Archive for July 25th, 2011

After the slap in the face deftly delivered last week by the French, in the form of wringing concessions on corporate tax arrangements out of Ireland as a condition for granting the exact same deal as gifted to Portugal without any condition, you might be forgiven for thinking Ireland might adopt a more cynical approach to recapitalising its busted banks so that those same banks can repay bondholders, many of whom are understood to be French.

For all the talk of billions and billions being shovelled into the banks, in reality just €18.4bn has in fact been paid in cash to the banks so far, comprising €15.4bn paid to the banks directly and a further €3bn in funding promissory notes – the written Dail reply above set out the position in January 2011 and other than the €3bn contribution to the promissory notes in March 2011, there hasn’t been any other State funding activity since. Where is the other €50bn of funding to make up the much vaunted €70bn, I hear you ask? About €28bn is still outstanding in promissory notes and the plan is for the State to stump up €3bn a year in cash to honour these. Much of the remainder is to be shovelled into the banks this week.

You might recall that the original plan under the bailout was to recapitalise the banks in February 2011, and the then-Minister for Finance, the late Brian Lenihan decided that he didn’t have a mandate to effect the recapitalisation in the middle of a general election, and left the task to the new administration (though he did offer at the time to complete the task early if the leaders of Labour and Fine Gael wrote to him in those terms, which they didn’t). And upon assuming power, Labour and Fine Gael pointed to their election promise to wait until the end of March 2011 when the stress test results were to be published, before recapitalising the banks. On 31st March 2011, the “mother of all stress tests” indicated that our banks needed another €24bn (including buffers) so as to reach a standard of capital which represented 10% of the assets of the banks. And then  Minister Noonan considered the €24bn cost, and the plans to extract a contribution from subordinated bondholders and he decided to wait until the end of July 2011 before injecting €24bn (less the subordinated bondholder contribution) into the banks. After this morning’s Bank of Ireland announcement it now looks like the banks need approximately €18bn of capital rather than €24bn. And according to yesterday’s Sunday Business Post “a spokesman for the Department of Finance and the National Treasury Management Agency confirmed that the transfer of funds would take place in the coming days.”

When the Minister shovels another €18bn into the banks, he crosses a Rubicon because that €18bn represents real sovereign funding which will inextricably tie sovereign debt to bank debt. Here are six reasons why the Minister for Finance should hold on to his cheque book for the time being:

(1) He doesn’t have to recapitalise the banks now. The original Memorandum of Understanding with the IMF/EU stipulated that the recapitalisation was to have taken place in February 2011 but that was seemingly waived. Following the announcement of the March 2011 stress test results, an intention was signalled to recapitalise by the end of July 2011. Certainly the IMF, EU and ECB want Ireland to recapitalise by the end of July 2011, as was clearly urged at the conclusion of the recent review mission. But the IMF and EU will not be back for the next review until October 2011. And although the ECB use their provision of non-standard liquidity as a stick, the ECB has committed to maintaining that liquidity to October. So as long as the recapitalisation takes place before October, what would be the consequence of a further deferral now? Might an act of defiance with low-value negative consequences signal a more confident stance on negotiating other obstacles, for example the burning of senior unguaranteed unsecured bondholders at Anglo and INBS?

(2) Bondholders inLondon andNew York are praying that the Minister recapitalises now. Because without the recapitalisation, our covered banks are effectively insolvent. A case can be made for Bank of Ireland, but truth be told, without the State guarantee, even that bank would become illiquid rapidly and consequently would become insolvent after a fire sale liquidation of assets to secure alternate liquidity. When this €18bn is shovelled into the banks, the banks will be solvent and the claim for 100% repayment by bondholders will move up to a whole new level. Not recapitalising now, strengthens the Minister’s hand in any future negotiations.

(3) As part of the banking restructuring announced in March 2011, an intention was signalled that Irish banks would undergo significant deleveraging. A long-held concern on here is that deleveraging would mean that new lending inIreland contracted, in much the same way as the 2000s saw an expansion of lending enabled by bondholders lending colossal sums to Irish banks. And in the 2000s that bubble of credit led to economic expansion and inflation. The concern is that deleveraging will have the opposite impact. Recently questions were put to the Central Bank of Ireland (CBI) and the Economic and Social Research Institute (ESRI) asking how their economic forecasting models would account for the announced deleveraging. The CBI did not respond but the ESRI did respond to say that it has not yet forecast the economic outlook taking account of deleveraging but its next forecast using its HERMES model would. It is worrying that Ireland may not at this point have examined the impact of deleveraging €70bn of assets from its banks – some will be foreign held but the domestic dimension of deleveraging is likely to contract lending and money supply and economic activity.

