Archive for February, 2011

“It [NAMA] already did a very good deal last week with Google, we saw the kind of deals it can do here….The cash is already gone back to government and a dividend gone back”

Micheal Martin, Leaders Debate, RTE 22nd February, 2011

It was last week when NAMA made an unscheduled announcement with some details of current events. It’s always welcome to get news on how the agency is performing though it would be better to get the quarter three, 2010 report and accounts which have now been sitting on Minister for Finance, Brian Lenihan’s desk for the past 54 days. Included in the announcement last week from NAMA was news of the sale of the Montevetro building on Barrow Street in central Dublin to internet search engine giant Google. This is what NAMA had to say in respect of the transaction:

“Noting the announcement earlier today by Google of its purchase of the 15 storey Montevetro development on Barrow Street in Dublin, NAMA confirms that it has recovered in excess of the combined amount of [1] the monies it paid to acquire the REO plc loan which was secured by the Montevetro development and [2] the additional funding advanced to REO plc in the form of development working capital to enable it to complete this landmark building so that it could be sold on the market.

Working with CIE, the State’s transport holding company, and REO, NAMA provided extensive resources, including working capital and expertise, to ensure the development was completed on time and to a high specification. Frank Daly, Chairman of NAMA said; “the successful completion of the Montevetro development and its sale again reflect the positive potential of NAMA to support the commercial property market in Ireland without compromising its objective of recovering monies owed to the taxpayer. NAMA played an intrinsic part in brokering the deal between purchaser and seller and in putting this deal  together. It is an excellent example of NAMA’s ability to enhance the value of its assets for the benefit of taxpayers.

I believe the sale of a building of the size of 210,000 sq feet will be seen as a very positive sign for the future of the Irish Commercial property market. I also believe that having such an internationally renowned purchaser demonstrates continuing confidence in Ireland and particularly in our attractiveness to major global businesses.”

The sale of Montevetro was regarded as a first but I don’t think that is the case. There were some €1.6bn of disposals under NAMA’s auspices last year and this sale of Montevetro was yet another sale by the developer under NAMA’s auspices. NAMA may feel that it played a greater role in this sale than others but, on the face of it, there is nothing original about this sale.

The building: a 210,000 sq ft, 15-storey with three additional basement levels office building on Barrow Street in the Grand Canal Dock area of Dublin 2 (central Dublin). Architecturally it’s more lines than curves and occupies a broadly triangular footprint.  At 67 metres, it is Dublin’s tallest commercial building. The tallest building in Ireland is the Cork’s 71-metre Elysian Tower which is mixed residential/commercial.

Its history: The application (ref: DD385) for a certificate under section 25 of the Dublin Docklands Development Authority Act 1997 was submitted to Dublin Docklands Development Authority in August 2006 by Montevetro Limited and the certificate was awarded in October 2006 subject to certain conditions. According to Treasury development commenced in March 2008 and completed in January 2011 (according to the Docklands Authority, development had already commenced in 2007)

The sellers: The developer of the property was Montevetro Limited, a company in the Real Estates Opportunities (REO) group which in turn is controlled by Treasury Holdings. The land was owned by CIE (state owned transport company) and it is understood CIE retained an interest in the site and has benefited from the sale to Google. It is also understood that NAMA Top 10 developer, Derek Quinlan had an interest in the development, possibly 30%. The loan underpinning the building was acquired by NAMA in April/May 2010 and since that time, NAMA has had a degree of control over the property through its ownership of the loan.

The underlying loan: Details of the loan have not been disclosed but we might be able to make an informed stab at the value of the loan. If the application for the development was made in 2006, which was close to the peak for commercial property prices in quarter three of 2007, and if the loan was advanced back then, then it seems that the completed development would have been valued in excess of €150m. This is based on the separate reported development by Ashdew Limited (a joint venture between Bernard McNamara and Jerry O’Reilly) beside the DART station on Barrow Street where the 100,000 sq ft development was valued at €70m in 2002. Rents for prime office space in Dublin had reached and exceeded €60 psf at the height of the boom which would have equated to a €180m price tag at a 7% yield. Standard loan to value (LTV) rates were 70%+ so a €150m valued property would have been capable of attracting a loan of €105m. Interest payable would typically have been the ECB rate plus 2%. If it had been rolled up, which was a common feature of property development, then the nominal value of the loan securing the property might well be in excess of €120m today. Because we don’t know the loan terms, we do not know if the loan was non-recourse, that is, secured on the Montevetro site only without recourse to other assets owned by the borrower. We also don’t know if a special purpose vehicle (SPV) was used to obtain the loan – the significance of a SPV is that its liabilities tend to be ringfenced to assets owned by that particular SPV. Of course it may be the case that the loan is secured on other Treasury/Derek Quinlan assets/companies or by personal guarantees – we don’t know because NAMA didn’t provide details.

