NAMA SPV Opportunity for Private Investors: Form an Orderly Queue

Via RTE, we find out about the dividends to be paid to the NAMA Master SPV’s private investors

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.

So, if NAMA loses money, the private investors will lose all of their €51 million, while if NAMA makes money, they will receive a maximum of Irish government bond yields plus 10% over ten years.

Simplifying this formula to mean that in the case of NAMA breaking even, the annual return is (r+1)%, where r is the rate of return on government bonds, the expected percentage return on this investment over ten years will be

10p(r+1) + (1-p)(-100)

where p is the probability that NAMA breaks even. The second term reflects the return of -100% that comes from losing all your money.

The excess percentage return on this investment over investing in Irish government bonds is

10p + (1-p)(-100-10r)

Whether this is positive or negative depends on the probability of NAMA breaking even and on the rate of return on government bonds.

The NAMA success probability at which this excess return equals zero is

p = (10+ r) / (11 + r)

With an r of 5%, this translates into a probability of NAMA making a profit of p = 15 / 16 = 0.9375. In other words, this investment only beats investing in Irish government bonds under the assumption that NAMA has a less than seven percent chance of making a loss.

Personally, I’m going to pass on looking to participate in this wonderful investment opportunity. As, I imagine, would anyone else investing their own money in this on a stand-alone, no-strings-attached basis.

That said, if (just for conjectural purpose) someone decided to give me non-recourse financing for this project (a proud tradition in Irish banking circles) so that the -100 in the bad scenario just became a plain old zero, then maybe I might start to think about it: Good scenario, I get a small return, bad scenario, I lose someone else’s money.

Alternatively, I might decide to get involved in this investment opportunity if I have other interests beyond just making money on this deal alone. Perhaps I take an avid interest in the Irish property sector and fancy appointing some members of the NAMA Master SPV. Or perhaps I have the nation’s interests at heart and want to do all I can to assist the Minister in getting the NAMA debt off balance sheet. Who knows what will motivate the NAMA SPV investors? Presumably, though, the process of raising the €51 million will be done in a clear and transparent manner, so that these people will be able to explain for themselves what their motivation is.

What’s that I hear you say? Commercial sensitivities?

55 thoughts on “NAMA SPV Opportunity for Private Investors: Form an Orderly Queue”

  1. Karl

    Simple. The banks take a shareholding each. They account for it as an investment.

    If it is that simple, that it is merely a wheeze to keep the debt of Eur54 billion off balance sheet for eurostat purposes, then fair enough.

    But I think everyone including Lenny needs to realise that, off balance sheet or not, the State is on the hook for the repayment.

  2. I think someone will like the idea of putting €51 million down just on the prospect that legal action could generate a whole lot more. Do we really trust this government to have written things in such a watertight fashion that 51% of all the NAMA portfolio won’t somehow translate into a tidy sum when all the loopholes are exploited?

  3. Quoting RTE:

    “When the SPV is wound up, the investors will be re-paid their capital only if the Master SPV has the resources.”

    Most natural interpretation is surely that investors will be re-paid ALL their capital only if the Master SPV “has the resources”. This surely does not imply that, in other circumstances they will be repaid NONE of their capital. It surely does not imply (under the most natural interpretation of the words above) that if “the resources” are only 46 million euro, they get nothing whatsoever back.

    Also would one not interpret the above to mean that, if the SPV has 51 million at the end of the day, the SPV will have the “resources”, and the investors would be paid back? In other words, NAMA puts in 49 million euro, investors put in 51 million; the first 49 million of losses will borne by NAMA; any further losses will impact on private investors, who would then lose some, but not necessarily all, of their investment if the Master SPV makes a loss exceeding 49%?

  4. @Karl Whelan
    One of the many disturbing things about Nama is the way the tangled web just keeps getting more tangled. The need to keep this off the government balance sheet is now generating its own insane unstoppable logic. If there is no impartial commercial rationale for investing in Nama then I fear that only those who have the money and want to have an influence will invest.
    €51 Million only works out at €12.75 for every person in the country.
    Why doesn’t Lenihan gift the private shares to a trust representing the public? He would be bribing us with our own money but the alternative would have the potential for huge corruption or could appear hugely corrupt. As Frank says if this goes legally wrong the consequences could be hugely costly.

