Archive for October, 2011

Just four weeks ago the NAMA CEO, Brendan McDonagh took a thinly-disguised swipe at vulture funds and bottom-feeders when he said at the Corporate Restructuring Summit in Dublin “if there is one key message I can ask you to take away from today it is: there is no point approaching us with an offer which is significantly below what we paid – it is a waste of your time and ours as it is unlikely to be entertained”

Thanks to a presentation given by NAMA’s Head of Portfolio Management, John Mulcahy to NCB last week, we now know that NAMA will sell its assets at a maximum discount of 10% below its acquisition value. So if there was a €100m loan in Anglo which NAMA acquired for €40m then NAMA will sell you the loan or the underlying asset for no less than €36m, that is a 10% discount on the €40m acquisition price. Good to know.

Of course inIreland, both commercial and residential prices have dropped by 20% since NAMA’s valuation date of 30th November, 2009 and of course NAMA paid a Long Term Economic Value premium to the banks which averaged 10% of the valuation. In other words, a loan acquired by NAMA at €40m might only be worth €29m today – NAMA is not exactly doing any buyer of Irish property a favour by offering a maximum 10% discount on what it paid!!

John’s presentation to NCB also revealed that NAMA will not sell an asset where the annual return is projected to be more than 20%. So Steve “wait for the blood on the streets” Schwarzman of Blackstone who seemed to be seeking 30% returns from distressed property assets in Europe might have to put away his USD 4bn (€2.9bn) real estate war-chest unless he lowers his sights. What is meant by a 20% annual return? Imagine buying a NAMA property for €10m and getting €2m rent per annum – that would be a 20% return. Remember that in some instances, NAMA will be prepared to lend you up to 75% of the purchase price at an annual interest rate of 4-4.5%. So you might buy the property for €10m, pay €2.5m cash and get NAMA to loan you the remaining €7.5m at 4% per annum. In order for you to generate a 20% return on your €2.5m you would need rent the property for €0.8m per annum [€0.8m rent less €0.3m paid to NAMA as interest, equals €0.5m which is 20% of your €2.5m investment]

What was absent from the presentation was criticism of the glacially slow progress being made by this Government in introducing legislation to give effect to Real Estate Investment Trusts (REITs). REIT legislation was sign-posted in the Fine Gael election manifesto in February 2011 “We are open to considering new types of investment vehicles – such as U.S. style Real Estate Investment Trusts – that can help create a new, liquid investment market in commercial property for Irish pension funds and smaller investors” There are still some locals in Ireland with some cash and they might welcome the opportunity to invest, for up to 20% annual returns, particularly within the managed, tax-efficient REIT framework.


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The NAMA CEO, Brendan McDonagh is set to appear before the Committee of Public Accounts in the Oireachtas this coming Wednesday 26th October where the discussion topic is billed as “Annual Report and Financial Statements 2010”. Proceedings are expected to get underway at 10am on Wednesday in Committee Room 1 and live video streaming should be available online here. The Committee comprises the following members : Paul Connaughton, John Deasy, Paschal Donohoe, Anne Ferris, Simon Harris, Michael McCarthy, Mary Lou McDonald, Seán Fleming, John McGuinness, Eoghan Murphy, Derek Nolan, Kieran O’Donnell and Shane Ross. The chairman is Fianna Fail’s John McGuinness.

The following open letter was submitted to the Committee this morning

“Dear Mr McEnery,

I understand that NAMA is to appear before the Committee this coming Wednesday. I would be most grateful if you might place the following before the Committee.

This is an open submission from the NAMA winelakeblog, an online blog which reports on NAMA and associated subjects. This submission is being published online on Monday 24th October at http://www.namawinelake.wordpress.com

Whilst there are myriad questions that beg to be asked about the operation of the Agency and its report and accounts for 2010, I would submit that the most pressing concern is the lack of information on the way in which the Agency is disposing of its assets which prevents any timely assessment of the Agency’s performance.

