Eurostat Opinion on NAMA

Eurostat has determined that NAMA falls outside the general government sector: see the materials here.

Update: The SIV framework is puzzling some readers, especially the role of private equity investors.  A handy primer is provided here and this report highlights that payouts from SIVs are typically skewed towards debt and management fees, with only a limited allocation to equity investors.

80 thoughts on “Eurostat Opinion on NAMA”

  1. Who are the 51% “market investors” (referred to elseswhere as private investors) in the SPV (capitalised at €100m) that Eurostat takes reassurance from? Am I wrong in thinking that the taxpayer takes 95% of the downside (SPV issues debt that is guaranteed 95% by govt, with 5% subordinated debt not guaranteed being the risk sharing by banks) and some private investors take 51% of the upside. Surely I am. But if I’m wrong then why is Eurostat reassured?

  2. A feature of the global credit crisis was the speed with which the Special Investment Vehicles (SIVs) of investment banks, and commercial banks with a retail deposit base suddenly came back on balance sheet with a vengeance. Activities which had been seen as peripheral to the ‘core’ business activities of banks and insurers suddenly threatened financial institutions.

    At a time when financial regulators are discussing how to ensure such ‘off-balance sheet’ activities do not threaten global financial stability in the future there seems to be a certain irony in the fact the Irish CSO and Eurostat have determined that the Special Purpose Vehicle (SPC) related to NAMA should lie outside the General Goverment sector, as if this should provide some reassurance for taxpayers because losses from non-performing loans won’t enter into the calculation of the general government deficit.

    Perhaps the CSO and Eurostat shouldn’t be facilitating this type of chicanery

  3. Ruddy Nora!
    “the equity investors will receive an annual dividend linked to the performance of the Master SPV”

    This is not TARP, this is its stillborn brother, the MLEC! No, it’s both! Who on earth are these equity investors who will put in 51 mn to gain control of 54 bn of government-guaranteed bonds?

    Wait, let me guess… round up the usual suspects… I suspect Dobby the tax exile might be one of them?

  4. Is this the first time a proposal to establish a SPV with a share issue of 100million has been publicly disclosed?

  5. Wow! Can we fund Social Welfare with an off-balance-sheet vehicle? Then our deficit would look great! How about the schools? Hospitals?

    Hmm, not enough return for those private investors I guess. Are these the same investors that only accept high spreads for our bonds? Are we being blackmailed?

    I’m not sure if I’m wearing a tinfoil hat or a dunce cap.

  6. I’m also a bit stunned by this.

    However, as regards the leveraged investment for private equity, the CSO methodological paper suggests that the private guys will not get 51% of any profits. It states:

    “The profits earned by the SPV will be distributed to the shareholders according to the following arrangement, which reflects the fact that the debt issued by the Master SPV will be guaranteed by the Irish Government:
    – the equity investors will receive an annual dividend linked to the performance of the Master SPV
    – On winding up of the Master SPV, the equity investors will only be repaid their capital if the Master SPV has the resources; they will receive a further equity bonus of 10% of the capital if the Master SPV makes a profit.
    – All other profits and gains of the Master SPV will accrue to NAMA.”

    Does this mean that they get 10% of the profits (the €4.7 bn in the NAMA business plan scenario) or that they get 10% of €51 million.

    If the former, then it’s put in €51 million and get back €235 million (plus dividends) if the NAMA business plan scenario comes through.

    If it’s the latter, then it’s put in €51 million and get back €51.6 million plus dividends. Whether this is any good would depend on the formula determining the dividend payments, a formula which is currently indeterminate.

  7. Apologies, shouldn’t type up my sums as I’m doing them!

    Correct

    “If the former, then it’s put in €51 million and get back €235 million (plus dividends) if the NAMA business plan scenario comes through.

    If it’s the latter, then it’s put in €51 million and get back €51.6 million plus dividends. Whether this is any good would depend on the formula determining the dividend payments, a formula which is currently indeterminate.”

    to:

    If the former, then it’s put in €51 million and get back €239.7 million (plus dividends) if the NAMA business plan scenario comes through.

