“Exceptionally, we have taken issue with the rating agency. It’s something we don’t like to do but there comes a point when the analysis is not robust” NTMA CEO, John Corrigan in August 2010 re-acting to Standard and Poor’s downgrade of Ireland’s sovereign debt
“The projections include Fund and EU disbursements. Government-guaranteed NAMA bonds are excluded, based on Eurostat guidance. For 2015, no policy change is assumed” IMF first and second review Staff Report, May 2011
The Irish government doesn’t, the IMF doesn’t, Eurostat doesn’t but ratings agencies do regard NAMA bonds as part of our national debt. This entry examines the difference in position and what it means for our country’s creditworthiness and prospects for re-entering the money markets.
First up, NAMA bonds are State-guaranteed pieces of paper which NAMA gave the banks in return for loans. The banks tend to exchange these pieces of paper for cash with the ECB and thereby we have the miracle of banks exchanging a class of loan assets which are of doubtful value with nice, crisp cash of certain value. Presently NAMA bonds amount to approximately €30bn. These bonds will be redeemed by NAMA by 2020, in other words, NAMA needs to generate €30bn in cash from its operations over the next ten years. In addition to NAMA bonds, there is also something called NAMA subordinated bonds which represent 5% of what NAMA paid the banks for their loans. These subordinated bonds will only be redeemed if NAMA makes a profit. The subordinated bonds amount to €1-2bn and that is on top of the €30bn of NAMA bonds. It should be noted that there exists a possibility that the sub-€20bn land and development and associated lending at AIB and Bank of Ireland, totalling €16.6bn gross, may yet go to NAMA and NAMA might be expected to pay €7bn for these loans based on its experience with its existing portfolio. NAMA may also absorb another €3bn-odd of loans whose borrowers have thus far been objecting to NAMA’s involvement and this loans may require NAMA to issue some €2bn of bonds. And the NAMA Act confers on NAMA the ability to raise up to €5bn to help complete developments. Taking all of this into account, NAMA could have a potential gross liability of €45bn.
Plainly at the outset, NAMA’s €30bn of bonds are backed by loans which are worth €30bn. Okay NAMA paid a 10% long term economic value premium for the loans which meant that NAMA automatically over-paid at the start and also NAMA’s main property market, Ireland has dropped 10-20% since the date by reference to which the loans were valued. Though on the other hand, 5% of the consideration paid for the loans, the subordinated bonds, will only be honoured by NAMA if the agency makes a profit. But give or take (actually, at this early stage it’s most definitely “take”) low single-digit billions, NAMA is still sitting on assets that roughly equate to the NAMA bonds.
And remember that NAMA is still an agency independent of government. Yes, we’ll all smile at that one but on a strict evaluation of the agency’s role and its funding, it has been so judged by Eurostat, the EU agency whose responsibilities including setting standards for measuring member state national debt. Eurostat’s preliminary view of NAMA’s bonds was that they were not to be regarded as part of the national debt. There is a detailed entry on Eurostat’s assessment here, including a copy of the assessment, but in brief, Eurostat paid heed to NAMA’s shareholders which include a 51% holding by private investors and the probability of NAMA making a profit (and the vestigial bank levy should NAMA make a loss). The government has gone to great pains to maintain this semblance of independence; the initial €49m shareholding was converted to a loan which was repaid and even though the State now owns 95% of AIB which in turn owns 17% of the 51% private NAMA shareholding, the State has seemed keen to bat away any suggestion that NAMA is majority owned by the State.
So, given the above, the fact that NAMA’s bonds are backed by loans of similar value and the Eurostat assessment that NAMA bonds are not part of our national debt, why do ratings agencies take a seemingly contrary position?
Standard and Poor’s issued a detailed note on the issue last August (available here) after being on the receiving end of then-Minister Lenihan and John Corrigan’s ire. The ratings agency dismissed the Eurostat assessment and said “we take a different approach and have treated similar off-balance-sheet arrangements to support national financial systems in other countries as direct obligations of the government”. That I would suggest isn’t too contentious but what about apparently ignoring the underlying value of the loans which were purchased with the bonds? S&P said “we view these loans as having value, and as recoveries occur in the medium term we expect them to be available to pay down general government debt. However, based on the information available to us, we would not expect recoveries to amount to much more than €16 billion (10% of GDP) over the time frame that our ratings address. As and when recoveries on NAMA’s assets materialize, we may revise our forward-looking estimates ofIreland’s gross and net general government debt.” S&P also said “in our view, the loans that NAMA is acquiring have limited liquidity and cannot readily be sold in the near term”. I would suggest that S&P is on shakier ground here and it is not hard to see why Minister Lenihan and John Corrigan were upset.
Will NAMA recoup its outlay on loans in time to redeem €30bn of NAMA bonds by 2020? Who knows? NAMA’s central scenario plan last year indicated the agency might generate a €800m Net Present Value. I would have said the short term inIrelandis assured to be challenging with both commercial and residential prices coming under continued pressure. But there seems to be consensus that we are close to the bottom of the macroeconomic cycle, by which I mean GDP, and that there will be growth of 2-3% per annum from 2013. NAMA will be incurring meaty operating costs, and for what it’s worth, it is hard to see where NAMA has made provision in its plans for the 5% loan management costs that are seen as intrinsic to the asset management business. Also the outlook for interest rates suggest NAMA will need pay more on its NAMA bonds. So although the general economic environment might begin to support higher property prices, it is still far from certain that NAMA’s existing losses won’t be exacerbated.
So what do NAMA bonds mean for our credit standing? Plainly the ratings agencies (and Moody’s and Fitch appear to regard NAMA bonds in line with S&P, that is, that the liability attached to the bonds should be associated with the State and national debt) see NAMA bonds as relevant. The NTMA produced an extraordinary information note two weeks ago which seemed to be in response to Morgan Kelly’s article in the Irish Times. The NTMA refused to account for NAMA bonds in national debt and coyly showed a “Loan assets of NAMA” and “Bonds issued by NAMA”, both at €30.7bn; even NAMA is apparently recognising a €1bn decline in value of the loans so the NTMA just looks silly in ignoring NAMA bonds. As for our credit standing in the market, the market is more likely to look to the ratings agencies and accept NAMA bonds as a contingent liability but with a decent probability of being substantially repaid. The same with external media as, for example, The Economist which might show the official government debt but which will then adjust it to reflect the NAMA liabilities.
It seems increasingly pessimistic that we will be able to re-enter the bond markets in the second half of 2012 when we will need roll-over maturing national debt, and indeed there are now unofficial suggestions that the “saving” on the bank bailout of some €11bn (€35bn contingency allowed for in the IMF/EU bailout less the €24bn maximum identified in the stress tests in March 2011) will be used to help roll-over maturing debt. Should we be able to use the “saving” in this way, it will be 2014 when we need go back to the bond markets and by then, on an optimistic basis, NAMA may have demonstrated its acumen with generating profits or at least breaking even. So at that stage, NAMA bonds will probably be still regarded as part of our gross national debt but the sovereign bond market may recognise that the NAMA assets will eventually lead to the extinguishing of that debt. On the other hand, if NAMA continues to generate losses, we might see the €30bn of bonds regarded as a contingent liability with an uncertain prospect of being offset by NAMA breaking even.