(4) The two “pillar bank” strategy is nonsensical. With a post office and credit union network together with local branches of foreign banks, Ireland can manage with one pillar bank, possibly supplemented by a competition oversight department in the Central Bank/Financial Regulator. The detailed arguments are set out here.

(5) Ireland’s banks are not lending. Mortgage and other lending statistics from the Central Bank of Ireland confirm that lending is contracting. From home buyers trying to get a mortgage to small businesses trying to get finance, the message appears to be that the banks are not lending. Even the State-operated Credit Review Office seems now to be accepting that lending constraints are at the banks rather than in demand from businesses. One of the pre-election promises to make it into the Programme for Government was the creation of an investment bank which might start with a clean slate and provide lending to businesses untainted with the need to rebuild a tattered balance sheet. Will the €18bn being shovelled into the banks this week improve access to credit? Difficult to say and it will be difficult to untangle future behaviour but it seems from this perspective that a new investment bank starting with a clean slate might be a better proposition.

(6) Despite protestations to the contrary by the NTMA and the Department of Finance, the economic environment has deteriorated since the stress tests were conducted in March 2011 (or indeed January 2011 when the stress test parameters were set). Last week’s EU crisis summit is unlikely to be the last this summer and now that the smoke is clearing after the hoopla last Thursday the cold reality of funding the EFSF and the remaining debt issues in Greece and elsewhere have to be tackled. A 20% reduction in Greece’s debt will not transform the prospects of that country. A Spanish bank needing €6bn of capital and liquidity funding on Friday last is unlikely to be the only Spanish casualty this summer. Domestically, the evidence points to commercial and residential property declines being more significant than expected. And the buffers built into the stress tests are not as significant as the NTMA or the Department of Finance would have you believe. So before shovelling another €18bn of our funds into the banks, why not validate the March 2011 results using the experience of the last four months. Might we need another €10bn for the banks? And if we do, might that change our position on maintaining two pillar banks or our negotiation stance on senior bondholders?


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Following on from what were described by Minister Leo Varadkar yesterday as “not non-serious” talks between the Department of Finance and a group of unnamed international investors, Minister for Finance, Michael Noonan has announced this morning the conclusion to these talks with the still unnamed investors agreeing to invest “up to” €1.123bn for “up to” 37% of Ireland’s oldest bank, Bank of Ireland, which is presently 37%-owned by the State.

“The commitment by a number of significant private sector investors to invest side by side with the State’s retained holding without any form of additional risk sharing by the State reaffirms the credibility of our stress tests” claimed the Minister. The €5.2bn identified in the March 2011 stress tests will be reduced by €2.4bn, being the contribution from subordinated bondholders in “ongoing and future burden sharing” plus the €1.1bn from this morning’s announced transaction. Meaning that Bank of Ireland will consume just €1.7bn of a State injection later this week in addition to the €3.75bn already “invested”

Worryingly the Minister is saying that the investment in the banks later this week of approximately €18bn will be taken from Ireland’s own funds, and not those provided by the EU/IMF who are now offering the bailout funds at ~3.5% in the EU’s case and 4.77% in the IMF’s case (and that will shortly drop). The Minister claims that using our own funds will result in interest rate savings. A worry on here is that depleting our own funds, especially when low interest funding has now been made available by the EU, will curtail our freedom of action when the inevitable talks on default (senior bondholders at Anglo and INBS, and potentially others, and potentially sovereign akin to the Greek solution) start later this year. Last year the NTMA generated a return of 11.7% on its assets under management. If these returns are still available, why use these funds when the EU/IMF funds are available at approximately 4% blended average?

At 10:30am today, Bank of Ireland’s shares were trading at 11c a share, up .9c or 9% on the day. There will be further reporting and analysis of this transaction later today.

