Archive for February 7th, 2013

“They have continued to withhold the full story..Furthermore, their evidence bearing on remuneration for professional services rendered to Lyndhurst is sparse in the extreme…I have no evidence that these two respondents are impecunious or that they have no support from well resourced sources…The judge declared that it would be fair and proportionate to fine each man GBP 15,000 and given six months to pay.In default, they will each be sentenced to four weeks imprisonment” Judge McCloskey in the Belfast High Court today, sanctioning two Ukrainian defendants in a Sean Quinn case

On this side of the Border, one of the common questions emerging in the past 24 hours has been how IBRC’s pursuit of Sean Quinn and family for €2.9bn and an international property portfolio and rental income thereon, will be affected by the IBRC scheme. The answer is contained in the Department of Finance Q&A that was published after the announcement last night.

“a) Cases taken by IBRC IBRC’s claims against third parties, whether or not the subject of Court proceedings, will be unaffected by the winding up. The Special Liquidators will have the power to continue to manage any IBRC claims that currently exist and will have the ability to assert further claims where they arise.  Alternatively, the Special Liquidators could sell IBRC’s interest in any such claims to a third party, or to NAMA, in which case the acquirer will be entitled to continue those proceedings. “

So, the Quinns are not off the hook at all with the IBRC scheme and the betting is that NAMA will end up pursuing it.

On the other side of the Border today, in the Belfast High Court, Judge McCloskey sanctioned two Ukrainian defendants who appeared via video link in a Quinn court case last year where IBRC was seeking to undo certain transactions involving a Northern Ireland company and a company registered in the British Virgin Islands. The judgment today is not yet online, but in brief, Judge McCloskey held the two Ukrainians, Oleksandr Serpokrylov and Dmytro Zaitsev,  to have flagrantly and deliberately ignored an order against any transfer of debts surrounding the €50m Univermag shopping mall in Kiev, Ukraine.

A chain of assignments scrutinised in the case set out how Fermanagh-based firm Demesne Investments, of which Mr Quinn is a former director, was owed $45m by Univermag. But in April 2011 Demesne transferred its rights to the debt to Innishmore Consultancy, another Northern Ireland company run by Mr Quinn’s nephew Peter Quinn. From there the loan was moved on to Lyndhurst.

Lawyers for IBRC argued that the assignment was a sham, part of an asset-stripping exercise carried out at a massive undervalue and not worth the paper it was written on.

The two men appeared before the High Court by video-link from Kiev to defend the action.

In a scathing judgment last month Mr Justice McCloskey found both them and Lyndhurst in contempt of court. He delayed imposing punishment to allow further submissions by the respondents’ legal team. But today, the Judge sanctioned the two Ukrainians though because they are apparently resident outside the European Union, questions were raised about the enforceability of any outcome.

Ruling today on the penalties, Mr Justice McCloskey described the two men as “relatively minor players in the overall scheme” who had acted on their client’s instructions.

But he also pointed out how they had declined to disclose their income or assets, and made no attempt to answer questions raised in the case.

“They have continued to withhold the full story,” he said. “Furthermore, their evidence bearing on remuneration for professional services rendered to Lyndhurst is sparse in the extreme. I have no evidence that these two respondents are impecunious or that they have no support from well resourced sources.”

The judge declared that it would be fair and proportionate to fine each man GBP 15,000 (€17,000) and given six months to pay. “In default, they will each be sentenced to four weeks imprisonment,” he said.

Legal costs for the contempt action were awarded against all three respondents, Lyndhurst Development Trading, Oleksandr Serpokrylov and Dmytro Zaitsev.

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NAMA has just now issued a statement, the full text of which is

“In conjunction with the arrangements announced today by the Minister for Finance for the appointment of a Special Liquidator to IBRC, NAMA has been directed to establish a special purpose vehicle (National Resolution Ltd. – NRL) to acquire a floating charge over certain IBRC assets. These assets are currently used as collateral by IBRC as part of its existing repo arrangements with the Central Bank of Ireland.  As consideration for the floating charge, NAMA will issue to the Central Bank new Senior Bonds which are guaranteed by the Minister.

In the period to mid-2013, the Special Liquidator will seek to value and sell the secured underlying assets subject to the floating charge.  After the sales process conducted by the Special Liquidator has been completed later in the year, NAMA will acquire the unsold loans in the IBRC loan portfolio in addition to the proceeds of any asset sales conducted by the Special Liquidator during the sales process.