  5. @ Karl

    The annual dividend is based on “performance” not “profit”.

    For the ECB to allow this “cute whorism” on its own watch is a complete disgrace to the ECB.

    Where is law?

    Where is the law of money that allows the ECB through the EU via Eurostat to cover the “cute criminality” of the Irish Government?

    There is no such law of money.

    This is a disaster for Ireland.

  6. @ Eamonn76

    “€51 Million only works out at €12.75 for every person in the country.”

    Exactly Eamonn.

    But, then you’re good Minister wants you to believe that this is just a ruse, to keep it off the books.

    Is that avoidance or evasion?

    Have Fianna Fail now corrupted the ECB?

    Can I buy 10000 shares in that ruse?

    Is the ECB more corrupt than Fianna Fail?

    Well Eamonn, I think we are at a crossroads in the management of money by the ECB.

    The ECB has one chance and one chance only to decide whether it is run by self interested politicians (with whatever (Euro) statistics they divine) or whether it is independent of such creatures and seeks sound money.

  7. Banks used to use such structures. They were called “conduits” and helped bring down quite a few.

    Bankers always view off-balance sheet funding as being smelly and usually, prudently, add it to normal debt to assess total debt and creditworthiness.

    Ironic that in saving the banks (or at least the banks’ shareholders) the Government resorts to a rinky dink to massage its own figures.

  8. I for one welcome my new private masters….
    We all should I think begin reading some of the great books by Antoin Murphy, esp the ones on the various schemae for privatising the national debt of france. That worked well….for blade sharpeners and tumbril weavers

  9. Karl. I think your maths is incorrect. r+1 is the annual rate of return whereas -100% is after 10 years. I agree that -100% of 0 remains 0but you could look at the 10 year return instead of annual return and do the sums with 10r+10 (ignoring compunding effects) and -100 and get different results.

  10. As Brian Lenihan explained clearly to the Dail, keeping the NAMA debt off balance sheet will lower Ireland’s cost of sovereign borrowing. The international investment community looks at the debt/gdp ratio as published by Eurostat and will not notice the additional debt hidden off balance sheet. They will be fooled into lending to Ireland more cheaply than otherwise if we can keep this off balance sheet. But shhhh! keep on your green jersey and do not tell anyone about this hidden liability — we do want the international investment community to find out!

  11. The worrying aspect of this is that the government is going to such lengths to prevent NAMA debt from adding to the reported government debt figure. What are the benefits of achieving this objective?

    In financial and economic terms there are none as markets will see through this form of reporting and look at the substance of the transactions involved.

    The only real benefit is a public relations / political one. Governments will be able to claim that our underlying national debt position has not been affected by NAMA.

    It is more than ironic that government is now turning to two of the major causes of the current global financial crisis – too much debt and off-balance sheet financing – as cures for that crisis.

  12. @Cormac
    “It is more than ironic that government is now turning to two of the major causes of the current global financial crisis – too much debt and off-balance sheet financing – as cures for that crisis.”

    you forgot the other leg of the stool – borrowing short (in a low interest rate environment) hoping that the markets will stay liquid and cheap, and investing long.

  13. @ Greg

    “For the ECB to allow this “cute whorism” on its own watch is a complete disgrace to the ECB.”

    I’m fairly sure that when i suggested an at least somewhat willingness by the ECB to bend the rules a few months back, people scoffed at me! Don’t say i didn’t tell ye so!!

    Also, as to the “why”, when people think that no one will care or that everyone will see through it…

    “My firm recently met with a Moody’s sovereign risk team covering twenty countries in Asia and the Middle East. They have only four professionals covering the entire region.
    Moody’s does not have a long-term quantitative model that incorporates changes in the population, incomes, expected tax rates, and so forth. They use a short-term outlook – only 12-18 months – to analyze data to assess countries’ abilities to finance themselves. Moody’s makes five-year medium-term qualitative assessments for each country, but does not appear to do any long-term quantitative or critical work.”

