Watching the pennies but completely ignoring the pounds is not good financial sense: privatisations and asset sales

This afternoon the starting gun on €2bn of state privatisations was fired as energy minister, Pat Rabbitte announced that a minority stake was to be sold in state-owned power company, ESB. He said that no decision had yet been taken on the percentage stakeholding to be sold. In his recent report on the sale of state companies, economist Colm McCarthy stated that the ESB had a total net asset value of €4,032,150. In recent days it has been suggested that stakes in Bord Gais Eireann and National Lottery may also be imminently be placed on the block for sale; there may well be stakes in the many other state companies considered for sale as part of the commitment to raise €2bn. Proposals for the ESB sale will be closely studied as it is regarded as a vital service, it employs 8,000 people and it affects every home in the land. In fact, the sale of any stake in any state company will be closely studied after the fiasco that was the last state privatization : Eircom in the 1990s which was considered a badly handled privatization as soon after privatization it was felt the company was asset-stripped with the sale of the mobile phone division, Eircell, and the fact that Eircom has maintained some of the most expensive phone charges in the world and been slow in rolling out broadband. Oh and many of those in the general public who bought shares lost heavily with the collapse of the dot-com boom and a consequent decline in Eircom shares.

So expect a sale of a stake in ESB, which in all likelihood will generate less than €1bn, to be closely studied, the subject of Oireachtas committee hearings, endless newspaper and media coverage, consultants reports and general debate. And perhaps rightly so.

But practically 100% state-owned Irish Life and Permanent has apparently commenced the disposal of €6.5bn of assets in the UK; most of you would never have heard about the sale until it was a fait accompli and it will be lucky to garner a couple of paragraphs in the newspapers. It is understood that last week ILP sent out a note to some 20-odd potential buyers inviting expressions of interest. What ILP is reportedly selling is a subsidiary company, Capital Home Loans Limited (CHL) which has assets of €6.5bn, almost all being residential mortgage loans in the UK. Market sources have suggested that in its current format, the company is likely to attract bids from two companies only – HSBC and Barclays. The March 2011 stress tests apparently projected a 25% haircut on theUK residential mortgage portfolio. The problem, it is suggested, is that €6.5bn of loans is just too big for the usual investors in such loans – JC Flowers, our friend Wilbur Ross,BlackRock,DE Shaw, Kohlberg Kravis Roberts for example. It has been suggested that breaking the portfolio down into smaller parcels, as happened recently with Anglo’s sale of loans in the US, would result in a far better price. Why? Certain companies specialize in performing loans, others in distressed loans, others in high end loans, others still in mass lending; the view is that specialist buyers would maximize the sale price.

Now much of the above is open to debate. Would selling CHL as a single entity result in a better price than selling parcels of loans? Would opening up the sale to a wider audience result in keener bids? Different experts with different interests may suggest different responses. But what seems certain is that the sale of €6.5bn of assets in a state-owned financial institution will receive a miniscule amount of attention compared with the sale of a minority interest in the ESB. Before the introduction of the euro inIreland, we used to have a regard for the expression “watch the pennies and the pounds will watch themselves”. But in the case of Irish Life and Permanent, are we ignoring the pounds whilst poring endlessly over the pennies to be generated from the sale of a minority stake in the ESB?

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UK commercial property – modest growth continues with 0.1% month-on-month increase in August 2011

NAMA is by all accounts pushing ahead with the disposal of London-based assets with at least three major properties coming on the market in the past month alone. On Wednesday this week, the High Court in Dublin rejected David Daly’s application for an injunction to reverse the appointment of administrators to his London property, including the flagship Louis Vuitton store on Bond Street, which presumably means this property is now available for purchase. No news yet from Treasury Holdings on progress with attracting a buyer/investor for the Battersea Power Station site. NAMA unfortunately doesn’t generally provide updates on its sales but you can see the regularly updated list of transactions gleaned from a variety of sources here. Quite a few sales have been in London.

Despite the fact that NAMA doesn’t provide updates on sales (the Montevetro off-market transaction was an exception) there is low-level noise that NAMA is not getting the best prices for its property. Ray Grehan, the NAMA developer to whom NAMA appointed receivers/administrators, is reported to have said that he had a €83m buyer for theCrownePlaza hotel pictured above and a €45m buyer for what is understood to be the Forge development inLondon’sCanaryWharf. Ray thinks that NAMA’s action has cost the agency, and by extension the rest of us, between €10-150m.

Today sees the publication of the UK August 2011 IPD Monthly Property Index – the index covering UK commercial property up to the end of August 2011. The IPD (Investment Property Database) index is the only UK commercial index referenced by NAMA’s Long Term Economic Value Regulations (Schedule 2) and is used to help calculate the performance of NAMA’s “key markets data” shown at the top of this page.

The Index shows that capital values are still increasing but at a modest rate compared with the end of 2009/start of 2010. The Index rose by 0.1% in August 2011 compared with July 2011. Overall since NAMA’s Valuation Date of 30^th November, 2009 prices have increased by 11.4%. On an annual basis prices are up by 1.9%%. Commercial prices in the UK are now 34.2% off their peak in June 2007 though remember that the UK has had elevated inflation rates (14% between June 2007 and August 2011). The NWL index is now at 854 which means that NAMA needs to see a blended increase of 17.0% in property prices across its portfolio to break even at a gross profit level (taking into account the fact that subordinated bonds will not need be honoured if NAMA makes a loss).

The first table below shows the month-on-month % change in commercial property capital values since 30th November, 2009. The IPD index is broken down into three components – retail, office and commercial.  The second table shows the change in value of an index set at 100 at 30th November, 2009 and applying the month-on-month % increases in a compound manner. Overall it shows that commercial property in the UK is worth 11.4% more at the end of August 2011 compared with the end of November 2009

The outlook for the UK is bumpy, with high-ish inflation, elevated (for the UK) unemployment and anaemic economic growth. Londonseems set to continue to out-perform with supply shortages and new money offsetting economic malaise. Yesterday in another part of the UK, the NAMA Head of Credit and Risk, Ronnie Hanna briefed members of the Northern Ireland Assembly and Business Trust and yet again promised that NAMA would “seek to help stabilise the market, generate transactions, provide liquidity and encourage phased asset disposals”

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