The sale price: €99.9m in cash. Equates to €476 psf. It is understood that part of these proceeds will be handed over to CIE, the original owner of the site.

NAMA’s purchase price and development costs: Not disclosed. NAMA Chairman Frank Daly did say that NAMA’s purchase price and additional development costs were less than the sale price. And on that basis, NAMA claimed a profit from the sale. The purchase price of the loan should have reflected the value of the Montevetro development on 30th November 2009 (NAMA’s valuation date). In addition NAMA paid the banks a Long Term Economic Value premium which has averaged 10% for the first two tranches acquired by the agency in 2010.

The good news: In my opinion the price achieved by Treasury under the auspices of NAMA in the current marketplace is outstanding. And NAMA also did very well to generate a profit on the transaction despite firstly, commercial property values dropping 10%+ since November 2009 and secondly, NAMA paying a long term economic value premium.  With a paucity of large transactions of similar buildings recently it is difficult to ascribe values but I note that the Department of Transport bought a more traditionally prestigious, though internally dated, building for €283 psf this month 500 metres away on Clare Street. Furthermore it is my opinion that the outlook for commercial prices is challenging for the next two years with a general oversupply, a difficult economy and the prospect of retrospective downward rent reviews. The sale to Google, one of the world’s great companies is most welcome to the economy now, both for the vote of confidence in the country’s future and for giving us one of the few major commercial transactions we are likely to see in 2010/2011. And our reputation as a technological hub for non-EU companies will be enhanced so in the years to come, we may well attract the EU operations of baidu , yandex or guriji.

The bad news: The sale of the building to Google is likely to have resulted in a loss to the taxpayer because the nominal value of the loan is likely to be more than the €99.9m sale price achieved by NAMA. The State owns 100% of Anglo, INBS, EBS and effectively owns nearly 95% of AIB. The State owns 36.5% of Bank of Ireland and were it not for the Minister for Finance concluding that he didn’t have the mandate to fulfil Ireland’s commitment to the IMF/EU, then by next Monday 28th February, we would likely have majority control of BoI as well. So the loss incurred by the banks is in fact a loss to the taxpayer. Because we don’t have details of the price paid by NAMA for the loan, NAMA’s development outlay or the nominal value of the loan we are not able to conclude that there was a loss or the quantum of the loss but we can arrive at an educated proposition. NAMA may care to comment if the proposition is invalid.

No news: it is not clear why NAMA sold the property at this time and didn’t wait for a recovery in prices. Given that the IMF was urging the agency to dispose of assets sooner rather than later and with rumours of an IMF staff member permanently occupying a desk in NAMA’s offices at Treasury Building, perhaps the final decision to sell was not NAMA’s to make…

UPDATE: 1st March, 2011. It seems that Simon Carswell at the Irish Times has been dabbling in the Black Arts as he is today seemingly able to bring us some inside details on the project. There was, he claims, an AIB loan of €30m advanced after April 2009 to REO/Treasury for the development. This was acquired by NAMA at a nil haircut because of a deal done between NAMA and the banks that post-April 2009 lending would not attract a haircut as otherwise banks would be reluctant to make the advances. It is not clear what pre-April 2009 lending had taken place. Simon claims that in total there was €40m of development lending on top of the €30m post-April 2009 from AIB. This €40m presumably includes the pre-April 2009 lending PLUS the additional advances made by NAMA to finish out the project. Whilst AIB and NAMA “declined to comment on the transaction” Simon also claims that the CIE obtained €21m from the deal (they apparently had a development deal with REO and CIE was the original owner of the land) – this echoes the claim made by Michelle Devane in the Sunday Business Post a couple of days ago. Simon concludes today with “the profit made by Nama is estimated to be less than €10 million, according to sources familiar with the finances behind the property”. It is noteworthy that at least 3/7ths of the lending was made after April 2009 when Montevetro was well advanced at that stage. Of course what we would all like to know is how much the taxpayer lost on the deal, but NAMA is not likely to reveal that voluntarily but who knows what the Black Arts might reveal.

