Archive for January 7th, 2013

“Ms Margaret Hayes: The treasurer of the bank is working on a strategy to address the roll-over of funding for the elements that are due and maturing next spring. We have been advised that this is well advanced but, as the Deputy will appreciate, this is commercially sensitive and I cannot go into any more detail about it.

Deputy Pearse Doherty:   I understand that. Does one of the options include the possibility of further recapitalisation by taxpayers of that bank if the strategy does not—–

Mr. Ray MacSharry: That does not arise. Our capital adequacy arrangement at the moment is 18%, which is very high. We are probably the best capitalised bank in the country. That is to take care of the problems of arrears.” Permanent TSB’s two public interest directors before the Oireachtas Finance and Public Expenditure and Reform Committee on 19th December 2012

Permanent TSB has two meaty bonds that it needs to imminently repay – one next Monday 14th January for €1.3bn and the same again in April 2013. The 99.2% state-owned bank says that it already has the funding in place for both redemptions, that is, the €1.3bn next week and the €1.3bn due in April 2013. The bank’s directors were also categorical at an appearance before an Oireachtas committee in December 2012 that no additional capitalization would be required from the taxpayer and that the bank was not in receipt of any Exceptional Liquidity Assistance from the Central Bank of Ireland. PTSB failed to sell the €8bn Capital Home Loans business in the UK last year when it didn’t attract deemed-adequate prices and only realized a relatively paltry €287m from the sale of its car loan business. It only had €58m of cash on hand at the end of June 2012 (see balance sheet below). So where has it gotten the money to now boldly assert it can pay the two maturing bonds?

Whilst it would generally have been open to PTSB to go cap-in-hand to the ECB for a loan secured on its assets – mostly loss-making impaired mortgages in Ireland with many in negative equity and loss-making mortgages in the UK – it is understood in the industry, that the collateral at PTSB would not have been such to provide it with sufficient funds to pay the two bonds.

However, it is understood from sources that PTSB has gone to “private banks” to access the funds on a repo basis, that is, secured on specific assets in the bank. But if Bank of Ireland has to pay 3.2% on 3-year debt secured on blue-chip mortgage assets, then how much did PTSB pay?

But why would private banks advance funds in the first place to a bank which seems to be drip-dripping bad news all the time – in August 2011, it told the European Commission it would be returning to profit in 2014, a year later in August 2012, it was reported to have said it would return to profit “at the end of 2014 or start of 2015” and yesterday, it said it would return to profit in 2016. It has a mortgage book which its directors say is 20% impaired, but in line with accounting practice, this ignores mortgages on homes in negative equity.

It emerged in 2011 that former finance minister Brian Lenihan has been issuing so-called “letters of comfort” to the Central Bank of Ireland as a condition of that bank advancing funds to Anglo. The letters of comfort acted as quasi-state guarantees to the Central Bank for its advances to Anglo; I say “quasi” as the whole legality of the Anglo promissory notes is set to be tested in the courts shortly with David Hall’s challenge in the High Court set to commence at the end of January 2013. Might there have been letters of comfort exchanged in PTSB’s case?

And if customized guarantees weren’t given, were the loans covered by the Eligible Liabilities Guarantee scheme. And does the repayment of these loans depend on a resolution of PTSB’s loss-making tracker mortgage book and its Asset Management Unit?

We had a splash announcement yesterday from PTSB on its €450m of lending into the Irish economy in 2013. It would be nice to see an announcement on how it is financing €2.6bn of bonds that fall due imminently.


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[Here’s the 30 second version – last year AIB sold €660m of loans to US company, Lone Star. If these loans had been acquired by NAMA instead, then a premium would have been paid which NAMA says it can recoup by 2020 as property markets improve. We own 99.8% of AIB. So we lost out on that premium, which we gifted to Lone Star. Minister Noonan controls the 99.8% stake in AIB on our behalf]

Communications minister Pat Rabbitte, who last week accused the media of “all-pervasive negativity”, might want to stick his fingers in his ears and ululate la-la-la for the next few minutes, because there is nothing positive in the following to reflect on his Government’s oversight of what was probably the largest disposal of state assets in 2012.