    If it’s the latter, then it’s put in €51 million and get back €56.1 million plus dividends. Whether this is any good would depend on the formula determining the dividend payments, a formula which is currently indeterminate.

  8. The SPV is described as having “autonomy of decision in its day to day operations”, subject always to a veto on all decisions that could affect the interests of NAMA or of the Irish Government. This appears to be a radically different model than that set out in the draft business plan.

  9. @Brian

    Annex H from April budget.
    http://www.budget.gov.ie/2009SupApril09/en/downloads/Annex%20H%20-%20NAMA%20-%20Indicative%20Term%20Sheet%20-%20Proposed%20Asset%20Management%20Company.pdf

    “In order to achieve the optimal return some property loans sold to NAMA will be capable of being transferred into NAMA SPV’s which will be capable of being worked out and disposed of in an orderly manner with private equity partners.”

    How could you forget Annex H?

  10. Isnt the SPV return limited to the initial equity and a potential 10% equity (ie €5.1mn) bonus? The dividends are unspecified, and NAMA main board retains veto over all actions. There’s no ‘claim’ over the main assets of NAMA, only the initial equity.

    “the NAMA representatives on the Board will maintain a veto over all decisions of the Board that could affect the interests of NAMA or of the Irish Government.”

    “On winding up of the Master SPV, the equity investors will only be repaid their capital if the Master SPV has the resources; they will receive a further equity bonus of 10% of the capital if the Master SPV makes a profit. All other profits and gains of the Master SPV will accrue to NAMA.”

    Sounds more like a semi-complicated structured and incentivised legal-heavy management agreement, as a way of ensuring it is classified as “in private control”, even though its obviously not. I imagine the banks themselves will be the ‘private investors’.

  11. today alistair bigley from Fitch (head of irish residential mortgage backed securities) said that their agency is in favour of NAMA, that kind of surprised me.

  12. @Eoin

    If you’re right that the banks will be the private investors, is Eurostat’s “reassurance” about the presence of private investors a bit misplaced?

  13. Karl,

    I’d hold off on doing sums until you see the definitions.

    The ‘capital’, ‘losses’ etc very much depend on where(/when) the government guarantee payments are made. The government seems to be playing the role of a monoline insurer. The operations of the NAMA spv make loss definitions/ops a lot messier than your standard spv for a mbs, so it’s hard to make a guess.

    If the government guarantees repays all bonds at a given date(s), all the remaining assets might be considered to be the ‘capital’. I can’t say this with any certainty that this is the case, but what genuine investor would put up 51m without assurances and significant upside?

  14. Less important than how NAMA is accounted for is the entire absence of an accrual-based accounting system for our national accounts.

    This absence allows substantial pension and future healthcare liabilities to be conjured away. It allows the real cost of public sector pensions to be understated. It provides a substantial, though not the only, motivation for PPPs (public private private partnerships).

    It provides prima facie evidence that the state wishes to avoid uncomfortable truths. And it’s a worldwide phenomenon.

  15. Note that from today’s news that FF backbenchers are having a tougher time with drunken driving bill than NAMA.

  16. @Eoin,

    If its the banks themselves then I’m not sure that should reassure Eurostat.

    By the way, I trust Eurostat were rigorous in the scrutiny of the statement by the “Irish authorities” that “under the current conditions the market values for properties are artificially low”. I trust it wasn’t down to commercial yields in Dublin!

  17. I still don’t understand why Eurostat would classify the NAMA SPV as majority privately owned.

    Surely they should look through the structure to determine who the true owners are.

  18. @Dreaded Estate. The SPV will be a majority private owned asset management company with €100m of capital and €54bn of AUM.

    Just like a really heavily leverage hedge fund. That is nearly a sovereign wealth fund, but not quite.

    The whole thing looks like €54bn worth of QE to me. Wonder if they explained the idea the same way to Mr. Trichet.

  19. @ Karl/Henry

    possibly private equity management financed by the Irish banks then? Non recourse basis (no jokes please)? Think of it as a tiny bit of extra risk sharing from the banks.