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A very Irish auction (Part 1 of 2)

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.

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The Sunday Business Post yesterday reported that NAMA is to take a “significant” impairment charge in 2010 in respect of its loan acquisitions from Irish banks. The newspaper appears to have had some direct contact with NAMA and quotes the agency as saying “the view of the Board is that it would be run counter to its statutory objectives under the Act for Nama to take this impairment charge while paying the interest on the Nama subordinated debt.” The newspaper does not estimate the impairment charge but misleadingly says “a subsequent fall [from 30th November, 2009 – NAMA’s valuation date] of 8 to 10 per cent in commercial property values has meant that it will have to write down this value [the value of loans acquired]”.

It seems that some people have deduced that if NAMA is paying €30bn for loans then it will therefore have lost €2.4-3bn. It is more complicated than that and you need bear the following in mind when trying to estimate the losses at the agency for 2010.

(1) NAMA has taken over loans relating to both residential and commercial property. Some associated lending may relate to assorted securities eg wine collections, helicopters. The rough estimate on here from examining NAMA’s business plan and tranche detail information is that 80% of NAMA loans relates to commercial property and 20% to residential.
(2) NAMA has taken over loans secured on property in Ireland and in other territories. The security representing 66% of loans by value was supposed to be in Ireland, 5% in Northern Ireland and 21% in mainland UK (mostly thought to be London). The remaining ~8% is scattered around the world.
(3) We track on here the change from 30th November, 2009 in index prices for both commercial and residential property in Ireland and the UK. You can see a summary at the top of this page.
(4) The consideration given by NAMA in return for loans comprises senior bonds  and subordinated bonds, the former making up 95% of consideration and the latter 5%. The subordinated bonds will not be honoured if NAMA does not make a profit over its estimated 10-year lifespan.
(5) NAMA has paid a premium to banks on top of the market value of the property underpinning the loans, The premium is called Long Term Economic Value and on average has been 10% of the market value of the loans in tranches one and two.
(6) NAMA has acquired €71bn of loans to the end of December 2010 and paid a total of €30bn in consideration.
(7) If NAMA makes a loss overall at the end of its lifespan, then a levy can be imposed on the participating NAMA banks in proportion to the value of the loans they transferred to the agency. Given the condition of Anglo, INBS, EBS and AIB, this levy business is rubbish. And even Bank of  Ireland which will account for less than 15% of NAMA’s loans may not be in any position to pay any levy.

Taking account of all of the above, it is calculated on here that the value of the loans bought for €30bn will be €25.5bn but since €1.5bn of the consideration representing subordinated bonds will not be honoured if NAMA makes a loss, NAMA’s net impairment will be €3bn. The detail is below, you might also like to look at the entry on the NWL index

As it happens, the estimated net impairment.for 2010 at €3bn is close to the figure calculated by taking the (incorrect) SBP estimate of commercial property decline in Ireland and multiplying it by the NAMA consideration. That is co-incidence.

It should be said that NAMA is a 10-year project and the hope on NAMA’s part is that prices recover. Indeed NAMA just needs a blended average increase of 12% in prices to break even at a gross profit level. I think Ireland will be challenging for the next couple of years. After that we’re into true crystal ball territory but I would have said that if the economy is competently managed and we confront our debt then NAMA can still break even or indeed make a profit but it will be a challenge and I do not think the next two years will be pretty for the agency.

And to conclude it should be said that accounting rules may allow NAMA to avoid full revaluations of the loans in 2010 and I would be surprised if the Q3, 2010 accounts which are now very overdue will revalue the loans. It should also be said that the above calculations are based on general indices and don’t examine territories beyond the UK and Ireland. NAMA has taken over specific properties which may perform better or worse than the indices and NAMA has not published a reliable split of property outside of the UK and Ireland.

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Last week’s announcements by NAMA were interesting in that it is unusual for NAMA to give a general update outside of its report and accounts unless it is making a formal presentation, and even then there tends to be few details disclosed. Exceptionally, the NAMA Chairman did deliver a pre-Christmas message which gave a general update on progress at the agency on the same day RTE screened a sensational Prime Time programme on developers’ debts – the image of Gerry Gannon and the Missus stuffing the ample boot of the silver Range Rover with Brown Thomas bags will linger.