UPDATE (1): 25th July, 2011. The Irish Independent is claiming that veteran US investor, Wilbur Ross of WL Ross is one of a group of international investors which has bought into Bank of Ireland. Last year and indeed until March this year, Wilbur was considered to be at the fore of the group poised to acquire the Educational Building Society (alongside the Carlyle Group from the US and local boys, the Dublin-based Cardinal Group). That sale fell through when the incoming government decided to take the sale off the table. EBS was subsequently merged with AIB. But Wilbur it seems is back, though this time without Carlyle or Cardinal.

UPDATE (2): 25th July, 2011. RTE broadcast news (Six One News)  reports that Cardinal is in fact a party to the Bank of Ireland deal, contrary to the report in the Independent. A Canadian company is reported to be the third party to the deal.

UPDATE (3): 25th July, 2011.  Canadian investor Fairfax (corporate website herehas been named as “leading the consortium of new investors”.

UPDATE: 27th July, 2011. RTE Six One News, and now RTE online,  has reported the names of three more investors who are part of the above consortium – Capital Research (part of The Capital Group), Fidelity Investments and Kennedy Wilson. No word of the Cardinal Group named by RTE as an investor on Monday.

UPDATE: 31st July, 2011. The Sunday Independent reports that Fairfax and WL Ross have each taken a 9% stake in Bank of Ireland.

UPDATE: 28th February, 2013. Just as a footnote to the deal announced above, the deal concluded and on 26th February 2013 in the Dail, the Minister for Finance provided the following response to a parliamentary question from the Sinn Fein finance spokesperson, Pearse Doherty “On 25 July 2011, the Minister for Finance announced that a group of investors had committed to buy up to €1.1bn of the NPRF’s shares in Bank of Ireland. This commitment reduced, from €1.9bn to €0.8bn (58% reduction), the potential maximum cost for the State to meet the bank’s PCAR equity capital requirement. As a result of investment from other non-Government sources, the total cost to the State (through the NPRF) from underwriting the bank’s equity capital raise reduced from €0.8bn to €0.2bn (including net underwriting fees received by the NPRF of €0.05bn).

The actual amount sold by the NPRF to the investors was 10.5bn Bank of Ireland shares at a price of 10c per share. The disposal of these shares took place in two tranches. The first disposal for €0.24bn settled on 2 August 2011 with the second, and final, tranche for €0.81bn settling on 17 October 2011.

The net proceeds from the disposals were transferred, on foot of a Ministerial Direction, from the NPRF to the Exchequer within 5 days of receipt from the investors. 

There are no further payments due.”

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In many jurisdictions when a business seeks a loan from a bank, the loan is secured on the assets of the business and no more. In Ireland, personal guarantees are part-and-parcel of business lending, and a business loan may be secured on a family home or other personal asset. Or just generally secured, so the borrower can’t rely on the limited liability status of a company, and if there is default in respect of the loan, the bank can come looking for personal assets. Having racked up the best part of 100 enforcements (listed here), it seems NAMA is also ratcheting up its efforts to enforce personal guarantees.

Last week, NAMA made five applications in Dublin’s High Court – references 2011 3037 S, 2011 3038 S, S2011 3039 S, 2011 3040 S, 2011 3075 S . Four were against the Grehans (Ray or Raymond, and Danny or Daniel and associated partnerships – the St Lohmans Partnership and the Ashford Partnership) and one against Jim Mansfield . The Grehans are presently represented by Dublinsolicitors Clerkin Lynch. No solicitors have been named on court documents for Jim Mansfield. It is understood the purpose of the five applications is to seek attachments to personal assets of the respondents in respect of personal guarantees on loans now controlled by NAMA. It is reported in the Irish Times that the Grehan actions involve €270m and there will be preliminary hearings today.

NAMA appointed receivers to Jim Mansfield companies on 20th April, 2011. The businessman had been beleaguered for some time after Bank of Scotland (Ireland) had previous taken enforcement action. NAMA appointed receivers to the Grehans on 27th April, 2011 which was more of a surprise as the Grehans were reckoned to be developers with a strong chance of securing approval from NAMA to their business plans. In the case of the appointment of receivers to the Grehans, there followed a farce whereby the receivers were “stood down” only to be re-appointed. There was then a High Court action by the Grehans to reverse the appointment of receivers, an action which failed in the middle of  June, 2011. The Grehan/NAMA relationship seems particularly bad-tempered with reports that the Grehans are to be regarded as personae non gratae at their former properties including the Glenroyal hotel.