Speaking on behalf of the NAMA Board, Chairman of NAMA, Mr. Frank Daly, stated: “NAMA is fully committed to managing the new responsibilities which have been delegated to it by the Minister and to realising the maximum possible return for the taxpayer from the portfolio that it is due to acquire later in the year”. [statement concludes]

The expectation on here is that NAMA will issue €16bn of new bonds to acquire the after-provision loans at IBRC. And that NAMA will employ about 400 of the 700 IBRC staff (there are already 300 staff of IBRC’s 1,000 working on NAMA loans).

UPDATE: 8th February, 2013. It is understood that NAMA will not be paying a long term economic value premium on its acquisition of loans, and it remains unclear what loans NAMA will be able to bid on, and if it will have a right of matching first refusal.

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We’re still awaiting the detail of what is now planned with the liquidation of Irish Bank Resolution Corporation which houses the legacy loans of Anglo Irish Bank and Irish Nationwide Building Society, but already we can have a pretty good stab at those who will make a killing out of this. There will be losers also, and we examine those.


You are: if the scheme works out as I expect it too, there will be reduced debt, reduced deficit and smaller budget adjustments needed. Now, the Troika might insist any short term savings are ignored and that we simply accelerate progress in balancing our budget, but from the information gleaned so far, we face the prospect of vastly reduced interest and cash repayments. However, you will still be angry that there is no debt write-down (a transfer of debt from promissory note to NAMA bond is a transfer from sovereign debt to contingent debt) and that we are still shouldering the entire cost of bailing out our banks. So you are a winner by reference to yesterday’s position, but compared to September 2008, you are still very clearly a loser.

KPMG: Yes the audit firm that was responsible for the audits of AIB (bailout cost €20bn), INBS (bailout cost €5bn) and Irish Life and Permanent (bailout cost €4bn) has been given the plum role in liquidating IBRC. Fine Gael deputy and banking expert Peter Mathews was incandescent yesterday, and some of you might feel likewise. But was any firm untainted by the banking bust from 2008 onwards? Arguably Mazars.

Lawyers: We don’t know which law firm drafted the IBRC Act 2013. It might conceivably have been Arthur Cox, but whoever it was, there will have been consultation and drafting fees.

NAMA staff: NAMA has emerged from this as a winner, as it will be NAMA which takes over IBRC. Poor old NAMA CEO Brendan McDonagh has been getting by on a €365,000 salary compared to €500,000 paid to IBRC CEO Mike Aynsley. So Brendan should be in line for a pay increase, if there is any fairness in this world. Similarly asset managers will now have expanded portfolios and will face more complicated decisions.

Advisers: We don’t know if there were third party advisers to the arrangement that has been so far announced, but Minister for Finance Michael Noonan’s past form would suggest he doesn’t have a bathroom break these days without a tender and impact statement, so  I would be surprised if there wasn’t an investment bank or consultancy lurking somewhere getting €1,000 per hour per person fees.

Bondholders. The status of the bondholders remains unclear. In the Department of Finance Q&A issued this morning, it states in relation to litigation – which will include litigation where at least three sets of bondholders, Enid, Assenagon and Fir Tree –  “The effect of the IBRC Act is to place an immediate stay on all proceedings against IBRC that are before the courts (including counter‐claims which do not give rise to a set‐off). Claimants who have issued proceedings against IBRC will now have to pursue and prove their debt to the Special Liquidators. Such claimants will rank as unsecured creditors in the liquidation. If a claimant is also a debtor of IBRC, and that debt is sold to NAMA or a third party buyer, such buyer will acquire the debt subject to that claimant’s pre‐existing valid and enforceable claims and counterclaims that give rise to an enforceable right of set‐off against IBRC.” If IBRC loses its appeal against Assenagon in March 2013 in London, then it faces €210m of costs and there is also an appeal judgment due in New York where Fir Tree who hold USD $200m of subordinated bonds are ultimately trying to position themselves to secure full repayment. Until, the status of these cases are clarified and what assets are available to satisfy judgments, I am regarding bondholders as winners.