The announcements last week were curious though – NAMA oversaw a sale by Treasury unit, REO to Google. Big whoop, since according to NAMA it oversaw sales of €1.6bn in 2010. NAMA stated that the sale price achieved covered both the NAMA acquisition cost and additional development outlay. That was no mean achievement given commercial prices in Ireland are down 10%-plus since NAMA’s chosen valuation date, 30th November, 2009 and NAMA paid an average 10% long term economic value premium. But what NAMA didn’t disclose was whether the taxpayer made a loss because NAMA will have to write off part of the face value of the loan. Of course NAMA may seek to recover the shortfall from other Treasury lending, unless the loan was non-recourse or otherwise ring-fenced. But the sale was hardly spectacular in the context of €1.6bn of disposals in 2010.

The announcement that NAMA would repay €250m of NAMA bonds “in the coming weeks” was also curious. NAMA is awash with cash apparently with the claim that the agency will have €1bn cash on hand even after making redeeming €250m of bonds. You would have to ask why the NAMA business plan didn’t anticipate using the early recovery of loans to fund development. Indeed why would NAMA need the €5bn development pot legislated for in the NAMA Act if early repayments could be used for working capital/development advances. This looks to me like a gigantic cock-up in the creation of the business plan. Remember the draft Business Plan in 2009 – it didn’t even consider early repayment of NAMA bonds until 2014.

But it was the third part of the announcement, that NAMA would repay a €49m loan, that was regarded as the most intriguing here. NAMA said “the Board of NAMA has also authorised the repayment of €49 million to the Minister for Finance. The money was advanced to the Agency in March 2010 as a loan by the Minister for Finance and was used to inject ordinary equity into the special purpose vehicle, National Asset Management Agency Investment Limited. This repayment is also ahead of schedule.”

Indeed the repayment is “ahead of schedule” (about nine years ahead, because it was the NAMA seed capital was to be repaid to the State when NAMA was ultimately wound up). And what’s this “loan” business? Wasn’t the €49m an investment by the State in NAMA?

Yes it was an investment but was reclassified by the Department of Finance in the December 2010 Exchequer Statement. Let’s take a look at the history of the State investment in NAMA

(1) 16th October, 2009. Eurostat issues its “preliminary view” on the accounting treatment of NAMA bonds in the context of Ireland’s national debt and concludes that because the NAMA SPV is at arms length to the State with 51% private investment that NAMA bonds can remain off the national balance sheet – welcome news indeed for a State whose debt is teetering towards 100% of GDP. The “view” is based on NAMA being publicly owned and investing in 49% of the equity of the NAMA SPV in whose name the bonds are issued.

(2) 28th April, 2010. Minister for Finance, Brian Lenihan reveals the names of the private investors that own 51% of NAMA. They include a 17% shareholding each in the names of Allied Irish Banks Investment Managers, part of the AIB group and New Ireland Assurance, part of the Bank of Ireland group.

(3) 10th September, 2010. AIB agrees to sell its 70.5% holding in Polish bank Bank Zachodni WBK SA (“Zachodni”) to Spanish bank Banco Santander (“Santander”). The sale will be subject to shareholder and regulator approvals.

(4) 28th November, 2010. As part of the IMF/EU bailout, the Financial Regulator issues new capital requirements for Irish banks which includes a €9.765bn requirement for AIB to be fulfilled by end February, 2011.

(5) 23rd December, 2010. State effectively nationalises AIB with immediate control of 49% of the bank’s ordinary share capital and control over Convertible Non Voting (CNV) shares which would be converted to ordinary shares when AIB had completed its disposal of Zachodni to Santander. When the CNV shares are converted to ordinary shares, the State will then own 90%+ of AIB.

(6) December, 2010 – the Department of Finance reclassified the €49m as a loan and says “It was felt that it would be more appropriate that the monies advanced be classified as a loan to NAMA as opposed to share capital acquired as this share capital isn’t directly held by the Exchequer but held by NAMA.”