In the 36 months from the end of 2010 to the end of 2013, NAMA has set itself a target of disposing of €7.5bn of assets – loans and properties – which equates to €200m on average a month, every month. And remember these NAMA assets represent loans which were acquired from the banks at an average 58% discount. So in terms of original value at the banks, the disposals are worth an average of €500m a month, every single month. This is the scale of the enterprise over which your Committee has oversight; it is colossal. And remember these disposals are not of an homogenous commodity like electricity or gas – these are individual loans, borrowers, properties and buyers in individual locations and countries and generated by individual staff, advisers and consultants.

The accounts from NAMA, both the annual report and the quarterly management accounts do not provide a level of detail which enables you to assess how well NAMA is performing in its disposal of assets. Specifically you cannot assess the following:

(1) The gross profit on the transaction – sale price less loan acquisition cost

(2) The net profit after consultant/adviser/agent fees, loan carrying costs, foreclosure costs, tax on profit including potentially capital gains tax

(3) Evidence that NAMA has marketed the asset – loan or property – so as to maximise profit (and generally the sales price)

(4) Evidence that NAMA has achieved the best price for a particular asset

(5) NAMA’s expertise to ensure the best price is achieved

(6) NAMA’s expertise to determine the best time to dispose of an asset

(7) Estimated carrying costs for a distressed loan or property [In the UK, the standard assumption is 5% of the value of the asset in insurance, maintenance, management and other costs]

There is a compilation of reported NAMA sales on the NAMA winelakeblog but these are but a subset of NAMA’s total sales –  based upon press/industry reporting, contacts and other research – as NAMA does not report individual sales.

To make the above questions more tangible, I would ask that you apply them in the forthcoming hearing to a specific NAMA transaction. The obvious transaction is the recent sale of the €800m of loans in the Maybourne hotel group because it is the largest single NAMA transaction to date but given the mutterings about legal action, it might be better to avoid that transaction in preference to the following, which is a common-or-garden property sale by NAMA:

Number 1, King William Street in the City ofLondon was owned by a consortium which featured developer Paddy Shovlin. NAMA appointed receivers GVA Grimley who managed the disposal of the property on NAMA’s behalf. The property is a prestigious office block in the heart of the City, a stone’s throw from the Bank of England. It was widely reported in the press that it sold for GBP 67.5m in June 2011 to Nippon Telegraph & Telephone Corporation, and that the yield achieved on the sale was 5.6%. Yield simplistically means the annual rent on a building divided by its value so if the yield was 5.6% on a GBP 67.5m sale, that just means the annual rent is GBP 3.78m. Now theUK generally, and centralLondon in particular, has a far more transparent market thanIreland, with sales prices and property-related documents readily available from theUK’s Land Registry. And this transparency means that “going rates” are more readily established. The “going rate” for yields in the City ofLondon is 5.25% and if the sales price of the property onKing William Street reflected a 5.25% yield then it would have been GBP 72m not €67.5m. Also at the time, I was unable to locate the property being advertised on GVA Grimley’s website.

So in relation to the above transaction, you might properly ask about the gross and net profit, but also challenge NAMA to justify selling the property for less than the “going rate” yield would have indicated. And you might also challenge NAMA to demonstrate that the property was sufficiently marketed so as to achieve an optimum price. And lastly you might ask if now was the best time to sell the asset, particularly asLondonproperty prices continue to rise.

In response to questions about individual transactions, NAMA will typically remain tight-lipped and will invariably cite client confidentiality which NAMA is obliged to respect pursuant to section 202 of the NAMA Act. But the NAMA CEO said last month at the Corporate Restructuring Summit in Dublin that “if there is one key message I can ask you to take away from today it is: there is no point approaching us with an offer which is significantly below what we paid – it is a waste of your time and ours as it is unlikely to be entertained.” So buyers of NAMA assets are expected to have an idea what NAMA paid for the loans, and frankly given the number of valuers used by NAMA in valuing the loans and the standardised method of valuation, the acquisition value is unlikely to be difficult to establish. Sales prices are publicly available in theUK and some other jurisdictions. NAMA should be able to disclose costs associated with an historical sale. So although, you might encounter a reluctance on NAMA’s part to disclose information on individual sales, that information should be produced unless NAMA can demonstrate it will jeopardize its own business.