In addition NAMA, it seems, is ratcheting up its efforts to investigate the finances of developers. Yesterday Ireland’s Sunday Times reported that NAMA had engaged the Kroll organisation to investigate the finances of developer, Sean Dunne, some of whose Irish assets were the subject of enforcement action on Friday last. This comes three months after it was revealed that NAMA itself was hiring investigators to examine the financial affairs of developers.

You can expect NAMA’s actions to be met with some particularly bad-tempered responses from developers. If enforcement action at a corporate level was met with shock and anger, then the pursuit of what developers regarded as personal property is likely to generate even stronger reactions. That said, NAMA is there to maximise the value of its loans on behalf of the State and to stand in the position of the banks and enforce personal guarantees to the maximum extent possible, though presumably that will be tempered with a consideration of recovery costs. We are also likely to see some actions by NAMA in respect of transfers to spouses.

UPDATE: 26th July, 2011. It seems as if the Grehans are not having very much luck at present in the courts. The Irish Independent today reports that yesterday in Dublin’s High Court, the judge, the redoubtable Mr Justice Peter Kelly ruled that the case against the Grehans be transferred to the Commercial Court, the special court that deals with commercial matters under the umbrella of the High Court, and that the case be heard this Fridy 29th July, 2011. The Grehans had objected to the transfer to the fast-track Commercial Court, claiming that NAMA had delayed in bringing the action. Judge Kelly was having none of it and the matter will be heard on Friday. NAMA’s urgency is apparently connected with an imminent sale by the Grehans of UK property expected to realise a reported €18m and NAMA wants to ensure it benefits from that sale. Elsewhere in the article from the Irish Times it is reported that Ray Grehan has provided €27m of personal guarantees against NAMA lending whilst Danny Grehan has personal guarantees of €22m. It is again confirmed that the NAMA action is in respect of a total of €270m of guarantees, of which only €49m is for personal guarantees and the remainder is in respect of corporate guarantees, with €195m guaranteed by just one company alone, Glenkerrin Homes . NAMA was represented yesterday by the barrister, Ciaran Lewis. The Grehans were represented by Mark Sanfey. There is additional reporting by Mary Carolan in the Irish Times.

UPDATE: 9th November 2011.  Mary Carolan in the Irish Times probably has the best reporting on tioday’sproceedings at Dublin’s commercial court – part of the High Court. It is reported that, seemingly for the first time in months, the Grehans agreed with NAMA, to a judgement order being entered against them personally. The judgment order reportedly means that Ray is liable for €270m and Danny liable for €265m, it seems that the orderhave some overlap as I don’t think the Grehans owe €600m in total. In addition to the personal orders, two partnerships controlled by the Grehans, Ashford Partnership and St Loman’s Partnership , had judgment orders of €16m and €26m respectively entered against them. An expensive day for the Grehans, but I wouldn’t be surprised if the Grehans now examined the bankruptcy process in the UK to see if that might offer better prospects of a quicker recovery than remaining under NAMA’s thumb.

UPDATE: 10th November 2011. The Irish Independent today carries some reaction from Ray Grehan to yesterday’s proceedings. It seems that filing for bankruptcy in the UK is indeed n option being examined. Ray also says that NAMA has sold “three properties” in the UK for “€50m less” than the Grehans had previously agreed. No further specific information is given but as far as I can tell, NAMA has finalised a sale of the Crowne Plaza in Shoreditch for 10% more than was agreed by the Grehans (comparing Sunday Times report in October 2011 with a Sunday Business Post report in September 2011 where Ray made a claim about a sale he had agreed for the hotel). So I don’t know how credible that claim is.

UPDATE: 15th November, 2011. The Financial Times reports that Ray(mond) Grehan has put his fourth floor one-bedroom leasehold apartment at One Hyde Park on the market for GBP 5.6m which the FT claims is a discount to the GBP 6.3m which one-bedroom apartments in the exclusive development overlooking Hyde Park (on one side) and a stone’s throw from Harrods. Others might say it’s beside a main road and the views on the Knightsbridge side are pretty mediocre (yes you can see Harvey Nicks but you are also staring at the Knightsbridge Tube station entrance and a very, very busy road junction). At close to GBO 6,000 psf plus a presumably eye-watering annual service charge, it doesn’t look like bargain basement even at GBP 5.6m. The estate agent details are here together with photographs and a floor plan. It is interesting that it is Ray who is reportedly putting the property on the market and that NAMA will benefit from the sale, I guess this is what the Americans call a “short sale” where a borrower in financial doo-doo is allowed sell his property so as to avoid a distressed sale.

