Sunday 18 November 2018

Richard Curran: Nama debt settlement could trigger early payout to Exchequer

Nama, chaired by Frank Daly, could hand up to €4bn to the State if bond repayments are settled
Nama, chaired by Frank Daly, could hand up to €4bn to the State if bond repayments are settled
Richard Curran

Richard Curran

Everything to do with Nama seems to have the word 'billions' attached to it. So it is easy to gloss over the fact that it is seeking offers on some of its €1.6bn junior subordinated debt. But a closer look shows how this move brings the agency that bit closer to tidying up its affairs, paying a dividend to the state and winding down operations.

Having borrowed €30.2bn in senior secured debt to pay Irish banks for their property loans, the agency also issued €1.6bn of junior bonds to the Irish banks.

This was to ensure if anything went wrong with the Nama plan, not all of the can would be carried by the taxpayer but in fact banks themselves would take a hit.

Around €850m of those junior bonds were held by IBRC and the rest was held by the other Irish Nama banks. Nama has now paid back all of its senior debt and is practically debt-free, except for these junior bonds.

It has around €2bn of cash, which is costing it money to hold on deposit. Meanwhile, it is paying around 5.6pc in coupons or interest on these bonds, which are repayable in 2020.

Nama is now on target to make a profit when it completes its job of around €3bn. Some have suggested it could be closer to €4bn.

But it cannot pay this money or even a portion of it to the Exchequer until the subordinated bonds are repaid.

So Nama wants to explore buying back some of this debt ahead of schedule, which would save it on coupon payments and make it debt-free.

It would also in theory free it up to make a payment to the exchequer.

It couldn't hand over all €2bn to Paschal Donohoe, because a portion of that is needed to roll out its plans on building houses and for balance sheet requirements.

If these bondholders bite and all of them sold up, the agency would no longer be restricted from making a sizeable payment to the Exchequer.

Irish banks will do well out of these bonds because they no longer carry any serious risk. They are trading at close to par.

Back in 2013 they were marked at 10c in the euro by the Irish banks, but as Nama's performance improved, they were marked up to around 65c to 70c.

The special liquidators of IBRC sold around €841m of the bonds in the last quarter of 2014.

They have never said what price they got but the liquidator's progress report from March 2015 says they received "€777m from the sale of bonds". This implies a price of 91c in the euro if it all related to this Nama debt, but it isn't totally clear.

This wasn't a bad price at the time by the liquidators but it is still around €60m shy of what they might have got if they had held on until now.

The buyers were international institutions and private clients in Ireland. Those bonds have since been packaged into a vehicle called Ballsbridge Repackaging.

Nama should be able to save some money by buying up its last remaining debt early, but it could also clear any hurdles to paying the exchequer a large chunk of change.

It's deja vu with 'carrot' of interest-only mortgage offers

Have you ever seen those TV ads, usually around New Year, allowing you to buy a massive luxury leather sofa today but don't pay for it or even make any repayments on it for about three years?

There is no evidence that buying the sofa in this way will leave you broke. However, it does make buying a massive luxury sofa a lot more tempting.

The same psychology applies to interest-only mortgages which are making a return to the Irish financial landscape. ICS Mortgages are offering a buy-to-let mortgage product where you don't have to make any repayments on the principal for up to 15 years. In the current rental market and interest rate environment, it makes borrowing for one of these things pretty enticing, especially when you can borrow up to €1.25m.

Fianna Fail's Michael McGrath was in quickly during the week to condemn the concept of interest-only mortgages and it is easy to scare everybody by simply uttering that phrase in a public place.

ICS argues said it has no fears about the product because in the bad old days, people were getting interest-only mortgages when borrowing 90pc or more of the price of the house. It argues that it is quite comfortable with the 70pc LTV it is applying here.

And yes that is a point of difference between then and now. ICS also argues there is "no shred of evidence to suggest that interest-only mortgages have caused an issue or caused mortgages to go into arrears".

True. And in fact it is quite the opposite because your repayments are so artificially low for a decade and a half, they won't get you into trouble.

However, does it not encourage more people to acquire more properties and accumulate more debt?

Back in 2006, Bank of Ireland said that 75pc of its investment customers had availed of the bank's 10-year interest-only mortgage,

It mightn't cause affordability problems (at least not for a decade or more) but if problems do arise, they can be more painful.

With the rental crisis in full swing there are arguments being made to keep as many landlords in the rental business as possible or continue to encourage more of them to go into it, because it will maintain or grow the number of rental properties available.

That may be so, but in carrot and stick terms, this is a very juicy carrot.

Losing Norwegian Air route is a real blow to Cork Airport

When Norwegian Air said it would fly people from Cork to New York for €99 one way, the Munster airport said it represented a "new chapter" in its history. Unfortunately for Cork, it's a chapter that may not have too many pages in it.

The airline announced during the week that it would cancel flights from Cork and Shannon to Providence Rhode Island this winter due to low demand. The move will inevitably raise questions about the airline's longer term commitment to Cork.

The loss of one route during winter shouldn't be a major setback but in the context of Cork Airport's growth, every route counts.

Last year the airport carried around 2.3 million passengers, just its second year of growth after seven years of declining passenger numbers.

But it is still 900,000 passengers short of its peak traffic flows back in 2007, and last year's solid performance only took it back to 2012 levels.

This is despite a wonderful, relatively new €120m airport terminal.

There are also questions over the number of Cork and Munster-based passengers bypassing Cork Airport to fly out of Dublin or Shannon because of their available network of routes.

Back in 2015 Ryanair claimed that it was carrying 500,000 Cork-based passengers a year from other airports and a further 500,000 from the wider South Munster.

This is an issue for all regional airports especially when road and rail links to the capital improve.

Dublin Airport has flights to 191 destinations in 42 countries and is now the 11th-largest airport in the EU.

Shannon Airport got its independence from Dublin back in 2012 after six years of declining passenger numbers. It is has grown passenger numbers every year since 2012 and last year carried 400,000 more passengers than it did in 2012.

But it is still carrying less than half its 2007 numbers - 1.9 million passengers short of that peak.

Much of the decline was around the recession but Dublin Airport has more than made up its losses. In 2007 at the peak of the boom, it carried 23.2 million passengers and last year that hit a record 29.6 million.

The DAA said last week that it made significant efforts to keep Norwegian Air's winter service and there is no reason to doubt that. Any further losses could raise the old political "hot potato" of cutting it loose from Dublin.

But that doesn't look like an easy answer either.

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