The bottom line is that you are going to have to establish some means of overseeing the meat of NAMA’s operation, which is the disposal of assets. Top-line reporting from NAMA will not enable you to determine if NAMA is doing a good job. Even if NAMA reports an overall profit, you will not be able to determine if a higher profit was achievable. So somehow, NAMA’s desire for confidentiality is going to have to square with your duty to oversee the operation of the Agency.

I don’t wish to finish on a harsh note, but it would indeed be unfortunate if a scandal or systemic failing in NAMA were to be uncovered in a couple of years and your constituencies rightly asked how the members of the main Oireachtas committee charged with the oversight of NAMA, failed to challenge the Agency early-on in its existence in a meaningful way which might have prevented such failing.

I wish you all well with the Committee’s important work.”

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This is the second part of a blogpost focussing on the repayment of a senior unguaranteed, unsecured bond at Anglo; part one was posted yesterday here. This entry examines in some detail what would happen if Anglo didn’t repay the bond.

The blogpost yesterday covered the position of the main stakeholders in the making of the decision to repay the bond. And this blogpost will start by concluding on that theme.

Is Minister for Finance, Michael Noonan a villain?
Not at all; there is clear evidence of the man going to great lengths to communicate a message to our partners in Europewho ultimately control the ECB despite all the talk of independence. He displayed bravado in the USin June this year when he met with the IMF and US Treasury Secretary Tim Geithner and announced on worldwide television that he would seek to share the burden of repaying bonds at Anglo and INBS. He raised the matter as a discussion topic with the Troika during their review mission in Dublin in July. He held meetings with ECB president Jean Claude Trichet, most recently face-to-face in Poznan. In the context of talks, he ran the marathon and then ran the extra mile. And he has failed to convince the ECB in the first instance of the merits of his position.

So why doesn’t he act unilaterally?

Because “heavy lies the crown” and Minister Noonan is facing the moment of truth with the actual burden of responsibility for the nation’s finances on his shoulders, and he presumably weighs up the €150bn of cheap funding provided to Irish banks through the ECB and the co-operative relationship between Ireland and the bailout Troika which sees our ongoing deficit being funded and concludes the risk to either, consequent to a unilateral default, outweighs the benefit.

What has happened when other EuroZone (EZ) banks defaulted on bondholder debt?
I stand to be corrected on this but I do not believe any EZ bank has in fact defaulted on bondholder debt since the introduction of the euro and the establishment of the ECB as a supra-national central bank. Outside the EZ there have been plenty of financial institution failures; in Northern Ireland, the Presbyterian Mutual Society went into administration and savers eventually received 100% compensation totalling GBP 232m from the London government. In the UK, Barings collapsed after our local, Nick Leeson (last seen on RTE Prime Time’s NAMA special) racked up dealing losses but Barings was bought for a nominal GBP 1 by Dutch bank, ING which also assumed all its liabilities. Icelandic deposit bank Icesave, part of Landsbanki, which operated in the UK and Holland collapsed and the UK government bailed out its depositors but only up to certain limits. The UK continues to seek compensation from Iceland, but to date the Icelanders have told it to get lost. And in non-EZ Denmark this year, at least three banks have failed and at least two, Amagerbanken and Fjordbank Mors have imposed losses on senior bondholders. But within the EZ itself, no bank has apparently collapsed; or rather no bank has been allowed to collapse with the usual consequence of business failure : unpaid creditors which in the context of a bank will include both depositors and bondholders.

In the US, 100 banks had collapsed in the first six months of 2010.

Irelandhas not signed up to any agreement to preserve its banks within the EZ, at all costs. Cast your mind back to 2007 when it was explicitly decided by EU finance ministers that creditors (including bondholders) and unsecured depositors “should expect to face losses” if a bank in the EZ failed. Cast your mind back to September 2008 when the deposit guarantee for ordinary depositors was only €20,000, and raised to €100,000 and subsequently made limitless. It was only three years ago when the system allowed for an EZ bank to go bust and creditors (depositors and bondholders) to face losses if that happened. Ireland has not signed up to a system whereby 20% of GDP (€29.3bn) must be paid by the nation to enable unsecured, unguaranteed creditors in failed banks to be repaid and we have also not signed up to a system whereby a bank must be financially supported at all costs.