(7) 7th February, 2011. With the announcement by Santander that it was bidding for 100% of Zachodni, AIB issued a release to the effect that the sale of its interest in Zachodni would complete soon after 24th February, 2011

(8) NAMA announces the forthcoming repayment of the €49m loan to the central fund (Department of Finance)

(9) 19th February, 2011. Santander receives approval from Polish banking authorities (the Financial Supervisory Commission in Warsaw) for its purchase of AIB’s stake in Zachodni

And lastly any day now, we are expecting an announcement that the CNV shares in AIB have been converted to ordinary shares and that the State now owns 90%+ of AIB. And as AIB owns 17% of NAMA already presumably at that point we will have majority control of NAMA and the €30bn of State-guaranteed bonds issued by NAMA will come onto the national debt?

So back to the curious case of the €49m repayment. Is the repayment of the €49m at this point an attempt to ensure the €30bn of State-guaranteed bonds stay off the national balance sheet? And if NAMA is no longer using State funds to invest in the NAMA SPV then how exactly it funding its 49% stake? The above might be a shaggy dog view on why NAMA is repaying €49m now but it does seem curious, on here at least, why NAMA is repaying a relatively small sum at this point.

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Fine Gael (FG) looks set to be at the centre of the next government. With just under a week to go to election day, the party is riding the high 30s in opinion polls and Paddy Power will this morning give you odds of 40/1-upwards that FG will NOT be in government. So it would seem likely that the manifesto pledges of this party will be put into action over the coming months and it is interesting to see their attitude towards the banks and in particular, Bank of Ireland (BoI).

FG’s vision for an “Irish” banking sector would seem to form around BoI, a foreign-owned AIB and a “third force” which might develop around Irish Life and Permanent, I would guess. It would seem that some effort will be expended in maintaining BoI as an “Irish” bank though I note that this might involve upping the State’s stake in that bank in the short term from the 36.5% held today. So with BoI being nominated as the Chosen One, the publication of that bank’s unaudited unconsolidated 2010 financial statements yesterday is of more than a little interest to the nation. And just to recap, this is how important BoI is in Ireland.

The financial statements are unconsolidated which allows all sorts of jiggery pokery – remember Anglo’s carouselling of €7.4bn loans at year end with Irish Life and Permanent? Well unconsolidated accounts allow such occlusion on a factored scale compared with that. The statements are also poorly prepared without comparisons or even a definition of the term “period”. Below is a better presentation with a 2009 comparison (the interim accounts for the six months ended June 2010 did not contain a company/bank balance sheet which would compare with last week’s results and the interim management statement in November 2010:

In terms of the big number movements

(1) Loans to customer have dropped by €24bn whilst loans to banks have increased by €24bn.

(2) Deposits from banks have increased by €44bn to €88bn, and that is probably a reflection of ECB/Central Bank of Ireland intervention

(3) Customer deposits have dropped €38bn from €89bn to €51bn

(4) Debt securities in issue which includes senior bondholders has dropped from €26bn to €12bn.

In terms of the BoI press statement on Friday, I think the following is significant:

(1) BoI say that deposits have stabilised since the end of November, 2010. This is in line with the IMF February 2011 Staff Report which said “Pressure from corporate deposit outflows have moderated, however, and retail deposits continue to be relatively stable.” Both statements would appear to be at odds with the facts, but what I think might be the correct interpretation is that deposit flight from the six State-guaranteed banks might have been in the €10bn/month zone in late 2010 but that has now moderated to low single digit billions. Information from the Central Bank later this coming week on January 2011 deposits might help clear up the apparent confusion.

(2) BoI say that the NAMA haircut has been an average of 44% but that some €0.9bn (before provisions) remains to be transferred. This is understood to be the objector developers’ loans and are good quality “cherry” assets which might have small haircuts so the 42% final forecast haircut that Minister for Finance, Brian Lenihan indicated in September 2010 might still be valid.

(3) The sub-€20m NAMA-eligible exposures amount to €4.1bn and we know from previous reporting that the €5-20m exposures are €2.5bn so that would mean there was some €1.6bn of sub-€5m exposures.

(4) It would seem that much of the profit for BoI for 2010 will flow from the redemption of bonds at a profit.

The poor quality of presentation of BoI’s financial statements on Friday last is surprising. Whilst the misspelling of the filename as “unadited” is forgivable the retained earnings figure for the start of the period appears to be wrong (it is shown as minus €474m and the 2009 accounts show it was €213m)(UPDATE: 20th February, 2011. Thanks to commenter Michael O’Donnell pointing out that foreign exchange reserves were previously categorised under “Other Reserves” though are now categorised under “Retained earnings (inclusive of foreign exchange reserves)”. The opening balance for foreign exchange reserves was minus €687m). Overall there is no indication as to how BoI is to raise the remaining €1.5bn originally deadlined for 28th February, 2011 nor is there any indication of the scale of additional losses from the current stress tests – CBI Governor Patrick Honohan says they will be larger than forecast across all banks. It seems that it will be some weeks yet before we get clarity on Bank of Ireland’s condition and I wonder if FG might need revise its commitment to the bank.