    Either way, the ‘pay off’ to these private investors seems to be structured so as to be more of a management fee than anything else. The whole structure seems to be set up to work within the off-balance sheet requirements and regulatory structures needed by Eurostat.

    @ Ahura

    the line in the document reads “On winding up of the Master SPV, the equity investors will only be repaid their capital if the Master SPV has the resources”. The word ‘repaid’ would seem to me to limit any ‘capital’ payments to the initial 100mio (51m/49m). The rest of the funds are called “profits and gains”, as opposed to ‘excess capital’.

    @ DE

    its a fudge. But its a standard Eurostat fudge. And as Cormac noted, this happens across the world. Remember, our pension liabilities are off balance sheet for the most part (€105bn in public sector alone i think?). The French bad-bank SPV is off balance sheet and so will the German one i think.

  20. @ Henry

    if we all ‘realised’ (as in actually admitted it to ourselves more often) how bad (or at least how big) most state finances are when you include unfunded and seldom disclosed off balance sheet liabilities like healthcare and pensions, well, we probably wouldn’t sleep as well as we do.

  21. @ Brian Lucey

    Tis. Just not called an SPV.

    NAMA could spawn a hundred mini NAMAs.

    NATIONAL ASSET MANAGEMENT AGENCY BILL 2009

    Page 17

    ““NAMA wholly owned subsidiary” means a company or body corporate that has no members
    other than NAMA or a nominee of NAMA;”

    Page 19

    (6) Where a NAMA wholly owned subsidiary or a NAMA group entity is specified in an
    acquisition schedule as the acquiring entity in relation to a bank asset, or where a bank asset
    has been transferred to a NAMA wholly owned subsidiary or a NAMA group entity, a
    reference to NAMA in Parts 4 to 10, 12 and 14 shall be construed as a reference to the
    NAMA wholly owned subsidiary or NAMA group entity, as the case may be.

  22. “On winding up of the Master SPV, the equity investors will only be repaid their capital if the Master SPV has the resources; they will receive a further equity bonus of 10% of the capital if the Master SPV makes a profit. All other profits and gains of the Master SPV will accrue to NAMA.”

    Why would any “private” investor invest for a return of 10% over 10 years and possibly suffer a loss?

    OK. Maybe I’m exaggerating. But the return is limited to 10%.

    The SPV is a place to park the subordinate?

    The banks will be the investors. Their investment will be the par value of the subs?

  23. @ Cormac Lucey

    Worthy of a thread (or a blog) in its own right.

    If you’re less than fifty years old don’t expect to get a state pension.

  24. @Greg

    Wholly owned subsdiary this is not. If it is all govt capital and nominee capital then it cannot qualify for off balance sheet status. How can 51% private capital (that gives Eurostat so much reassurance) also permit this to be off balance sheet? This is another underhand fait accompli. I expect the SPV, being private, will have various rights to non disclosure of accounts etc.

  25. The CSO & EU knew this in Sept 2009

    “We have been informed that NAMA, once established, will create a separate Special Purpose Vehicle
    (SPV) to purchase certain assets from participating institutions in order to further the purposes of the
    legislation – most of these assets will be loans associated with property development. This SPV will
    have a majority of private equity. It will fund the purchase of the loan books from financial institutions
    by issuing securities, most of which will be backed by a guarantee from the Irish Government.”

    Were the Greens informed?

  26. Is it possible that, say, the Irish Glass Bottle will have its own mini SPV?

    If so, how can the State control any of this?

  27. So, regardless of the profit share, private capital gets majority control of €54Bn + €10Bn (finishing out)

    Why does the SPV need to be controlled by “private” capital?

  28. “the equity investors will receive an annual dividend linked to the performance of the Master SPV”

    What the hell does that mean?

  29. @Greg
    ““the equity investors will receive an annual dividend linked to the performance of the Master SPV”

    What the hell does that mean?”

    More importantly how much will it be.

    Why did the government not release this information as part of the business plan?