    …this is from David Einhorn, the guy who called Lehmans ahead of everyone else last year. He sees the ratings agencies as still being very short term focused and not nearly as clever as people give them credit for. As such, it’s quite possible that the classification of NAMA as off-balance sheet actually could have a material impact on the way they rate our debt. If so, the process would be very much worth it.

  14. Eoin
    Bending rules is what got us into this mess, worldwide. Rules are there to protect the system itself. As everyone wises up to the bending it recurs and everyone games the system until it breaks!
    Fitches has already said it will not be fooled by the off balance sheet non sense. You are engaging in wishful thinking. If …. then …..!
    You have been playing with OPM for too long! This will affect every taxpayer and inhabitant of Ireland for the next three decades, and the effectys may be severe. Given the debt world wide and the government bubbles now being blown to pay off the real PTB, ahead of others, I suspect the prospects of recovery are slim! Fraudulent preference of creditors on a grand scale! Contrary to the Conveyancing Acts?

  15. If the “private investors” are to be the banks themselves then this model will provide an incentive for them to work out the loans properly. Indeed, it would seem a risky investment for anyone who did not have a degree of control over the loans.

    However, it is to be noted that this incentive model suffers from the same flaw as the NAMA bonds model which dictates that no investor whall be paid unless NAMA makes an overall profit.

    As such, I cannot see a truly effective incentive for the banks to work out the loans properly. I am discounting the nebulous “levy” because it may be abandoned if the banks are struggling in the future. Accordingly the banks can rest assured that the levy can be resisted on grounds of a lack of ability to pay.

    It is to be noted that the remaining Irish banks are likely to have much more control over the Govt and the Irish economy down the road when the competition are gone. It is also to be noted that such competition may be reluctant to return to a market still contaminated by a beleaguered by NAMA. This means that there may be a perverse incentive for AIB and BoI to delay the work out of the NAMA loans.

    I think we also need to be sure that there is a time limit on the winding up of the SPV. The document furnished to Eurostat does not put a time limit on this:
    “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.”

    Accordingly, there is a danger that the private equity investors may try to delay the winding up of NAMA if they have not recovered their losses after a number of years. This will of course be tempting for the Govt too but the State may be best served by taking its losses on the chin at that stage. The rules of the SPV on voting and decision making will be crucial. A “veto” for NAMA is not sufficient. This is particularly so if the continuance of NAMA or the SPV is discouraging competition in the banking market.

  16. My solution to the issues I have raised above are twofold:

    1. Bring in proper risk sharing, and/or
    2. Introduce an option to Nationalise into the NAMA deal.

    I am not sure how No.2 would be done. Perhaps we could get the banks to agree to the Govt’s right to nationalise (by exercising new share options) if NAMA does not succeed in getting the banks back to sustainable full health (specify criteria of capitalisation) to be assessed at any time or times specified by the Govt within the lifetime of NAMA. The price of the share options should be at practically nil.

    Either way, the Govt should avoid at all costs the decoupling of NAMA and Nationalisation in circumstances where we are returning to a banking duopoly at a time of national and international economic uncertainty.

  17. @ Eoin,

    Einhorn’s description of Moody’s is depressing.

    However, I don’t think that Eurostat did what it did to misdirect the ratings agencies.

    It did what it did so the EU could pretend that the banking crisis is not affecting its scared rules.

    Europe would be better off if it admitted the extent of the crisis.

    It might drive down the currency.

  18. Lenny’s stroke in pulling a SPV out of Nama’s hat raises lots of questions aside from ROI etc. including:
    1. Why was no mention made of the key role of SPVs in the draft “business plan”?
    2. Who will really exercise control over Nama’s day-to-day operations? Nama’s board and CE or the boards and CEs of the SVPs?
    3. Given that the SPVs will be private entities, will they be shrouded in a cloak of “commercial sensitivity”?
    4. Will the accounts of the SPVs be subject to the same reporting requirements as Nama?
    5. And so on ………

  19. 1. Why was no mention made of the key role of SPVs in the draft “business plan”?

    coz then people like us would have done what we are doing and worse, teh meeja would perhaps have stumbled onto the issue

    2. Who will really exercise control over Nama’s day-to-day operations? Nama’s board and CE or the boards and CEs of the SVPs?
    you assume that they will be distinct….