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UPDATE: 7th July, 2011. There is a preview analysis here of the 2nd Allsop/Space auction being held on 7th July, 2011.

The Allsop-Space auction of 84 properties in Dublin’s Shelbourne Hotel today, 15th April, 2011 has now concluded and you can see the results here. The next Allsop-Space auction date has not yet been announced but there are likely to be another six “increasingly large” auctions in the next 18 months. The entry below examines the background to the auction.

This blog has no formal or informal connection with the organisers of the Allsop-Space auction of some 80 properties in the Shelbourne Hotel, Dublin at 12-midday, today Friday 15th April, 2011. However because it is a major property auction and may indicate the present state of the market, it is being watched closely and there will be analysis here later. The auction is being broadcast LIVE and indeed there is presently a LIVE video stream from the auction room – this is the link to the video (click on “Live video” on the right hand side of the screen, it seems there is a 30 second delay with the broadcast and audio will only be fully available from 11.45am). I have had difficulty viewing the video stream using the Mozilla Firefox web-browser but it seems to work fine with the Internet Explorer browser. There are live pictures now at 10.45am so if you can’t view it, you might have a problem with your browser or plug-ins. There is also a bidding notepad here which should show the bids live. All in all this looks like a slickly-run auction.

Last March we had the spectacular damp squib that was the Sherry Fitzgerald McCreery “Mega Auction” in Kilkenny where just 20 properties were up for grabs, and on the day just two sold. Back then of course, we were deep in denial and were waiting for a recovery – after all, Minister for Finance Brian Lenihan had told us in December, 2009 that we had turned the corner and that the worst was behind us. Since then our general economy has broadly stabilised though with high unemployment, net outward migration, a two-tier landscape with exports booming and domestic demand stagnating, up to 2% added to standard variable rate mortgage rates, mortgage arrears over 90 days rising from 28,603 cases in quarter four, 2009 to 40,472 in the latest quarter three of 2010, residential property prices continuing to fall with the decline accelerating in quarter four, 2010 with a 3.5% decline nationally, Bank of Scotland (Ireland) exiting the market and NAMA taking on some €71bn of mostly-troubled loans. And against this background, there is to be an even more mega “Mega Auction” in April 2011.

It has been rumoured for some time but this morning the Irish Times confirms that an auction organised by UK auctioning specialist Allsop and Dublin newbie estate agents Space4u* will see some 80 properties potentially go under the hammer on the day. The IT say that 77 of the properties will be receiver sales, (it is understood to include repossessed property) and there have been rumours of Bank of Scotland (Ireland) being a prominent seller and indeed it should not surprise us if NAMA dips it toes in the water – after all the agency did say that it expected to put property on the market in 2011 at “teaser rates”.

Will there be bargains? I think the approach will be more realistic than at the Kilkenny auction last year. After all, if receivers are unable to sell on the day then that will tamp down their prospects in the months ahead with private treaty sales. According to Space4U managing director, Stephen McCarthy, quoted in the Irish Times “realistic reserves “lower than 50 per cent from peak” will be set”. According to the Permanent TSB/ESRI house price series for Q4, 2010 prices in the capital are down 45% from peak (39% nationally). According to John Moran at Jones Lang LaSalle we are off 60% from peak.

By Irish standards, the sale of 80 properties in one auction is a major event. Given the lack of transparency with sold price information in the State, the public auction will be watched closely across a widespread audience – I think it will be a challenge for the Shelbourne Hotel to accommodate everyone on the day. The prospect of shilling and other games can never be discounted but with such a quantity of property under the hammer, it is likely that we will get some desperately needed price discovery. You can probably expect a number of other “Mega Auctions” in 2011. The auction brochure will be available from the start of March 2011 and the date for the auction in April at the Shelbourne Hotel has not yet been confirmed.

*Space4u – founded in November 2008. Today has just over ten staff and is based off St Stephen’s Green. Managing director is Stephen McCarthy. Their website lists some 170 properties for sale and rent today.