What will happen on 2nd November 2011 if Anglo does not pay the USD 1bn bond?
One of three things (1) the bondholders have contracts with Anglo and would claim a default. They would presumably sue Anglo for their money. (2) Anglo would decide it was unable to meet the financial commitment of repaying the bondholders and would seek examinership or (3) the Government would intervene, presumably using its powers under the Credit Institutions (Stabilisation) Act , to stop the payment.

This is what the Anglo balance sheet looked like in the last accounts published for the six months ending 30th June, 2011 (page 26 is the balance sheet) There is some simplification and aggregation but simplistically the bank had €30bn of loans, €6bn owing to bondholders, €40bn owing to the ECB and Central Bank of Ireland and €27bn of accumulated losses and €29bn of state funding.

Of course there would be ructions with the ECB who might well decide to withdraw its extraordinary funding to Anglo. The Central Bank ofIreland, as part of the euro system, might decide, or be forced, to do the same. Anglo would collapse and there would be some form of examinership or receivership. If Anglo’s problems were ring-fenced, then I don’t think we would be unduly worried.

The fear would be that the ECB might alter the terms upon which it provides extraordinary funding to other banks, in particular AIB and Bank of Ireland. But to be clear, there is nothing in the bailout Memorandum of Understanding or anything that I am aware of in the agreements governingIreland’s relationship with the ECB which would allow the ECB to unilaterally act in such a manner.

And in respect of the ongoing funding of Ireland’s deficit to the end of 2013, again there is nothing in the Memorandum of Understanding which would allow our benefactors to withhold funds, as long as Ireland continued to meet the terms set out in the Memorandum and reduced/eliminated its deficit as agreed.

There has been a recent (almost suspiciously recent) suggestion that Ireland might be able to build on its good form in complying with the Memorandum of Understanding, and access additional cheap funding from the EU to pay off the Anglo promissory notes; and Ireland reneging on Anglo’s bondholders now might deter any agreement in this area, which might mean that next year we need borrow funds at 8%+ to pay off the promissory notes. That is an issue, but if Anglo was to be placed in receivership or examinership, the validity of all of the promissory notes might be tested, and some suggest that these represent what is called “odious debt” in international law and would not need be honoured by the State at all.

Society’s view
Yesterday the aim of part one was to provide a balance of the views of the stakeholders involved in making the decision to repay the Anglo bond. Whilst Society at large has no direct input, it is worth pointing out the cost being borne by Society, in part in order to repay bondholders. Since March 2011, we have had notice of three additional taxes – the pension levy, the €100 annual property charge which will start in January 2012, and the proposal for a €50 septic tank inspection charge. As unpopular as these have been, they are as nothing compared to what is coming in the next week. The Comprehensive Spending Review which was supposed to have been completed in September but which Fianna Fail leader, Micheal Martin was told in the Dail two weeks ago was still not complete, will set out savings and cuts to be imposed on state spending; it will not be popular in Society. Minister Noonan has committed to publishing a separate document “by the end of October” which will set out in “as much detail as possible” the new taxes and cuts to be introduced in the next four years; the aim of this document is to give some certainty to the economy but it will not be popular. And on 6th December, 2011 we will have a Budget which will cut at least €3.6bn out of the economy, and it will be in granular detail. Society isn’t exactly ecstatic at the moment, but in the next seven weeks it is likely to be deeply unhappy. Having said that, we know we need adjust our costs and taxes so as to balance what we earn with what we spend.

But when Society has the detail that will be contained in the three documents, the Comprehensive Spending Review, the Four-Year Plan and Budget 2012, and understands that part of the austerity is being used to repay colossal sums to unsecured, unguaranteed bondholders, it won’t just be deeply unhappy, it is likely to be incandescent.