Paddy McKillen: if I were a betting person, I would have said that Paddy McKillen has a reasonably good chance of winning his appeal in London this week, against a High Court judgment last year which rejected his claims that the Barclay brothers had engaged in shenanigans to wrest control from Paddy, of the Maybourne group of hotels. However, you might recall that Paddy fought tooth and nail to have his loans at Anglo (and other NAMA banks) stay put, and not be acquired by the Agency. Paddy went to the High Court and Supreme Court in Ireland where he ultimately fought NAMA to a draw, and NAMA decided to leave Paddy’s loans rest at Anglo. Well, now that NAMA is set to acquire ALL of IBRC’s loans, Paddy will either have to refinance the loans elsewhere, and we appear to be talking about €360m-odd for both IBRC and Bank of Ireland, or Paddy will need to submit to the NAMA machine. And given NAMA’s control over some remaining Derek Quinlan loans, and given the history between Paddy and NAMA, it must be a nervous time for the developer and businessman this morning. IBRC and Mike Aynsley appeared to be bessie mates with Paddy, but over at Treasury Buildings, there is no love lost.

IBRC staff: there will be close scrutiny in coming days on any redundancy deals struck with IBRC staff, particularly senior staff like the Australian CEO, Mike Aynsley who was scheduled to continue in post until March 2018 when he will be 60. Recently Minister Noonan stated in the Dail that the CEO’s contract contained standard termination provisions. The IBRC pension scheme was in reasonable shape and without a deficit. Somehow I can’t see the departing staff, estimated on here at about 300 receiving just the statutory two weeks per year of service. And the estimate on here is that 300 staff will be out of work by the end of 2013 which will be one of the biggest single job losses in the State this year.

IBRC depositors who had more than €100,000 on deposit. This is more of a theoretical loss because it is understood that the relatively minor deposits – €518m at 30th June 2012, page 24 of the H1, 2012 report – all related to legacy loans which IBRC was managing. So a businessman might have had a €2m loan but maintained his working capital in a deposit account at IBRC. So any loss suffered by that businessman on his deposit in excess of €100,000 will probably be offset against the outstanding loan. The Central Bank of Ireland has this morning confirmed that depositors will receive the first €100,000 back, but I would expect any deposits to be offset against outstanding loans.

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I know that what is happening at IBRC right now sounds pretty complicated to some of you, but practically all of you will know that most deals can be improved. This blogpost examines how the IBRC scheme as presently described can be improved.

The number one fear at the ECB is that Ireland will renege on the promissory notes, and as the Irish saying goes “you might as well be hanged for a sheep as a lamb” so if we reneged on €26 of the promissory note, it would be the same as reneging on €26bn. The ECB is highly concerned that the promissory notes can be reneged on and that the ECB will be legally exposed to a massive loss. The ECB recognizes that the promissory notes were IOUs from a democratically elected minister of Ireland and that they are backed up by so-called “letters of comfort” but the ECB is concerned that there might be some reneging, and that “some reneging” might quickly lead to an utter rejection of the promissory note debt.

The main way by which the IBRC scheme can be improved, is to renege or threaten to renege on the €27bn of extant promissory notes. This course of action will carry risk, and there will be dire threats in retaliation. The ECB is lending €70bn to our banks directly, including Bank of Ireland, AIB and Permanent TSB apparently. The ECB might seek higher interest on its lending. The ECB ultimately has the power to collapse our banking system. Solidarity with our European partners might deter extreme action. We can argue about the legal niceties but without banks, we might be too busy hiding in cellars with tinned food to deal with the niceties of court action.  So there are risks but there are huge potential rewards also.

As recommended on here a year ago, because the status of the promissory notes is the ECB’s Achilles Heel, and we should be pounding on it relentlessly.

These are the days in which Ireland can save billions and maybe €10bn+.

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The IBRC scheme

What happened yesterday?

It seems that some un-named source told Reuters and Bloomberg that there was a plan to liquidate Irish Bank Resolution Corporation – IBRC, the entity that houses Anglo and Irish Nationwide Building Society. Rumours flourished and around 5pm, RTE started reported its understanding that IBRC was to be liquidated and that emergency legislation would be introduced in the Oireachtas because it is to be a special liquidation. KPMG were appointed liquidators yesterday afternoon and the IBRC board was dismissed. At around 8.30pm, a copy of the Bill was given to the parliamentary parties and at around 10.30pm it was given to the Opposition. The Dail and Seanad worked on the Bill to which no amendments were admitted, and in the end it was supported by Fine Gael, Labour, Fianna Fail and a couple of Independents. The President, who had rushed back from Rome, signed it into law earlier this morning.

So we’ ve got a deal with the ECB?

Not at all, though we might get more clarity on that today. All we’ve done so far is some domestic rearrangement of banking assets and liabilities. Sources this morning say ECB approval of a scheme may take another three weeks.

