Tuesday 12 November 2019

Constantin Gurdgiev: Anglo, INBS legacy will remain with us

The IBRC Bill does not change nature of zombie bank's assets and liabilities

Constantin Gurdgiev

Last week, the Government proudly announced the closure of the 'sad chapter' in our history – the end of the Anglo Irish Bank and Irish Nationwide Building Society (INBS) legacy. The twin pillars of this announcement were the restructuring of the promissory notes created to fund the winding down of the Anglo and INBS, and the official liquidation of the IBRC – the zombie 'bank' created in 2011 to wind down the two bust banks.

In reality, the entire set of complex financial and legal manoeuvres undertaken by the Government during last week amount to little more than a last-ditch effort to rearrange yet again the remnants of the zombie institutions. PR spin aside, the legacy of Anglo and INBS remains with us: different in the name, but unchanged in its true nature.

Under the legislative mandate secured last Thursday with the passage of the Irish Bank Resolution Corporation Bill 2013, legacy Anglo and INBS assets (more specifically loans issued by these institutions still retained on the balance sheet of the IBRC) are to be sold to Nama. This amounts to a transfer of some €16bn worth of primarily non-performing or distressed loans from the liquidated entity to the state-run agency, potentially expanding the Nama balance sheet by up to half.

Such a transfer does not change the nature of IBRC assets and liabilities, nor does it change the quantum of assets and liabilities that are to be worked out over time. It does not alter the risk of further losses impacting adversely the taxpayers in the future, although it does provide for some potential gains in the form of reduced costs and greater efficiencies of the management processes.

On the positive side, Nama is the best-equipped institution to deal with working out Anglo and INBS assets.

To date, IBRC has worked closely with Nama on managing the process of unwinding other ex-Anglo debts and the latest change promises to lower the cost and improve consistency of the management processes involved.

Reduced duplication of functions and potentially lower financial burden of managing legacy assets that can be generated by Nama with respect to the IBRC loans offer some cost containment benefits to the taxpayers in the long run.

Alas, with Nama set to rehire much of the IBRC staff, the question of just how much more efficiencies can be gained by the IBRC liquidation remains open. In normal private sector mergers, managerial and operational gains average around 30-40pc of the original costs associated with running separate entities. Nama, being a state undertaking with civil service-like structures and contracts, is unlikely to yield similar scale of savings.

Another positive is the potential for obtaining lower cost funding for completion of IBRC-financed projects. In some cases, where loans do offer some upside potential on completion, Nama will be able to offer funding to finish these projects at a very low cost, via its access to the ECB funds. IBRC had no access to cheap funding, nor did it have any significant capacity to raise private funds. In contrast, Nama was created with the built-in capacity to raise €59bn in funding, including €5bn for the purposes of investing in completion and retrofits. To date, it raised €32bn in funds and has already repaid €5bn of these, to cover purchases of assets from the Irish banks prior to this week's IBRC Bill 2013. Thus, Nama will have no difficulty issuing some €16bn in bonds to fund purchases of IBRC assets and still retain significant room for raising further funding for investment in unfinished projects.

Since Nama bonds are not counted as a part of our official Government debt, the transfer of IBRC assets to Nama can actually reduce our debt, when taken jointly with the promissory notes restructuring undertaken this week. This reduction is subject to the uncertainty relating to Nama valuations of IBRC assets and terms and conditions of the purchase, as well as the future realised value of Nama assets.

On the negative side, the IBRC Bill 2013 introduced a set of new powers to the Minister for Finance which are both worrying in their scope and nature, and represent a threat to the effectiveness of Nama operations. Article 13 of the Bill clearly puts Nama under the explicit direction of the Minister in relation to Nama pricing and purchasing of the IBRC assets and liabilities. In theory, the minister can force Nama to buy IBRC assets at valuations inconsistent with proper risk pricing, thus reducing upfront costs associated with the IBRC winding down at the expense of increasing future losses to Nama.

The IBRC Bill 2013 has significantly undermined the independent nature of Nama, raising a serious question as to whether there should be a reconsideration of the undertaking as being consistent with effective majority private ownership. If such re-appraisal were to determine that Nama is no longer independent, we can potentially face a highly unpleasant scenario whereby Nama bonds can be counted as Government debt.

Over its history, Nama has shown strong willingness to pursue debtors, albeit this propensity has not been consistent across all borrowers. The transfer of IBRC assets to Nama can see the return to courts of such high-profile borrowers, previously aggressively pursued by the agency, as Paddy McKillen. It can also mean an acceleration of the pursuit of the Quinn family case. There will be drama and

high-stakes battles, but in the end, Nama is most likely the best-armed and more competent entity to deal with these issues.

On the net, however, Nama-managed liquidation of IBRC offers the potential for some savings, while coming at a cost of possibly increasing overall Nama losses in the future. The devil, as always, is in the details of valuations and the efficiencies of Nama's own operations and with the IBRC Bill 2013 that devil has just gone political.

Dr Constantin Gurdgiev is Adjunct Professor of Finance with Trinity College Dublin

Irish Independent

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