    3. Given that the SPVs will be private entities, will they be shrouded in a cloak of “commercial sensitivity”?
    you bet

    4. Will the accounts of the SPVs be subject to the same reporting requirements as Nama?
    no

  20. @ Eoin,

    What’s going on with bank shares?

    AIB @ €1.81 down 14%
    BOI @ €1.84 down 16%

    How is their debt performing?

  21. @ Greg

    its all related to this ING breakup, basically banks in receipt of government support may have to sell off non-core assets (asset mgt, insurance, custodial services etc), so few worries about (a) earnings growth prospects if they have to sell off parts, (b) any new share issues like the one ING announced and (c) it kinda ends the recent ‘recovery’ story in banks so the short termers are bailing out. No major change in the debt.

  22. @ Brian

    “you forgot the other leg of the stool – borrowing short (in a low interest rate environment) hoping that the markets will stay liquid and cheap, and investing long.”

    You’re absolutely right.

    I find it hard to imagine that interest rates (short-term and long-term) won’t rise markedly over the next decade as a result of:
    a. governments issuing unprecedented amounts of debt;
    b. central banks printing unprecedented amounts of money; and
    c. commercial banks eventually reversing their current use of crisis funding (by buying government bonds) and lending instead into the real economy, thereby contributing to rising bond yields.

    The only reason I am still a bit uncertain about this scenario is that the developed world could conceivably be facing into a Japanese-type scenario where deep deflation caused interest rates to remain ultra-low despite very aggressive fiscal and monetary policies.

  23. @ Greg

    i’d assume so. Both actually very good assets with lots of potential buyers. No reason why they should have them in the medium-to-long term if they are short on capital and in receipt of government support, though obviously we don’t want them to flog them below fair value either.

    BIAM and BOISS (custodial) are both worth a little bit for BOI, but not nearly as much.

  24. Can I mention something here about property development, which you may find interesting. I began to think about this recently, having attended a very technical presentation by a UK professor on the subject of offshore wind. The tinned history of wind generation, is that German and Danish companies did the early R&D and came up with a design of wind turbine, that would work on land. Now the onshore wind industry has reached its maturity so we are looking to move offshore. At the moment, the very same design and approach used for onshore wind is be tried out at sea. But some people question that approach, and wonder should we wipe the slate clean and re-invent the game entirely for offshore wind. It requires re-thinking, re-design and engineering. However, the opportunity is there to define an entirely new kind of business, and some reckon that offshore wind generation could prove more economical than onshore generation, if we go about it the right way.

    The property business in Ireland is at one of those phase shifts in my opinion. It doesn’t take much either, to create a phase shift in the property business. We have plenty of things available to us now, to upset the apple tart that traditionally worked. We might see in the coming years, an entirely new set of players in the property business in Ireland, who approach things very differently to players in the past. We have issues like carbon taxation, energy independence, sustainable family living environments, public transportation, smart-er economies, NAMA, a whole raft of things basically which seem to alter the fundamental rules.

    Take only one of those things, sustainable family oriented living environments. In the past, we never got to a stage where high density apartment living offered this. But now the local authorities and government departments are expecting it in their development plans. The truth is, there is no blueprint for this, how it could work in Ireland. A blueprint which may work somewhere else, in a different society, may not work here. Implicit in the blueprint is the business model – we don’t know what the business model for sustainable family oriented living environments could be. We don’t know how capital intensive it may be from a developer point of view. We don’t know how long term an investment in might be. These are all unknowns. We roughly knew in the past, how the property game worked based on an older model, which didn’t need to perform to the same level, in a whole plethora of measurements. In fact, I would argue, in the older model the financial management capabilities of builders and lenders wasn’t sophisticated at all.