First though, cast your minds back to 2009 when NAMA was being set up. Remember it was originally going to acquire €77bn of bank loans and pay €54bn for them. Remember the hullaballoo about “Long Term Economic Value” – NAMA was not going to pay just the market value of the loans it was acquiring, but it was going to pay a premium on top of the market value to reflect the fact that we were supposedly at the bottom of the market, that the banks were distressed and that NAMA would turn a profit by managing the loans in a recovering economy? Long Term Economic Value (LTEV) was one of the most controversial aspects of the NAMA project and back in 2009, it was estimated that the €54bn that NAMA would pay for the loans, would comprise market value of €47bn and LTEV of €7bn. In the event, NAMA now says that it has paid €5.6bn of state aid when it acquired the loans, which mostly comprises LTEV. All clear so far?

And remember what NAMA was set up to do – acquire property loans from certain banks, pay for those acquired loans with NAMA bonds which banks could exchange at the ECB for crisp new cash, NAMA would manage those loans and by 2020, it would have made a profit of €5.48bn, that was the plan! The “NAMA bonds” are no more than paper IOUs approved by the European Commission as the means of funding the purchase of loans, and NAMA must pay the holder of the bonds interest annually, presently a little over 0.75% per annum. The European Commission approved a NAMA scheme which allowed NAMA issue €54bn of bonds plus an additional €5bn of bonds to support development of the loans – €59bn in total. To date, NAMA has issued €32bn of bonds and redeemed just under €5bn.

What has any of this to do with what was probably the largest disposal of state assets in 2012?

Cast your mind back to October 2012, when, as part of its deleveraging commitments, AIB sold €660m of loans to US investor Lone Star, these were 70 loans secured on “400 properties, including hotels, nightclubs, shopping centres and offices both in Dublin, the single largest geographic concentration, and the Irish regions.” When the Sinn Fein finance spokesperson Pearse Doherty tried to quiz Minister for Finance Michael Noonan on the deal, he was mostly told to get lost because it was confidential.

But there is one aspect of the deal that we can readily surmise.

No Long Term Economic Value was paid to AIB by Lone Star!

Now, drawing all of the above together, NAMA, which was set up to acquire property loans – in fact NAMA can acquire any loans it deems systemic – NAMA, which still has over €22bn of unused NAMA bonds which cost the Agency a measly 0.75% per annum when issued and NAMA which pays about 10% LTEV as a premium on the market value of loans, sat back and watched Lone Star buy €660m of property loans from AIB.

In October 2012, we were even more at “the Bottom” than we were in 2009 when NAMA was set up. So what the owner of 99.8% of the shares in AIB – that’s Minister Noonan! – did, was to approve this transaction which saw Lone Star paying the market value for the loans and no more, while we had another Agency standing by which specializes in managing property loans, which has the funds and the resources to manage these loans, and which is set up to manage the loans so as to break even on its purchase price by 2020.

How much LTEV would NAMA have paid for the €660m of AIB loans? Difficult to say – NAMA has typically paid 10% on top of the market value of the loans. But as Minister Noonan refused to tell us what that market value was, we can only speculate. The average discount applied by NAMA to €19.3bn of AIB loans acquired by the Agency for €8.6bn was 55% which would indicate a LEV of €27m – roughly what the cut in the respite grant will save this year.

All of this might seem quite convoluted but it distils to our Government overseeing another tens-of-million loss at our state-owned banks whilst another agency, also overseen by the Government, set up to acquire and manage loans and break even by 2020 stood by.

If Pat Rabbitte was in Opposition still, he would be calling the Government a bunch of clowns. Don’t worry Pat, continue this standard of governance and you’ll be back there soon enough.

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“I am informed by IBRC that this information is not readily available at this time and the compilation of this information is likely to delay completion of the Mercer Remuneration Report which is a Government priority” Minister for Finance Michael Noonan with his recent template response to questions about banking pay and pensions.

The outrage towards pay and pensions in the banking sector, which was reignited last October 2012 when the Fianna Fail finance spokesperson Michael McGrath asked the AIB CEO, David Duffy, a seemingly benign set of questions at an Oireachtas committee hearing, has receded in the last month as Budget 2013 woes and then the Christmas and New Year holidays interceded. The politicians are still on a break, and won’t return to the Dail until 16th January, but one of the first items on the agenda should be banking pay and pensions.

