from first to last by the Minister of Finance whose signature is on the application to the High Court pursuant to the Credit Institutions Stabilisation Act 2010. Why not leave the transaction to the incoming administration? After all €3.6bn of assets were sold yesterday to ILP which is a private-sector company. And although AIB is effectively 90%+ owned by the State it still has a substantial private sector shareholding. Why did the absence of a mandate not prick Minister Lenihan’s conscience yesterday?

(5) Why does ILP need 297 staff from INBS to manage €3.6bn of deposits whereas AIB only needs 210 staff from Anglo to manage €8.6bn of deposits? ILP is taking on 160,000 deposit holders (average of €22,500 per depositor) and AIB is taking on 120,000 deposit holders (average of  €71,667), so the answer might be that staff requirements are a function of the number of depositors rather than the value though AIB took on the entire staff of Anglo Irish Bank Corporation (International) PLC.

I realize all of the above might attract suspicion of shenanigans and so to be clear I should say that there is no evidence of shenanigans (private benefit, political advantage). That said, the puzzles above remain. And if anyone from the mainstream media is talking with AIB or ILP, it would be nice if they asked what the revised loan to deposit ratios are for those two institutions – back of the envelope calculations on here are that ILP will now be 207% and AIB 135% but these calculations are based on financial reporting that is now several months old.

UPDATE: 25th February, 2011. Anglo has issued another release on yesterday’s transaction “Following the announcement yesterday afternoon that the Minister for Finance issued a Transfer Order under the Credit Institutions (Stabilisation) Act 2010, Anglo Irish Bank Corporation Limited (the “Bank”) is providing further clarity around transaction details. The Transfer Order instructs the Bank to sell its senior NAMA bonds with a nominal value of €12.2 billion at a price of 98.5% to Allied Irish Banks p.l.c. (“AIB”), together with its deposits.  The Bank will pay €1.6 billion in excess of the book value of the deposits in Ireland and the UK. In addition, the Bank will sell the shares of its Isle of Man subsidiary to AIB at net asset value.  The expected net effect (before tax) for the Bank will be a loss of approximately €0.2 billion.” It is unclear how Anglo can have a net loss of €0.2bn on this transaction given the fact that in its previous financial reporting it indicated that it had written off ~9% from the value of NAMA bonds and the transaction yesterday valued the bonds at 98.5%. No doubt there is more to follow…


Read Full Post »