  30. @ Greg

    management performance fee maybe? There’s €80mn per year in ‘service’ and ‘ongoing’ fees in NAMA draft. It would allow Master SPV to classify itself as being a private operated, profit orientated entity. Again, this is all for the benefit of the Eurostat/EU requirements.

  31. The Master SPV will have a wide range of powers, including the following:

    Eh?

    A privately controlled company can do all this with our €54Bn.

    What is going on.

    3. contract options and other derivative financial instruments;
    7. establish trusts;

  32. @Eoin

    Jeepers, another 800 mn that needs to be made to break even. Harry Potter and all of Hogwarts would have trouble with this one!

    The NTMA has always given the impression that NAMA would be part of the national debt. The fact that it is being structured not to, even though the liabilities will be considered by bond markets when assessing the ‘indebtability’ of the Irish state is interesting.

    A conspiracy theorist might say they are leaving room for something else to be added to the national debt? A longer run of high deficits? …. or Anglo?

  33. @ Bond. Eoin Bond

    Possibly.

    “Again, this is all for the benefit of the Eurostat/EU requirements.”

    So they have become contortionists in order to satisfy Eurostat.

    Just so the NAMA debt is not included as “National Debt”.

    And they open up a vista that Mad Max would be proud of.

  34. @ Greg

    the NAMA members on the board of the SPV will have a veto on anything that the Master SPV wants to do. It being ‘privately controlled’ should be seen in this context.

  35. @ Bond. Eoin Bond

    Then it is not,

    “a separate legal having autonomy of decision in its day to day operations”

  36. @ YM

    1. the 80mn i referred to is included in the 2.64bn of fees thats been mentioned quite a bit. I just meant they give a breakdown of it in the draft plan, so thats where it could come from.

    2. NTMA has always been quite open about the likely off balance sheet nature of NAMA debt. I say this with absolute categoric knowledge having been at an NTMA presentation about a month ago where they were very open and honest about this when asked about NAMA. They said they were waiting to hear from Eurostat about whether it’d be on or off blance sheet, and hoped that it would be off balance sheet like France and Germany bad-bank plans are.

    To be honest i think people are getting too worked up about this. Other than the fudge issues, which were always expected and are used by plenty of governments, i dont see any major issues.

  37. @Greg

    “NAMA representatives on the Board will maintain a veto over all decisions of the Board that could affect the interests of NAMA or of the Irish Government”

    I would imagine the likes of the ESB etc are ‘autonomous’, but still cant do certain things the government doesnt want them too. Same principle (semi states are off balance sheet right?).

  38. I kinda agree with Eoin on this one.

    After the experience of current crisis does it really matter whether things are off or on balance sheet.

    Why is government going through all these loops just to keep the liabilities off balance sheet when every lender will know that is just a statistical illusion?

  39. @ Greg

    no no! Just detailing how some of the 2.64bn breaks down!

    Note to self: clarify first in future!

  40. No, probably HK cos there’s a plan for John O’Donoghue to be President,C’man and CEO (three salaries & bonuses)!

  41. The problem with off balance sheet stuff was that it was too complex with bonds of bonds and so forth. This structure is fairly simple so it should not cause problems associated with previous off balance sheet entities.

  42. @ DE

    it keeps it out of headline reports and comparisons. It never quite has as much ‘bite’ when you have to read about something in the notes to the accounts or whatever. There’s politics at play as well – no one wants to admit it was under their watch that debt:gdp went to a horrible XX%. As i said, everyone is doing this.

  43. @ Greg

    ESB could raise 10bn tomorrow and it wouldnt hit the national debt. Bord Gais too. Same principle.

    NPRF is off balance sheet as well, right (it would lower debt\gdp ratio obviously)? National accounts are more opaque than you’d think.

  44. @Eoin

    Thanks for the clarification on the fees.

    On the NTMA, the last publication I’ve seen from them about this was in April, in the Ireland memo for the bond roadshow:
    http://www.ntma.ie/Publications/2009/NTMAInfoMem09.pdf (large pdf – 4.8 mb)
    “The Agency will purchase the assets through the issue of Government bonds. This will
    result in a significant increase in gross National Debt, to be offset by the assets taken in.”