Presently there are a number of ongoing, sporadic protests throughout the country, at a hospital closure here, a bondholder protest there, the Occupy Dame Streetprotest, and small-scale marches. To be honest it probably hardly registers with the Government. But having said that, I can’t help but notice the increased incidence of the words “protest”, “march” and “strike” in our media, and I would say that an amber light, perhaps just a soft-focus amber light at the moment, is already flashing. Taoiseach Kenny may enjoy a comfortable majority and an extended political honeymoon and it may be over four years to the next general election, but schisms happen and the Terminator-like red-eyed glint in last year’s leadership challenger, Richard Bruton has still not been extinguished; Taoiseach Kenny cannot afford to dismiss protests with the claptrap he mouthed in the Dail at the end of September, claiming that these payments to bondholders were not coming from taxpayers. Nor can Minister Noonan dismiss the question of these bondholder payments, claiming the maximum saving might be only €100m; we remember clearly enough Minister Noonan suggesting in June 2011 that an interest rate reduction on the bailout might be worth a only €148m per annum rather than the €1bn+ now achieved on the coat-tails of Greece’s woes.

What can you do?
I hope that you have a sense from the above that the payment of bondholders is not a black-and-white matter and different stakeholders take different views. If you conclude that these bonds should not be repaid, you can contact your local TD, a complete list of email addresses is here. If you are interested in a protest, you will find information here on the mechanics of the protest started by the Ballyhea villagers. The enormous sum being paid to unsecured, unguaranteed senior bondholders by Anglo on 2nd November, 2011 might not resonate with you, but when you soon see what lies ahead with austerity, part of which is needed to pay those bondholders, you may well be moved to act. The 34th weekly Ballyhea/Charleville protest march takes place tomorrow in Ballyhea and this evening at 8pm there will be a gathering in Charleville where Declan Ganley will give a talk on the subject at the Schoolyard Theatre (details of both and photos of the Ballyhea/Charleville protest are available here)

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It seems that the summer hiatus in NAMA foreclosure action has come to an end with yet another receivership, this time the appointment of a property receiver to assets in Alan Hanly Properties Limited. Iris Oifigiuil shows that NAMA appointed Neil Bannon of Bannon Commercial in Dublin on 14th October, 2011 as a receiver to unidentified assets at the company. Alan Hanly Properties Limited is one of a number of companies in the Hanly Group controlled by Roscommon developer and hotelier, Alan Hanly (pictured here)

Remember you can see a comprehensive list of Irish foreclosure action by NAMA here and in this regularly updated spreadsheet.

UPDATE: 25th October, 2011. The Hanly group has provided a statement reported in the Irish Times today which claims that NAMA’s action is limited to two properties – ” two industrial units in Keypoint Business Park [Blanchardstown, Dublin]  “. The statement is reported to continue “Lough Rynn Castle and Kilronan castle Hotels are not in receivership and, in fact, are trading very positively in what is a challenged economic climate”

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“There will be a debate in the House next week and I expect the Deputy, as the leader of his party, to spell out credible alternatives and an economic policy that is not based on fantasy but on reality. If the Anglo bondholders are paid, they will be paid from their own resources. This will not come from the taxpayer.” Taoiseach Enda Kenny replying to a question in the Dail from Sinn Fein leader Gerry Adams, on 28th September, 2011.

“It’s Frankfurt’s way or Labour’s way” Tanaiste Eamon Gilmore on 3rd February 2011 with the launch of Labour’s economic plan in the 2011 General Election, which he later dismissed as chapel-gate rhetoric

“The Government accepts that enabling provisions in legislation may be necessary to extend the scope of bank liability restructuring to include unsecured, unguaranteed senior bonds” – Programme for Government, March 2011

“Agreed Procedures for Restructuring the Debts of Troubled Banks: Fine Gael in Government will force certain classes of bond-holders to share in the cost of recapitalising troubled financial institutions. This will be done unilaterally for the most junior bondholders (owners of preference shares, sub-ordinated debt and similar instruments), but could be extended – as part of a European-wide framework – for senior debt, focusing on insolvent institutions like Anglo Irish and Irish Nationwide that have no systemic importance.” Fine Gael manifesto in February, 2011.