Last year, Minister for Finance Michael Noonan eventually refused to answer parliamentary questions on banking pay and pensions by saying a report was being produced and researching the responses to questions would only delay its completion, this despite the fact that we are paying €120,000 to a third party, Mercer to produce the report.

Minister Noonan was coy about the terms of reference* but we understand that Mercer was engaged in June 2012, so we’ve been waiting six months for whatever report will be produced – at least 180 days, access to the Department of Finance and €120,000, the report had better be outstanding. An Taoiseach Enda Kenny indicated the report would be published before the Budget 2013 announcement but Minister Noonan has kept to his line that it would be delivered “by the end of the year”. That was last week.

Minister Noonan has claimed he is “powerless” to intervene at banks, which he owns, to regulate pay and pensions. He was told to “get lost” by IBRC when, last April 2012, he requested staff earning more than €200,000 to take a 15% cut. He has recently approved a €500,000-plus salary for IBRC’s chief risk officer and then said he wouldn’t tell us how much the equivalent function was being paid at NAMA. The €1.1bn pension fund top-up at AIB in August 2012 has not gone away, and just before Christmas, Independent TD Stephen Donnelly was cut short at an Oireachtas hearing when he tried to probe why we bailed out the AIB pension fund, when that bank was hopelessly insolvent and have stood by whilst other pension funds have run into deficits.

The view on here is that the Mercer report is a diversion designed to kick the issue of banking pay and pensions into the long grass. Minister Noonan knows that at a senior level, there is wide variation on pay levels, that NAMA staff are carrying out the same functions with the same complexity as IBRC, and yet senior pay levels at NAMA are 25%-plus less than those at IBRC.

Next week, when the politicians return from the holliers, the Mercer report should be firmly on the agenda.

*There was a raft of questioning on the Mercer report in November 2012. This is a sample.

Deputy Pearse Doherty: To ask the Minister for Finance in respect of the appointment of Mercer in June 2012 to examine pay levels across banking institutions, if he will provide the terms of reference attaching to the appointment; the timescales for the production of research or reports; if such timescales form part of the contract with Mercer, the estimated fees payable to Mercer and a copy of any associated tender document, and an overview of the cost and description of any additional resources provided by the him or his Department to Mercer to facilitate the completion of the work..

Deputy Pearse Doherty: To ask the Minister for Finance in respect of the appointment of Mercer in June 2012 to examine pay levels across banking institutions, if salaries at the Central Bank of Ireland and National Asset Management Agency were included in the scope of the Mercer work when that company was appointed in June 2012.

Minister for Finance, Michael Noonan:  I propose to answer questions 225 and 226 together. The Deputy should note that I have already provided the information he seeks when responding to his parliamentary questions of 15th November 2012 (Ref No. 50509/12) & 20th November 2012 (Ref No. 51025/12).

For his convenience I am including the information below.

“The Deputies will be aware that my Department is presently engaged in a Review of Remuneration Practices and Frameworks at the covered institutions.   I have recently engaged, as I informed the Opposition Spokespersons on Finance, the services of Mercer (Ireland) Limited following a limited competitive tender competition to assist my Department in bringing this exercise to a conclusion.  The estimated cost of the review, at this stage, is approximately €120,000.

The object of the review is to thoroughly review all remuneration practices at the covered institutions with the object of simplifying remuneration and compensation structures, discouraging excessive risk-taking and to better align pay and reward to long term value creation.  Present Government policy on remuneration dictates that no employee, at the covered institutions may receive more than €500,000 (excluding pension contributions) per annum and remains in force.

Numerous engagements by my officials and Mercer have taken place since the awarding of the contract.  I am expecting the consultant’s report to be delivered by year end whereupon consultations with the various stakeholders will commence.

As I have said previously, I fully recognise that there is a real public interest in the levels of remuneration at the covered institutions and have committed to placing the details underpinning the review into the public domain”.

In relation to his further question on additional resources, no such resources have been provided by me or my Department to Mercer to facilitate the completion of the work.

As the review involves the Covered Institutions the Central Bank of Ireland & the National Asset Management Agency are not included in its remit.

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