    Personally, I think it is a tactical error to minimise the headline debt figure. It gives the impression that there is scope for a more drawn out budget realignment, that the debt situation is not too bad.

  45. @ Eoin,
    The first refers to ‘their’, the second is ‘the’ capital. The idea that you’d find a real investor to take a large punt on such a low return is unlikely. You’d need to see the terms and definitions. Hopefully this element of nama should amount to nothing controversial.

  46. @Eoin
    “NPRF is off balance sheet as well, right (it would lower debt\gdp ratio obviously)? National accounts are more opaque than you’d think.”

    Hmmm. So the state is asset rich and cash poor? It seems to be not worth mentioning what your assets are if you can’t pay your debt when it comes due!

  47. @Eoin
    “There’s politics at play as well – no one wants to admit it was under their watch that debt:gdp went to a horrible XX%. As i said, everyone is doing this.”

    Might want to make that XXX%

  48. @ YM

    possibly they weren’t sure if it’d be on or off balance sheet at that stage (April), so they went with caution. Like i said, once France and Germany got indications there’s would be off b/sheet, odds were always that ours would be too.

    As it was noted by some up above, in the short term anyway, everyone knows what the real deal is. Any slippage in the deficit levels and things are gonna get ugly again.

  49. @ Ahura

    i honestly think it’ll involve non or low recourse irish bank financing. Its 50mio on top of an already crystalised 23bn or so loss. Its not even a rounding error. And its not even payable for 10 yrs.

    But you’re right, clarification would be nice so that we can be sure it’d all on the level and just some legal hoop jumping.

  50. @ zhou

    “The problem with off balance sheet stuff was that it was too complex with bonds of bonds and so forth. This structure is fairly simple so it should not cause problems associated with previous off balance sheet entities.”

    zhou,

    Your words are comforting in that we may not see bonds of bonds.

    However, we are guaranteed

    3. contract options and other derivative financial instruments;

    Not doubt some will say it’s all plain vanilla stuff. Look at the Harvard experience.

    I will not take comfort.

    6. enter into partnerships or joint ventures which allow for private sector participation in the
    form of private equity

    When did the Minister elucidate on this? I can’t remember.

    What does it mean? Who are they? What will be the terms? How will profits be shared? Who’s holding the baby?

    7. establish trusts;

    I know I’ve pointed this out a bit much so far. But What?

    9. purchase other property, assets or rights;

    What?

    10. invest;

    Do you think they need to broaden that definition a little?

    No, zhou.

    I hear what you’re saying but I am more concerned now about the operation of NAMA than when I woke up this morning.

    This morning I woke up just worried about the likely economic failure of NAMA. Now I’m looking at the operation of NAMA getting so far away from control that economic failure looks like a certainty.

    Clever people can be too clever for their own boots at times.

    Now I won’t be able to sleep.

  51. @ Bond. Eoin Bond

    “ESB could raise 10bn tomorrow and it wouldnt hit the national debt. Bord Gais too. Same principle.”

    The ESB & Bord Gais are hardly comparable to this behemoth.

    “NPRF is off balance sheet as well, right (it would lower debt\gdp ratio obviously)? National accounts are more opaque than you’d think.”

    The NPRF has already been compromised for political expedience.

  52. @ Bond. Eoin Bond

    “Its 50mio on top of an already crystalised 23bn or so loss.”

    Eoin,

    How are you arriving at 23Bn?

  53. @ Greg

    my point is that the accounting of these is similar. People are hearing SPV and freaking out, but there’s a lot of similarities with the set ups of our semi state companies. This doesn’t change what NAMA is.

  54. @ Ahura

    “The idea that you’d find a real investor to take a large punt on such a low return is unlikely.”

    There’s an annual dividend al well.

    Eoin thinks that’s €80m.

    So you invest €51m and get €80m for ten years.