“Look, it’s no longer a bank. Anglo is now merged with Irish Nationwide. It’s a warehouse for impaired assets. Its deposit base has been moved out into the pillar banks. And it doesn’t work as a bank anymore. You can’t put your money on deposit in Anglo Irish. You can’t get a loan from Anglo Irish. So the only thing that gives it the name of a bank is because it has a banking license. It needs the banking license to access the monies from the Central Bank. So I said that as far as I am concerned, this is not a real bank. This is a warehouse, and we need your assistance in dealing with the senior bond holders because we don’t think the Irish taxpayer should have to redeem what has become speculative investment.” Minister for Finance, Michael Noonan in an interview with RTE in the United States in June 2011

For the past couple of months on Twitter, there has been a daily countdown to the repayment of a USD 1bn (€730m) bond by Anglo Irish Bank on 2nd November, 2011. Anglo of course is no longer legally in existence since it was officially re-named the Irish Bank Resolution Corporation Limited last Friday 14th October 2011. The imminently-maturing bond, ISIN ref: XS0273602622, was issued on 2nd November, 2006 and matures on 2nd November, 2011. It is denominated in US dollars and based on current exchange rates will cost Anglo €730m. The market assumes that it will be repaid in full and you can track its price and examine its price history here. Anglo has so far received €29.3bn of funding from the Irish state, some in cash but most with IOUs called promissory notes that the Irish state will need repay in cash over the next 10 years.

In the small CountyCorkvillageof Ballyhea(so small it’s not on many maps) they have been holding protest marches every single week since 6th March 2011, protesting at the repayment of bonds in our banks. They brought their march to Thurles in May 2011, and then they ran, cycled, crawled from Ballyhea to Leinster House in June, to hand in a petition. There was a bread and water fast in August. For the past couple of months, they have joined up with protestors from the nearby town of Charleville and they alternate the marching venue between Ballyhea and Charleville.  They will be holding the 34th weekly protest march this coming Sunday in Ballyhea, and will be joined by Declan Ganley who will also be giving a talk in Charleville on Saturday evening.

Although last night on RTE Prime Time, Europe minister Lucinda Creighton refused to confirm that the bond will be paid in full and she said that Minister Noonan continues to seek to negotiate aspects of our predicament, it seems all but certain that the bond will in fact be repaid in full on 2nd November. On that day it is generally expected that USD 1bn will be transferred from Anglo to the bondholders, who Minister Noonan describes as being mostly speculative investors at this stage.

But what would happen if Anglo didn’t make the payment? This entry is in two parts with part 1 examining the position adopted by the stakeholders in the decision to repay the bondholders, and part 2 which will be posted tomorrow will tease out the consequences of not repaying the bond in full on 2nd November, 2011.

The ECB’s view
The ECB wants Ireland to meet the repayment of senior bondholders in full and it objects most strongly to a loss – any loss – being imposed on senior bondholders. It has re-stated its position on many occasions and in recent times, the outgoing ECB president Jean Claude Trichet has reacted with impatience and irritation when the subject has arisen, for example at news conferences when Irish journalists have posed questions on the subject. The ECB’s position is that if Ireland imposes losses on senior bondholders and is allowed do so by the ECB, then senior bondholders buying bonds in any of the 17 EuroZone countries will demand higher interest rates to compensate for the increased risk of non-repayment. That would push up the cost of funding all banks in the EuroZone. Secondly there is a fear that if an Irish bank were to impose losses on bondholders then those bondholders, who might be banks in other EuroZone countries, might get into difficulty themselves and seek to impose losses on their own bondholders, and thus an Irish problem might become a French problem which might become a Spanish problem and so on. This seems to be what the ECB means by “contagion”. And what is the ECB’s locus standi in Ireland’s decision making? It seems to be two-fold (1) the provision of €150bn of extraordinary funding to our banks at low rates and (2) it is one of the three partners which comprise our bailout Troika. It should be stressed that there is no commitment given in the agreement with the Troika that Irelandwill meet 100% the cost of repaying bondholders in our banks, but according to Minister Noonan, “a nod is as good as a wink to a blind horse

The economists’ views
There seems to be precious few economists willing to express a view in support of the 100% repayment of senior unsecured unguaranteed bondholders. But one – and an important one at that, since he is the chairman of our newly formed Fiscal Advisory Council – is John McHale, professor of economics at the National University of Ireland in Galway. In February, 2011 he set out his views on the irisheconomy.ie website; essentially he views the extraordinary funding provided to Irish banks by the ECB as giving rise to a quid-pro-quo obligation onIreland to repay senior unguaranteed unsecured bondholders in full. In the comments that follow his blogpost in February, economist Brian Lucey says that the ECB’s provision of funding will be repaid in full with interest and is not costing the ECB anything, and the implication from this is that there shouldn’t be an obligation onIreland to meet 100% of the cost of repaying bondholders. Economist Colm McCarthy said “bluntly, the risk of sovereign default is increased every time a bondholder gets paid. Market prices are shouting that the risk is already seen as large.”