    The truth is, at the moment all of the incumbent property players in Ireland are sue-ing one another, and jostling around for positions and watching one another. In other words, they are fairly flat footed and static. I would bet my right arm, that many of them will be left dead in the water. They are all waiting to see what the next model will look like. When Gerry McCaughey introduced Century Homes, he was copied several times over. When Liam Carroll introduced shoebox apartment complexes in inner city Dublin, likewise, he was driven out of his own domain by competition. In fact, when he had perfected his model to the n’th degree, that is when he was making the least profit from his operations.

    I think rather than waiting around for a bus to hit them and flatten them outright, the property players in Ireland should group together – that is, do the very opposite thing to which their instinct tells them – and decide what the new model should be. They have difficulty understanding though, their opponents in the future will not be each other, but someone completely new, who never existed in the game before.

    Thanks. B.

  25. so- we have an off balance sheet special investment vehicle, consisting of illiquid / hard to value assets, a ficticious business plan based upon non existent revenue streams, issuing bonds to pay for the entire thing.

    it might just be me but haven’t we seen this somewhere before? ( cdo’s, subprime….

    truth is really stranger than fiction in this land of ours….

  26. @Garo

    Indeed, I shouldn’t have been comparing one year and ten year returns. My bad! Math fixed and message basically the same. NAMA needs to have only a ninety three percent chance of losing money in this example for the investment to be as attractive as investing in a government bond.

    Of course. it may the case that even if NAMA is performing badly, the investors will still get their performance-linked dividend, so the real world may be more complicated. But the example illustrates a general point. The tiny premium over government bonds offered to these investors would is completely out of kilter with the widely-acknowldeged risk of the project.

  27. @Eoin.

    Yes, David Einhorn of Greenlight Capital is quite a clever and shrewd operator. He made a substantial amount of money shorting Lehmans.

    I would agree with most of what he says about Moodys. They seem to have blown their ‘economic moat’. It will be interesting to see if Buffett has reduced his stake in the company in his next sec disclosures.

  28. @ David W

    The CSO documentations states:
    “On winding up of the Master SPV, the equity investors will only be repaid their capital if the Master SPV has the resources.”

    The meaning of “only being repaid their capital” is uncertain. But even if it means getting all your money back without a return after ten years(a return of zero) the general point remains. In the bad state of the world, you get no return. In the good state, the most you get is a paltry ten percent premium over government bonds over ten years. Given the decent probability of the bad state of the world materialising — even NAMA’s most vocal supporters concede that their are serious risks to the exercise — I find it hard to view this is anything other than a terrible investment prospect.

  29. @ Eamonn K

    he reduced down a 20.31% stake to 16.6% over the summer. Going to be far more regulation and potential liability on the ratings agencies going forward. Buffett possibly didn’t like the fact that Moody’s downgraded Berkshire Hathaway earlier this year either!

  30. @ Brian O’Hanlon

    “The truth is, at the moment all of the incumbent property players in Ireland are sue-ing one another, and jostling around for positions and watching one another”

    Brian, I wonder if the reason for the above is that those who are selected by NAMA or the SPV ( no one knows who will be pulling the NAMA LEVERS) will be the ones who survive and thrive building out the oversupply they or others began.

    I wonder would I be allowed to invest in the SPV?

  31. @ BL
    “you forgot the other leg of the stool – borrowing short (in a low interest rate environment) hoping that the markets will stay liquid and cheap, and investing long.”

    Have you been told that the NAMA bonds will be short? I was presuming they would be floating interest but medium term.

    @ Karl I repeat again the words of Eurostat. They distinclty said “the SPV will have a net present value of €4,800M provided Irish property prices only increase by 10%”. But now we know that the very highest NPV that could be accorded to this SPV is little over €100M.

    It is good news of course that the SPV is not an exuse to line the pockets of some SPiVes but I’m with you, who on earth would want to invest in this?”

  32. @Greg

    “Thanks for that.
    No looking clever for Irish banks then.”

    Or people who bought shares in them recently. Down about 47% since Sep 18th if measured in USD. Wonder what Minister Lenihan thinks about the boards of these banks and their solvency.

  33. @ Robert Browne,

    I received a response earlier from Richard Tol in discussion about the carbon taxation.