    That ought to help the bottom line and no one will see it.

    Another gift to the banks.

    Nice.

  55. @ Greg

    i meant 80mn is there to cover “service and ongoing” fees. SOME of this may go to SPV management, i dunno, may not even be possible as its called a ‘dividend’. All im saying is that would be my first area to question. But some of those fees are gonna have to go to legal, accountancy/audit, outsourced back office/valuations etc. But you could earmark some of this for the private investors should NAMA perform well.

    Re 23/16/7 – well 7 was provisions, where as NAMA crystalises that as well as a further 16 on top. Either way, a 50mn 10yr loan isnt going to be the issue for them.

  56. @ Greg,

    The annual dividend seems to be subject to performance. Equally the return of the 51m is dependent on performance. To me, this means any reasonable targets would likely result in these investors losing 51m. We’d need to see the terms and conditions.

    @ Eoin,

    If the investors aren’t real/genuine (terms I qualified my previous posts with), it’s another example of Irish authorities taking the piss. Personally I lost trust in them after the various anglo share support schemes came to light. Most regulators require real risk transfer for banks to claim capital relief for abs. Although real transfer isn’t happening here, for some reason eurostat appears to have given the ok on condition that the spv was capitalised with the majority being privately sourced. Perhaps denis o’brien or other patriots will provide at risk investment. More loans along the lines of the anglo golden circle will further erode confidence in the Irish system. If the ecb pull back on the emergency repo facilities, the irish banks will need to tap the interbank markets. This won’t be easy if Irish banks and authorities are seen as cowboys.

  57. €54bn of bonds issued by this SPV and 51 % will be owned by private equity investors? With the tax payer on the hook for 95%!

    Who are these investors who are going to control 51% of €54bn for an investment of €100mln? Golden circles again, and again!

    This kind of Ponzi scheme could destabilise the whole of the Euro Zone. “Eurostat?” what good are Eurostatistics of you are going to allow Ponzi schemes of this magnitude, not only to operate, but also to be off balance sheet.

  58. @ Ahura

    Exactly, Ahura.

    It is “performance” NOT profit.

    Any taxi driver could make up a “performance” indicator.

  59. @ Ahura

    “for some reason eurostat appears to have given the ok on condition that the spv was capitalised with the majority being privately sourced.”

    They want their money back.

  60. @ Robert Browne

    “This kind of Ponzi scheme could destabilise the whole of the Euro Zone.”

    Exactly.

    But the idiots want their money back first. They have no idea what they have begun. This is not Latvia. We are in the Eurozone.

    If they had any sense they would just decree that there is a crisis and Ireland may add another €35Bn to its national debt, not to be counted for the purposes of “sustainability”.

    Instead they chose to use nonsense “eurostat” rules to make everything smell nice.

    So, the joke goes “What’s the difference between Ireland and Iceland”.

    Here’s a new punch line.

    Ireland can destroy the Euro. Iceland didn’t even destroy itself.

    ““Eurostat?” what good are Eurostatistics”

    Off balance sheet and out of sight Robert.

    ___________________________________________

    But hey, as long as the bondholders are made whole.

    Happy days.

  61. Rothschilds are the advisors.

    N M R made the foundation forune by ensuring that Waterloo was treated as a disaster, when for hours he alone knew it was a triumph.
    He and his kind bank rolled Kings and their devastating wars.
    There is clearly no conflict of interest here at all! Innuendo!

    BUBBLES can continue. They are old to the credulous on the basis that they must continue.

    When this crash comes, I wonder who will have the capital left to buy at the bottom? History repeats itself!

  62. @Pat
    whenever I see somene on about the Rotshcilds, i tune out. Its often a precursor to a screed on gold standards.
    Nathan had better information and made money on that. Whats the problem? And he was already by then a wealthy man.

  63. @Pat Donnelly
    Even I would forgive sins committed by the Irish evil triangle if they were committed 200 years ago. Rothschilds or AIB (Al capone of Irish Banking) -give me Rothschilds any day. Insider dealing wasn’t even a crime back then.

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