The lawyers’ views
It is indeed a disappointment that during this financial crisis which began here in earnest in 2008, the legal profession has on the whole been remarkably quiet. Whilst there is an irisheconomy.ie website to discuss economic aspects of the crisis, there was never an irishlaw.ie website to perform the same functions from a legal viewpoint; which is a pity, because navigating a course out of the crisis seems to require legal expertise as much as economic expertise, particularly in the context of laws affecting our relationship with the ECB. Governor of the Central Bank ofIreland, Patrick Honohan said that he did examine the legalities of imposing losses on bondholders and concluded it was not legally possible though he has not made the advices publicly available. Whatever about the influence the ECB can bring to bear, it should be noted that there is no obligation set out in the bailout Memorandum of Understanding which compelsIrelandto repay bondholders. The legal obstacles to imposing losses on bondholders seem to focus on three headings (1) bondholders ranking equally with depositors so if we want to imposes losses on bondholders then we need do the same with depositors and (2) since Anglo has minimal deposits remaining and presumably these are associated with lending accounts, following the sale of Anglo’s deposits and accompanying assets to AIB in February 2011, that Anglo has deliberately disposed of assets which might have been used to repay bondholders which might expose the bank to actions under a fraudulent conveyancing heading and (3) since Anglo has received €29.3bn of state funding, it is a solvent bank and normally it would be the shareholder (that is the government on our behalf as citizens) that absorbs the first loss.

The politicians’ views
It’s worth saying that if this bond is to be repaid, you can expect the Government to downplay the benefits, and highlight the risks, of imposing losses on bondholders. The only political view that will really matter in terms of the bond repayable on 2nd November, 2011 is the Government’s, and remember that it has a complement of 112 seats in a 166-seat Dail and practically no dissent so far (save for Denis Naughten who lost the FG whip over his stance on Roscommon hospital thereby reducing the complement from 113 to 112). And within the 17-member cabinet, it is really Enda Kenny, Eamon Gilmore, Brendan Howlin and Michael Noonan’s opinions that matter. And the view seems to be that (1) Ireland is putting clear blue water between itself and other PIIGS, is generating positive albeit modest growth, is rebuilding a tarnished reputation and has seen its 9-year bond rate fall from a high of 15.5% on 18th July to 8.3% today and does not want to jeopardise any of this by adopting a position that is contrary to our partners in Europe and (2) whilst the country is still running an annual deficit and is dependent on a bailout to pay day-to-day costs – “salaries of nurses, teachers and gardai” – it does not want to jeopardise the continuing funding from the Troika by adopting a contrary position and (3) whilst Irish banks are dependent on the ECB for €150bn of cheap funding, it does not want to jeopardise the continuing provision of this funding by setting its face against the ECB and lastly (4) a suspiciously recent topic to emerge has been the funding of the Anglo promissory notes which are set to cost us €30bn plus interest in the next 10 years and the suggestion is that we might get a deal from our bailout Troika on the cheap-funding of these promissory notes if we would only let this issue pass.

Part 2 of this blogpost will be posted tomorrow and it will tease out the detail of the consequences of non-payment of the bond on 2nd November.

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The drip-drip of NAMA receiverships continues apace with the agency appointing receivers to two companies last week. The first is Cork-based Fachtna Crowley Construction Limited, a residential developer which focussed on developments in County Cork. Its website is still available and shows its developments as Berryhill (Castlelyons, Cork), The Riverbank (Bandon, Cork), Gleann Alainn (Crossbarry), Lissagroom Meadows (Crossbarry, Cork), Radharc na Spuaice (Ballineen, Cork), Cois na hAbhainn (Dunmanway, Cork), The Spires (Inishannon, Cork), Cluain na Croise (Crossbarry, Cork), Church Hill (Inishannon, Cork), Woodside (Dunderrow, Cork). The company is most associated with Factna Crowley and his father Jerry Crowley. Just an ordinary residential developer whose developments are likely to have declined significantly in value, as far as I can see.

