Minister for Finance Michael Noonan is so far resisting the release of the unaudited accounts for Irish Bank Resolution Corporation for the year ended 31st December 2012, so the best we have at present are the interim IBRC accounts for the six months ended 30th June 2012. Below is the balance sheet.
For you non-accountants, the balance sheet at 30th June 2012 doesn’t look too bad. There are net assets of €2.7bn, and that is after IBRC has booked over €10bn of provisions for losses on its €27bn of loans. Yes, only 30% of IBRC’s loans are performing but IBRC is also receiving interest on the promissory notes, so you might have expected IBRC to be breaking even on its operations.
But no, not only is the Department of Finance saying that the €2.7bn of net assets at 30th June 2012 have been wiped out, but the Department is saying that IBRC will need an additional €1bn of capital in 2013 to cover losses from the Eligible Liabilities Guarantee – that’s where bonds and depositors were guaranteed from December 2009 until mid 2013.
IBRC is set to be finally wound up in August 2013, so that means that in the space of just 14 months, it has made a loss of €3.7bn.
That’s €3,700,000,000.
How on earth is it making such a loss? Was there gross mis-reporting at 30th June 2012? Has there been a massive fraud? At this stage of the property market cycle, hasn’t most of the bad news come out, so for IBRC whose main loans are still property related, how on earth is it now expected to make such a colossal loss? Remember NAMA is expecting to deliver a profit in 2012 and 2013, and NAMA has a larger loan book.
NAMA Wine Lake 
Look, the ECB is still ecpecting €3.1 billion at the end of March, and BoI are also due another €3.1 billion. That €6.2 billion has to come from somewhere and given that IBRC is in liquidation anyway, I imagine the government is taking the opportunity to do some creative accounting.
Somewhere, deep in the bowels of the DoF, shunted from bank to bank via Dublin’s catacombs, I imagine that sitting behind a small desk with a wry smile, sits one Kenneth Lay — or Des Traynor, take your pick.
@NWL
Good post. This one is certainly worth pursuing.
Not only a loss of 3.7BN, but on a loan book of approx 16BN, that had, one assumes, been fully reserved at June 2012.
Unless, unless…Certain legal cases of enormous value look to have gone sour….
But again, one assumes that on liquidation, these will not be paid.
Strange!
It is certainly worth a question to our Alan, who was being paid handsomely to run the show, in addition to his other State and EU remunerations.
There is no loss. There might be a loss depending on what prices are obtained for the assets but that is down the line.
The reason for the loss of equity is pretty simply. €27.7 billion of Promissory Notes were replaced by €25 billion of long term bonds. There are a couple of reasons for this. One if the accounting complication of the interest holiday which means the PNs were treated differently in the IBRC and government accounts. A second is the book value of the PNs. The drop in government bond yields increased the value of the PNs given that they had an interest rate of around 6%.
The IBRC was set to make a profit on the Promissory Notes which would have been returned to the Exchequer eventually. There was €25 billion of ELA supported by the PNs so that is the amount of long-term bonds the Central Bank got. There is no loss. It is merely the moving forward of an equity return that the Exhequer would have got anyway. We could have received €2.7 billion in 2020 or so, instead we replaced €27.7 billion of PNs with €25 billion of long term bonds.
The reason for the ELG claim is that the IBRC doesn’t have enough cash now to meet the guaranteed bonds/deposits which were due to be paid in the future but are being paid now. The payment would have been made anyway but is being brought forward because of the liquidation and is being paid under the terms of the ELG. This means that when the IBRC assets are sold there is €1 billion fewer liabilities to be paid so the money will be recouped then.
There has been no massive loss in the IBRC since June 2012. The changes are because of the liquidation. As stated a loss may arise on the June 2012 figures but that depends on what can be raised from the sale of the remaining loan assets.
@Seamus, you are probably – almost definitely – right, though the question of the €1bn predicted charge to the Exchequer in 2013 isn’t explained.
But if you are (almost definitely) right, then the unsecured creditors must surely have a (very) strong case to contest the IBRC liquidation which is seeing some of them foot very significant losses, though I understand the €8m for McCann Fitzgerald, reported in the old media, is significantly overstated.
I’m not sure the unsecured creditors have such a strong case. The IBRC has defaulted completely on a €25 billion liability with the Central Bank of Ireland!