In outline what will happen?

IBRC which has about €16bn written-down value of loans to developers and businesses and mortgage holders (INBS) will transfer the loans to NAMA. NAMA will issue NAMA bonds. NAMA will manage the loans until 2020 by which time it hopes to have generated enough to redeem the bonds. Most of the 1,000 IBRC staff will move to NAMA which has a true present staff of about 700 at present. I would expect about 300 redundancies, but it should be stressed that is sourced here and here alone.

How does the cost of what is proposed compare to the existing arrangements

Good question. We don’t know the ECB leg of the deal so we can’t say right now, but we can say that using NAMA bonds to take assets off IBRC means that the State will save because NAMA just pays 0.75% on those bonds and hopes to recover that through its operations.

Are there risks of hidden losses?

Oh yes, questions remains about what will happen to the bonds at IBRC. IBRC has at least three sets of litigation where it is defending actions from bondholders who want full payment. Minister Noonan last night referred to all bonds being repaid and it remains unclear if this means that IBRC will have to foot an additional €460m-plus loss. We await details of redundancy and pay-off costs.

Are we better off?

We will probably be better off, but we still await details of the ECB leg of the scheme. However we are converting promissory notes which the ECB fears we will renege on, to a direct commitment to the ECB which we can’t renege on without a clear sovereign default.

What’s in it for Ireland? What’s in it for the ECB?

We get to use NAMA bonds to fund assets at IBRC and NAMA bonds are cheap and NAMA will expect to make sufficient profit to cover their cost. The ECB sees the wacky promissory notes replaced with a firmer commitment from Ireland.

What effect will the new arrangements have on our debt, deficit and budget adjustment

NAMA bonds don’t form part of our debt so I would expect our debt to drop by €16bn or 8% from 122% to 114%. We will pay interest only on whatever instrument we replace the promissory note with and for illustration, if we replace it with a 4% 10-year bond, then on the estimated €10bn, we will pay €400m interest compared with about €1.8bn this year for the promissory note.  We will make similar savings in 2014 and 2015, though the savings reduce after that. This consequently means we can potentially cut the adjustment this year by €1.4bn and the Budget in December would be €1.7bn of adjustments rather than €3.1bn.

What happens to IBRC staff and premises?

Most staff will transfer to NAMA. The estimate on here is that there will be about 300 redundancies from the 1,000 staff presently employed. Look out for termination packages. Remember this is a bust bank. The IBRC premises will probably be kept for the short term, but would expect moves to Treasury Buildings in next six months.

What happens to the Quinn litigation?

Nothing. NAMA steps into shoes of IBRC, and NAMA is harder than IBRC. In any event, the Quinn litigation will now die down until after the Fitzpatrick trial next year.

Why was there a mad rush yesterday?

I don’t know. Min Noonan said it was because there was a threat to the assets of IBRC. Those assets are loans and it is unclear to me why those loans would have been jeopardized by a litigation. I am doubly suspicious because it has been the intention, apparently, to liquidate IBRC for several months, so there was always going to be such a rush AT SOME POINT. Given the Keystone Cops yesterday, I just don’t believe Minister Noonan that if there had been such long-prepared plans that it would have been so chaotic.

What next?

There are scores of questions that remain unanswered. The ECB may answer some today. But what most of you are looking for is an illustration of the cost including interest of the present scheme by year compared with the proposed scheme. That will be worked towards on here.

UPDATE: 7th February, 2013. This evening there are a raft of references to help us understand the scheme. To start off, the Fianna Fail finance spokesperson Michael McGrath asked An Tanaiste the following

Michael McGrath: The Tanaiste might say in his response how long the Irish Central Bank will be allowed to hold these long term Government bonds, which is the key issue at the heart of all of this. As long as the bonds are held by the Irish Central Bank the true interest rate to the State is reduced

The Tanaiste: On the specific questions asked, the Irish Central Bank will only sell the bonds where such sale is not disruptive to financial stability. There is a schedule of sales, which if the sale conditions are right, will amount to €500 million up to end 2014, €500 million in the next four years, €1 billion in the following five years and €2 billion per annum thereafter. As I stated, such sales will only be in circumstances where they are not disruptive to financial stability. The interest rate will be a floating interest rate. We expect it to be between 3% and 3.5%.

Next up, we have a statement from the Central Bank of Ireland on the deposit guarantee scheme. There is a Q&A from the Department of Finance.

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