    Basically, Richard’s point is that when the government can free up cash inflow from somewhere, like the carbon tax, which doesn’t impinge too much on our next economic recovery, that inflow of taxation might free up the government and policy makers to focus on helping areas that need help – i.e. education, etc. Stuff that could lay a foundation for the economy longer term.

    In other words, any little bit of movement and free-ing up of space within the system might get the economy to work again. I suppose at the moment we are in a gridlock situation as far as the economy goes. The classic case being in the construction industry – I can’t pay out, until I get paid. Hence, the only route to fruit is to begin sue-ing one another. But that is only something to pass the time, it doesn’t deal with the primary gridlock issue.

    The grid lock issue stems from the fact that Irish property always had early innovators, and copy cats. There wasn’t a huge amount of initial innovation done up front to develop the model. There was a lot less major innovation done after, because followers copy-cat-ed the early movers.

    What is happening now, is everyone is standing back waiting for someone to take the first leap. Richard Dawkins in his book, The Selfish Gene, gave the example of Penguins jumping into the water. They gang up together at the edge of the ice berg. Eventually the pressure of the crowd builds up, one penguin gets pushed in, is gobbled up by a seal and then the whole crowd plunges in.

    This is what normally happens in Irish construction. At the moment, we are in the build up stages of this theatre before the first one gets pushed in and ka-nabbled to save the rest. The only difference in this situation, is likely or not the the first penguin in the water is going to be Brian Lenehan and then the rest will spot the mistake in the model, fix it, and it will be a big crowd, free-for-all in construction.

    That is my theory anyway. What we do need, seriously, is one or two major schemes under construction somewhere in the country and completed. Even if they turn out to be less than successful. It will basically give some pointers to the rest of the group, and the industry will get some idea of how to move forward with a blueprint. But nobody wants to be that first penguin at the moment, so I suggest the minister for Finance takes one for the team.

    I don’t know what that would entail. Possibly a completion of the building of Adamstown with subsidised rents or something to fill it with people. Another major scheme that springs to my mind and is already completed, though vacant at present is the Elm Park office development in Booterstown designed to the highly of environmentally-friendly standards. We need to make some incentive and get that occupied soon I believe. Even if we have to take a hit.

    Another McNamara spear-headed project which will definitely take a hit is the Irish glass bottle site. But it is also an opportunity for Ireland to aim research and development at new innovative ways to reduce toxicity levels is the soils at that site, to enable the process of building to commence in the process of time. There is no point in allowing the site to sit there indefinitely. It will require government investment again. I would humbly suggest though, that if the Irish taxpayer is to sink more money into the Irish bottle factory site, that other stakeholders shares are transfers in part to the taxpayer under some new joint venture policy. But get the thing moving, make that first plunge.

  34. I hate to pick on Bernard McNamara so much, but the other obvious example being, the PPP’s to develop local authority housing sites in Dublin city centre. Again, there is a plunge into the deep blue ocean required by someone to get the model established and moving. Once someone tries out a project, and the new rental model for residential is set up, we can start to move again.

    Unfortunately, McNamara pulled from his committments in that scheme.

  35. @The Luceys
    Many believed from the start that NAMA was just a questionable piece of financial engineering Merill Lynch had cooked up. I wonder if this goes terribly wrong can they be sued? I suspect that the details of their liability for bad advice if Nama goes wrong will remain “commercially sensitive”.

  36. “Many believed from the start that NAMA was just a questionable piece of financial engineering Merill Lynch had cooked up. “.
    Isnt there one o too many in the last word but one?

  37. @Brian Lucey Says:

    “Isnt there one o too many in the last word but one?”

    You could be right
    Read somewhere that one of the ML team had advised on the acquisition of ABN AMRO – a deal that cooked a number of banks.

  38. It sounds like the investors will get a variable payout where the rate is based ont he current ten year yield. This is better yield than buying govt bonds simpliciter because yields are likely to go up.

    You might get a 5% yield this year a 7% yield next year and an 8% yield the year after that.

    There is also no mention of whether there will be fees and salaries to be earned. High variable interest rate + fees and salaries + 10% bonus payment. It could be tasty enough in the end!