@Seamus you lost me…IRBC’s book value on the PN’s was dependent on Irish interest rates ….
“The drop in government bond yields increased the value of the PNs given that they had an interest rate of around 6%.”
Can’t find this in their accounts do you have a link…bern a while but really ?
@ John
I have previously posted some details here.
http://economic-incentives.blogspot.ie/2012/09/how-much-are-promissory-notes-worth.html
@Seamus,Karl W. in his latest Forbes piece,incl. a shout out to your good good self,covered where I was going with this.
I have argued/ranted/raved that the positive arbitrage enjoyed by IRBC was integral to the various run off scenarios,and any assumption that the “spread” was getting returned was suspect.But,tis a funny old world,no updated numbers for IRBC……how convenient for all involved !
@ seamus coffey
Thanks for throwing light on this.
An observation tentatively made is that, in terms of the liquidation (leaving aside the time sequence), the IBRC asset of ‘promissory note owing’, valued at 30 June @ €27.7bn, has been allocated to the Central Bank by the liquidator (because it was security on ELA loan). It’s book value at 7 February would have been higher, A further seven and a half months of accrued interest would have been added, bringing the book value to perhaps €28.5bn. Let’s say the revenue reserves decreased a little in that period to (say) €2.0bn, down from €2.7bn, because of some additional bad debts.
The value of the Central Bank ELA loan, directly corresponding with the promissory note, included as a liability, would not have been an exact €25bn. We don’t know. We can surmise that its value would have been been greater than €25bn because the bond coupon is set at a higher rate than the ELA rate. That would allow for a slightly lower principal amount in the new bond compared with the ELA balance.
The bond coupon is at the 6-month Euribor interest rate plus an interest margin which averages 2.63%. 6-month Euribor is currently 0.372%. The ELA charge according to Patrick Honohan (Joint Oireachtas Committee on Finance, 16 January) was currently 2.25%, i.e. ECB rate + 1.5%.
Is it the case that the only interest owed to IBRC by the government at 7 February was the interest accruing since January 1st, at the revised higher interest of 8%. What about the holiday interest period, 2011/12?
The liquidation would result in the asset of ‘promissory note owing’ @ €28.5bn crystalising at the actual balance sheet value of the ELA balance directly corresponding with it, say, €26bn. That, in turn, would lead to a balance sheet deficit which is bound to be even greater when account is taken of the likely deficit arising from the loan book valuation.
All in all, the replacement of the ‘higher principal/lower interest rate’ ELA with the ‘lower principal/higher interest rate’ bond will lead to the IBRC assets being discounted at present for future interest gains, resulting in other assets (including the government ELG claim) not being paid.
As I said, it is an observation tentatively made.
@ seamus coffey
I am revisiting this issue. It appears that the interest payable to IBRC on the promissory note was ‘as it said on the tin’, i.e. 0% interest for 2011 & 2012. However, the IBRC financial reports for this period (2011 and 6-months to 30 June 2012) applied an interest gain, as if averaged over the full period of the promissory note. The additional interest gain included for the 18-months was €2,406m (2011, €1,477m, 2012, €769, INBS pre-merger Jan-June 2011, €160m [estimated]). Without this, the revenue reserves at 30 June 2012 are only €328m, i.e. €2,734m less €2,406m.
For me, this explains how the revenue reserves of €2,734 have disappeared. Also, without the promissory note interest for the 2nd half of 2012 financial report (€769m reported in 1st half), the ‘revised’ opening revenue reserves of €328m will not be sufficient to prevent a negative figure arising at 31 December 2012.
If it is ‘as it says on the tin’, then, for once, the DofFin have been smart. The financial reporting, maybe less so.
‘When the final capital contribution was made on 31 December 2010 an interest holiday was inserted into each of the promissory notes which meant that between 1 January 2011 and 31 December 2012 no interest was payable.’
(Dáil Report, 13 October 2011)
‘In December 2010, at the request of the Minister for Finance, a change was made to the legal terms of the promissory notes allowing for an ‘interest holiday’ in 2011 and 2012, with a higher notional interest rate thereafter. This interest holiday does not impact the accounting for the promissory notes as the cash flows and effective interest rate of the notes were unchanged. Hence the Bank will continue to accrue interest income on the notes in 2011 and 2012.’
(IBRC Audited Accounts, 2011, Note 25)