UPDATE: 3rd December, 2011. Simon Carswell in the Irish Times reports that NAMA is taking legal action in Canada in relation to an apartment bought for CDN $1.6m (€1.2m) by Ray Grehan just days after he temporarily achieved the dubious record of having the largest personal judgment ordered against him in Dublin’s High Court (overtaken now by the Sean Quinn judgment). The apartment is referred to as a ““a condominium suite and related units” at The Residences at the Ritz Carlton in Toronto”, Ontario, Canda and is said to have been purchased by Ray on 16th August 2011, and there was a subsequent reported transaction on 17th November, 2011 when Ray is said to have transferred the property to a company called 2295661 Ontario Inc for nil consideration. NAMA is seeking to reverse the November 2011 transaction which according to the Irish Times is claimed by NAMA to be “made with the intent to defeat, hinder, delay or defraud creditors of Grehan”. There is no reporting on NAMA’s position in relation to the original purchase of the property in August 2011. Presumably the Agency will seek to establish the source of the funds used to purchase the property and if these funds can be matched to the statement of means which presumably Ray Grehan produced for the court hearing in Dublin. Doesn’t look good…

UPDATE: 6th December, 2011. The Irish Independent reports that NAMA has secured a “European Enforcement Order” (EEO)which allows the Agency to pursue assets belonging to the Grehans in all EU countries without the need for intermediate litigation. In other words, if NAMA identifies a Grehan asset in Finland, for example, it can apply to the Finnish courts to take possession of that asset and doesn’t need show indebtedness on the part of the Grehans. It seems that in order to secure a EEO, the Grehans need to have consented to it, which is presumably what they did at the start of November 2011 when NAMA secured the judgment against the brothers, by consent.

UPDATE: 7th December, 2011. There is quite a confusing story by Simon Carswell in today’s Irish Times about the Toronto apartment which does include the claim “he [Ray Grehan] does not intend challenging the Canadian action on the basis that he claims there is no equity left in the apartment given that it has fallen in value to the level of bank debt owing on the property” Apparently Ray did not include the apartment in his NAMA business plan submission, but that is confusing because Ray’s plan was submitted in 2010 and the apartment was only bought in August 2011, so why would Ray disclose it as an asset in 2010? There is also a claim in today’s article from a source close to Ray that the recent transfer from Ray to a Canadian company was done so as “to save stamp duty”. Apparently Ray Grehan himself has not commented on the stories, but it all looks very curious indeed.

UPDATE (1): 14th December, 2011. The Irish Independent today reports that NAMA has initiated legal action in New York to stop the sale of an apartment in Manhattan owned by Ray Grehan and his wife. The apartment at the Centria Condominium on  West 48th Street beside the Rockefeller Centre (Rockefeller Plaza) was reportedly bought for USD 1.38m in May 2007 and reportedly is subject to a USD 300,000 AIB mortgage. The property is seemingly valued at USD 950,000 and the newspaper reports that the Grehans wanted to sell it. NAMA is seeking to stop the sale, and no doubt will seek to have any equity in the building set off against the €300m judgment secured against Ray Grehan.

UPDATE (2): 14th December, 2011. RTE reports that NAMA has secured at the High Court in London a worldwide order preventing Ray Grehan disposing of any assets. Interesting that the order was obtained in London, perhaps that’s a reflection that Ray may be intending to move to the UK permanently.

UPDATE: 15th December, 2011. It is reported by the Irish Times and Independent today that a condition attached to the judgment granted in the UK’s High Court yesterday is that Ray and his wife and children are entitled to GBP 5,000 (reported as €5,000 in some Irish media) per week for living expenses, but it is understood the judge didn’t specifiy the source of that funding. NAMA is certainly NOT providing it, so the obvious conclusion is that it will come from assets still under Ray’s control. It is understood that Ray will have to declare any such income which he receives as living expenses to NAMA together with revealing its source.  It is reported by Simon Carswell in the Irish Times that “the court approved the payment of living expenses of €5,000-a-week to Mr Grehan in the face of objections from Nama, which wanted them capped at €1,250. The judge said Nama could apply to have them reduced, which the agency now plans to do.”

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