  39. @Eoin.

    Cheers. I hadn’t realised he sold down some of his stake. Looking more closely a lot of other value investors have either sold out or are in the process of doing so.

    I dont think Buffett would care that much about Moodys downgrade of Berkshire. Id say he had a good laugh. He’s such an independent thinker. Im sure some people saw the program on BBC2 the other night. Imagine getting away with doing a wife swop like that? I’m sure many people might like to do it, but by God they wouldn’t succeed!

  40. @ Brian O Hanlon
    Have a look in todays indo a huge planning application to build a mini Las Vegas outside Borris in North Co Tipperary, with a world class horse racing track, hotel, conference facilities, greyhound track, even a church, etc etc a mega application! Could be the kind of thing you were hoping for. Oh, and BTW already has the backing of trainer Aiden O’Brien.

  41. @Brian Lucey
    You’re right. Merrill Lynch will just say that if the government had followed their brilliant scheme to the letter then it would have worked. “Nama was cooked up brilliantly. But Lenihan omitted the crucial second o”.

    @zhou
    Even if this investment was attractive it would still be worthwhile for a group of people, of a number more or less than ten, with an interest in how Nama operates to buy in. Perhaps the government accidentally forgot to tell us about this until now. Perhaps they view it as a meaningless concession to Eurostat. In that case the best way for Lenihan to get out of this dilemma is to give the shares to an independent trust representing the citizens of the country. Even a public auction would be no protection. I just hope he doesn’t spring on us another unpleasant surprise regarding who the private investors will be.

  42. €51m is a trivial amount of money in the NAMA context and for any of the major participants. Could there be an “understanding” that all or some of the key banks and/or developers will put up the money so that the objective of keeping the NAMA debt off-balance sheet is achieved?

  43. Karl,
    As mad as it seems, it appears that the 2.7 bn “risk sharing” sub bonds offer a better investment than the spv investors. If the subbies get written down 10yrs from now, the lifetime pv of the coupons would be close to (in either direction) to the pv of the 2.7bn. Given both “investments” depend on performance, it seems the “risk sharing” is the more attractive option.

    Perhaps Mr Lenihan could explain exactly what his vision of risk sharing is.

  44. If we achieve off balance-sheet treatment with the effect that the cost of borrowing for the State does not increase in proportion to the NAMA debt then that is a massive massive benefit. However, if NAMA is seen to perform badly at any period then the benefit of the SPV arrangement will lost in part (depending on the amount of bonds outstanding and the projected losses) if markets perceive a possible failure by NAMA to yield sufficient funds to redeem all ordinary NAMA bonds.

    The fact that the SPV was not announced at the outset suggests that the SPV is not a mechanism which was seen as having key strategic benefits. Common sense dictates that if the primary aim of the SPV structure is to achieve an accounting treatment of debt then it is a bad strategically as it alters the control and operation of NAMA dramatically for reasons other than strategic benefit. Such an approach smacks of schemes devised by financiers and accountants rather than by experienced CEO’s who focus on strategy and the long term overall economic gain for the company.

    The benefit of the SPV is the off balance sheet treatment of Govt liabilities. The risk of the SPV is the loss of control over the operation of NAMA (only has a majority of shareholders, has a veto but may not be able to disctate actions, introduces a legal construct where the aims and objects of the SPV will have primacy in dictating board behaviour). The degree of loss of control is therefore the crucial issue. If the NAMA board members can legally act and vote as a block in the interests of NAMA and/or the State rather than in the interest of the SPV then that may be sufficient.

    There may ancillary be benefits of the SPV approach to be taken into account. For instance, it may act more commercially rather than acting politically.

    Nonetheless, it appears that we are buying a pen-knife to do a tin-opener’s job because pen-knives are much much cheaper at the moment.

  45. @ Zhou

    “Why do you assume there will be any coupon on subordinated debt???”

    Lenihan indicated yesterday there would be a coupon of between ‘5-7%’, though he was somewhat vague and indicated that it might not be paid immediately (performance based?). I assume there has to be a market-based coupon or the banks would immediately have to write it down from par when it hits their books?