UPDATE (1): 21st February, 2011. The Independent today reports that a reserve price will be quoted for all properties in the auction so that buyers will know the minimum price that will result in a sale, another novelty for an Irish auction where Advised Minimum Values or guide prices are usually cited but where buyers had no certainty of acceptance of a bid.

UPDATE (2): 21st February, 2011. Allsop, the UK auctioneer is saying the next Irish auction is on 15th April, 2011.  The catalogue is not yet available. Interesting to note that in the UK the typical auction is some 250 lots and usually lasts 3-4 hours, from experience.

UPDATE: 3rd March, 2011. Allsop say that the catalogue will be available online from this Saturday, 5th March, 2011. It is interesting to see Allsop’s take on our property boom ” The Irish property boom ran from 2000 to 2006 and was largely due to intense speculative construction, rapidly rising prices and bank lending of unprecedented generosity. Prices stabilised in 2007 and the bubble burst during 2008. By Q2 2010, house prices had fallen by up to 50% from Q2 2007, and the number of housing loans approved fell by 73%. The sharp fall in domestic and commercial property prices contributed to the Irish banking crisis. From 2000, approximately 75,000 housing units were built every year (Dept of Environment, Heritage and Local Government). 230,000 are vacant. 115,000 of these may be holiday homes”

UPDATE: 4th March, 2011. The auction catalogue will be available to all, tomorrow afternoon at 5pm from both the Space and Allsop websites. Meanwhile the Irish Times has some early details which show the maximum reserve (that is the minimum price that will be accepted on the day and if there is no higher bid the property will go for that price – “guaranteed”). This summarises the details from the Irish Times (you should read the article to see what “existing” means – it could be asking or settled or an estimate of values). The Irish Times has a second article with a little more detail which explains that some of the properties are leasehold and have tenants. The reserves quoted are mouth-watering but both Allsop and Space need to be careful here to manage expectations – if the auction reserve prices turn out to be “spun” then Allsop may find its untested reputation in the Irish market permanently dashed, and Space may lose credibility in what can clearly be a highly lucrative venture for a small estate agency.

UPDATE (2): 4th March, 2011. The Irish Independent continues to stoke the frenzy for this auction citing provincial aprtments at €24,000 each (as part of a job lot it should be said). Liam Carroll apartments at Castleforbes are apparently also being sold which is interesting as Liam is one of the NAMA Top 10 developers – that said, he is known to have obtained loans from non-NAMA banks like Bank of Scotland (Ireland) but I would not be surprised if NAMA did dip its toes in the market. Apparently 1,000 people have requested copies of the catalogue and “Already, an Irishman phoned from New York to check the date in order to book his flight home to attend the auction” said Space MD Stephen McCarthy. Perhaps they should pace themselves with the publicity lest we’re all burnt-out by 15th April and see the auction itself as a bit of an anticlimax.

UPDATE (1) : 5th March, 2011.  Publication of the auction catalogue deferred to 8pm from 5pm/7pm this  evening. UPDATE  (2): 5th March, 2011.It’s here! The catalogue for the auction of 80 properties at the Shelbourne Hotel from 12 midday on Friday 15th, April 2011. I must say that there is intense interest in this sale which I would guess equates to the number of new properties registered on DAFT.ie each day. So the interest isn’t to do with the volume of properties. I’d guess it’s the price and the perception that it includes distressed sales by receivers etc. Allsop say that they expect to have further auctions this year “we expect that very exciting buying opportunities will emerge in Ireland this year”

UPDATE: 9th March, 2011. Space has confirmed that it expects “two more auctions this year, and up to 4 auctions next year”

UPDATE: 2nd April, 2011. I would guess that Allsops is bemused by the amount of attention on the auction which is now less than two week away. 84 properties (80 as far as I can see because some seem to be duplicated) is one third of the auction catalogue offered by Allsops in its regular UK auctions (used to be every three months, a couple of years ago). Today the Independent in Ireland carries a piece on the auction with supportive comments from economists Brian Lucey and Ronan Lyons both about the price discovery and transparency the auction will bring not to mention the attractive yields implied by the reserves. The auction is being managed locally by the Space estate agency which says that its online catalogue has had 75,000 hits with interest mostly from Ireland and the UK but from practically all corners of the world. All of this hullabaloo for 80 properties? This should be telling NAMA something.

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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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