The second receivership, in relation to Conrick Developments Limited, seems to be some cleaning-up of loose ends by NAMA. This is a Paddy Shovlin company whose developments included a 1.5 acre mixed-used scheme at Old Bray Road in Foxrock. NAMA took very robust action against Paddy Shovlin last year and secured a personal liability order in Dublin’s High Court last October 2010. NAMA has since appointed receivers to his property including No 1 King William Street (pictured here) in the City of London which was sold earlier this year, and of course the Beacon South Quarter where NAMA sold 58 apartments to the Cluaid Housing Association last month.

Remember you can see a comprehensive list of Irish foreclosure action by NAMA here and in this regularly updated spreadsheet.

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Jones Lang Lasalle (JLL) has today published its commercial property series for Ireland for Q3, 2011(free registration required). The JLL series is one of the two Irish commercial indices 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 other quarterly Irish price series is published by SCSI/IPD and will be available on Tuesday 25th October 2011; because it is generally published after JLL’s, it is not used here but the index does historically show a very close correlation with JLL’s.

The JLL Index shows that capital values are continuing to decline. The Index declined by 4.2% in Q3, 2011 compared with Q2, 2011. Overall since NAMA’s Valuation Date of 30th November, 2009 prices have declined by 21.5%. Commercial prices in Ireland are now 64.7% off their peak in Q3, 2007. On an annual basis prices are down by 13.7%. The NWL index is now at 835 which means that NAMA needs to see a blended increase of 19.8% 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).

Today’s figures from JLL are worrying although the quarterly decline is “only” 4.2% compared with a decline of 5.7% in Q2, 2011. JLL continues to emphasise that the effect of the proposed change to Upward Only Rent Review (UORR) leases is EXCLUDED from these falls. JLL says “It must be noted that capital values at Q3 2011 do not allow for the proposed legislation on the abolition of upwards only rent reviews in existing leases.” Having said that, it is likely that there is some degree of anticipation by the market of the proposed legislation and that anticipation which is based on a proposal, then a commitment in the election manifestos in February 2011, then statements by the justice minister Alan Shatter and finally leaks of the proposed legislation, has meant that notional values have declined. So the view on here is that there will be some further capital declines when the UORR legislation is introduced, but it will be far less than the 20-30% declines being talked about at the start of the year when the changes were just proposals.

JLL’s capital index is now down 11.1% for the first six months in 2011. If the expected changes are made to UORRs, then a 20% reduction from today would see a total decline of 29% for 2011. That compares with a Central Bank ofIrelandadverse scenario in its March 2011 stress tests of 22%. A more-likely 5-10% decline in Q4, 2011 would see a 16-20% decline for this year.

Also based on a NAMA portfolio acquired for €30bn, NAMA is nursing a loss of over €5bn. That is, if NAMA paid €30bn for the loans, that would comprise €28.5bn NAMA bonds and €1.5bn subordinated bonds which need not be honoured if NAMA makes a loss. The €30bn includes a Long Term Economic Value premium of an average of 10%. So the loans were worth €27.3bn in November 2009 (€30bn / 1.1) and are now worth 16.5% less (index of 835 is 16.5% less than 1000; 857 plus 19.8% = 1000) or €22.8bn. So if the loans have cost NAMA €28.5bn and are only worth €22.8bn today, NAMA is nursing a paper loss of €5.7bn.

Elsewhere the JLL report shows that the fall in capital values is spread across different commercial property categories with Offices down 4.1%, Retail down 4.3% and Industrial down 4.6%. Rents also continue to fall with JLL’s net income index was up 1.1% in the quarter (the first increase since Q2,2010), but its ERV index was down 2.3%, the latter representing the notional fall if properties were vacant and available to rent.

UPDATE: 25th October, 2011. Ireland’s other commercial property index was published this afternoon by the Society of Chartered Surveyors in Ireland (SCSI) in association with IPD. The quarterly fall for Q3, 2011 was 4.6% compared with 4.2% recorded by JLL. Below is the recent history of the two indices.

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