  46. @Eoin

    “I assume there has to be a market-based coupon or the banks would immediately have to write it down from par when it hits their books?”

    that is exactly what I assumes would happen. Is the interest payable annually or at the end? I don’t like the sound of it.

    From RTE: “He [Lenihan] said if the Government had issued up to half of the bonds in the form of subordinated debt, NAMA would be crippled with huge interest bills. ”

    This suggests NAMA will pay a coupon annually on subordinated bonds. How could it be crippled if the interest would be paid out of NAMA profit? I am appalled if a coupon will be paid annually.

  47. http://www.irishtimes.com/newspaper/breaking/2009/1029/breaking17.htm

    Lenihan is still fibbing about the impact of Nama, and how the EU regulates it, on our undynamic duo of AIB and BOI’s shareprices.

    http://www.irishtimes.com/newspaper/breaking/2009/1029/breaking40.htm

    AIB, the world’s least favourite, double crashed multiple scandaled bank is sounding a bit more modest on its astoundingly arrogant demand for an internal chief executive.

    While this comment by the Irish Times business columnist Cantillon really deserves a thread on its own:

    “Just because you are paranoid about Nama . . .

    THE REVELATION that Nama will carry out its functions via a special purpose vehicle (SPV) has raised the prospect of property developers, banks and pretty much every other bogeyman emerging cuckoo-like in the Nama nest.

    The source of this concern is the requirement that the SPV be majority owned by unspecified private investors in order for the Government to be able to avoid including Nama’s €55 billion worth of debts in the National debt. Indeed, the real issue in all this is arguably the logic of relying on off-balance sheet accounting at a national level to solve what in part was a problem caused in the main by faulty off-balance sheet financing by institutions.

    Leaving that aside, the fact that the Government decided in its wisdom not to disclose the SPV arrangement up front only feeds the paranoia surrounding Nama. The fairly limited information disclosed subsequently about the checks and balances that will operate to protect the public interest has failed to put the issue to bed.

    In the Government’s defence it should be borne in mind that the more watertight they make the Master SPV, the less independent it becomes and eventually it will fail the tests imposed by Eurostat, who are the ultimate arbitrators in this issue.

    And what has been decided to date is reasonably comforting: a veto over decisions affecting the national interest combined with returns linked to 10-year bond yields would be expected to ensure that only institutional investors come on board. Further limits may be imposed on who can invest and what size stake they can hold at a later date.

    But there is no escaping the fact that private capital is being invited into the heart of the Nama process, albeit under the Government’s terms.

    It adds a further element of risk to what is already a spectacularly risky enterprise”.

    Nama couldn’t be just a scheme to allow bankers & developers who are facing further probable losses of €17.5 Billion to transfer the bill to the ordinary public, could it? That is so horrible that it simply couldn’t be true.
    Still, at least he/she is starting to contemplate it.

    Shouldn’t the Nama board represent taxpayer interests only?
    Isn’t that the least we deserve for putting up €54 Billion to overpay for property loans?
    Why should anyone else, be they bankers, developers or institutions, decide on every issue except “decisions affecting the national interest”, over which they will still be able to have a majority voice at board level?

    Board members matter.
    A board chaired by Peter Mathews, with Bo Lundgren, Morgan Kelly, Joseph Stiglitz, those two Dutch guys from ACC and Peter Mathews would be very different from one chaired by Pat Farrell, with Eugene Sheehy, Tom Parlon, Sean Dunne, Frank Fahey and Patrick Hurley.

  48. Barry O’Halloran’s analysis piece in today’s IrishTimes
    (link : http://www.irishtimes.com/newspaper/finance/2009/1029/1224257604260.html)
    mentions that a similar SPV was used recently for the SFEF scheme in France and suggests that the SPV used for NAMA has arisen because of lobbying from French and German governments.

    Just wondering what is known about the context of this French rescue scheme and whether the analogy is appropriate ?

    Constantin’s recent blog entry suggests that the Irish SPV gives us the honour of owning the most leveraged SPV on earth
    http://trueeconomics.blogspot.com/2009/10/economics-21102009-ireland-most.html

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