Given that Fitch has just downgraded Ireland’s sovereign rating from AA+ to AA-, we thought you might be interested in a bit of Irish analysis. The below is an FT Alphaville round-up of the latest developments regarding Ireland’s bad banks plan — the so-called National Asset Management Agency, or Nama.
Under the terms of the plan, announced in September, Ireland will pay €54bn to take over bank debt with a book value of €77bn. The initiative is intended primarily to free the banks of their toxic asset burden and encourage lending to small businesses, according to finance minister Brian Lenihan.
But contrary to initial appearances, banks won’t be taking a haircut on the assets so much as they will be getting something of a hair transplant, as one person familiar with the plan put it.
Consider this: Nama will issue the banks with bonds and subordinated debt to the value of €54bn to take over both performing and distressed loans, many of which were made to the country’s largest property developers and collateralised by what one person described as a “rag bag mix of property, including fields in the middle of nowhere that don’t stand a chance of being developed”.
The book value of these loans may be €77bn, but as of September and according to comments by Lenihan, the market value of the portfolios was closer to €47bn.
So you can look at Nama in either of two ways. On the one hand, the banks involved will be taking a haircut of around 30 per cent on the book value of the loans. On the other, the government is paying the banks a premium of about 13 per cent versus the September value of the loans.
According to Lenihan, the €54bn payout “strikes a balance between reflecting the long-term potential of these assets while minimising any potential risk that Nama will make a loss”.
By Lenihan’s thinking, the loans that will be bought by Nama need only appreciate by a “very modest” 10 per cent over the next decade for the scheme to break even. But such a forecast assumes the Irish property market has bottomed, which is far from a given.
At this point (or at least, not to FT Alphaville’s knowledge), there are no published or public criteria for the loans that Nama will buy.
We are told, however, that those involved in purchasing will assess the portfolios based not so much on whether they are a sound investment for the state, but on how badly the banks need to get rid of the loans.
Which brings us neatly to another point of contention. If Nama is indeed intended to free banks’ balance sheets of non-performing assets and induce them to lend to small businesses, why exactly has Anglo Irish Bank been included in the scheme?
Anglo Irish does not have a retail branch network — and has no intention of establishing one — and is not a significant source of financing to small Irish businesses. Rather, about half of its business is as a lender to middle-market companies and high net worth individuals, while the other 50 per cent comprises secured lending to property investors.
But despite the lack of a small business focus, Anglo Irish will be the biggest beneficiary of Nama, as the following breakdown of the proposed distribution of the €54bn demonstrates:
Allied Irish Bank €24 billion; Anglo Irish Bank €28 billion; Bank of Ireland €16 billion; EBS €1 billion; INBS €8 billion
Most recently, the mutterings about Anglo’s inclusion have been overshadowed somewhat by news the Irish government will offload Nama’s exposure into a special purpose vehicle, in which private investors will have a 51 per cent equity stake and the administration 49 per cent.
The SPV, which will have subscribed capital of €100m, will be charged with buying, managing and selling off the loans identified by Nama for purchase.
What that means is from a capital base of €100m, the SPV will issue €54bn of so-called Nama bonds. Unless our maths is off, that represents 54,000 per cent leverage.
Moreover, as RTE Business explained:
The private investors, along with NAMA, will receive an annual dividend linked to the performance of the Master SPV. According to a briefing note issued to TDs today, this will be capped at the 10-year Irish Government bond yield at the time the dividend is declared.
When the SPV is wound up, the investors will be re-paid their capital only if the Master SPV has the resources. They will receive a further bonus of 10% if the Master SPV makes a profit. NAMA representatives will have a veto over decisions which could affect the interests of the Government or NAMA.
In short, if Nama loses money, the private investors lose their shirts. But if the loans turn a profit, the investors will (in aggregate) be repaid their capital plus €10m, as well as any dividends (capped at whatever the 10-year Irish government bond is yielding at the time of issue). The Irish exchequer gets to keep any excess, according to the plan.
The SPV is a part of a very creative accounting scheme designed to allow the Irish government to keep Nama off its official accounts.
Here’s RTE Business in October on the rationale for the structure:
The cost of funding the National Asset Management Agency will not be added to the national debt.
…
The €54 billion required to fund NAMA represents around 30% of gross domestic product (GDP), or economic output. On top of the very rapid increase in the Government debt as a result of borrowing to fund the budget deficit, the inclusion of the NAMA sum in the national debt calculation would have pushed the country’s debt/GDP ration well over 100% next year.
Under the EU stability and growth pact, countries are supposed to have a debt/GDP ratio of 60% or less. The Irish Government has been given five years - instead of the normal two - to get its debt ratio down to the target figures. Not having the NAMA money included makes that task easier.
Commentators in the Irish press are less than keen on this Nama 2.0, particularly as regards accountability and the government’s ability to veto decisions made at an entity in which it only has a 49 per cent stake. As the Sunday Business Post put it in an editorial:
All sorts of guarantees were given about how Nama would be accountable to a committee of the Dáil and otherwise. But how can a privately-controlled company be accountable to anybody other than its shareholders, the majority of whom will be private investors?
Whether the Irish plan to bail out its banks will ultimately end up the craic without a paddle remains to be seen. For now, worth keeping a close eye on.
Related links:
NAMA SPV Plan Versus NAMA Draft Business Plan? - The Irish Economy blog
According to NAMA it’s all in the yields - Long Room
Ireland’s e-NAMA-ous property gamble - FT Alphaville
Nationalise all (Irish) banks - FT Alphaville
