# ptsb has sold a tranche of  restructured mortgages



## Brendan Burgess (29 Nov 2018)

MEDIA STATEMENT FROM PERMANENT TSB
Permanent   TSB   Completes   Second   Major   Transaction   To Reduce   Further   Its   Non-Performing   Loan   Ratio 


• This transaction involves the sale of a pool of NPLs through a securitisation. The mortgage loans involved are linked to 6,272 borrowing relationships (a borrowing relationship can be a single borrower or two or more joint borrowers).  All bar 133 of the borrowing relationships are secured by PDH loans. The securitisation vehicle in this transaction is Glenbeigh
Securities 2018 – 1 DAC.

• The mortgage loans have a gross value of c €1.3 billion and a net book value of c €0.91
billion.
• The nature of this securitisation, and the transfer of mortgage loans is similar to a loan sale.
The resultant impact on customers is that, after the transfer date (circa 6 months from now),
their loan will no longer be serviced or owned by PTSB.
• The loans will continue to be serviced by Permanent TSB for a period of up to 6 months.
Permanent TSB will continue to be the contact point for customers during this period.
• NPLs included in the securitisation are considered non-performing by reference to
regulatory definitions.  These loans have been restructured and, are operating in line with
restructuring arrangements agreed between PTSB and the relevant account holders.

• After completion of the transfer, Pepper Finance Corporation (Ireland) DAC (Pepper Ireland) will hold legal title to the loans.  In addition, it will act as servicer and administrator handling
all of the day-to-day management of these loans.

• All of these customers will continue to be covered by the protections of the Central Bank’s consumer protection codes and regulations.

• The terms of the existing restructuring arrangements, including alternative repayment arrangements agreed between customers and PTSB, will be unchanged.  This will remain the case if customer circumstances do not change.

• PTSB has received confirmation from Pepper Ireland that post-transfer, when an
arrangement is up for review, Pepper Ireland will engage with customers to review their individual situations, will work with them to understand if their circumstances have changed (i.e. improved or dis-improved) and, where possible, identify the best long term sustainable solution in a way that is right for their situation.








• Citibank is the Arranger and Lead Manager for this transaction.

Financials



• The transferred NPL portfolio has a gross balance sheet value of c €1.3 billion and a net book value of c €0.91 billion. 

The NPL portfolio carries a risk weighing of c €0.91 billion. 

In the year to December 2017, the portfolio generated an operating income
of c €4 million.  

At completion, the Bank will receive a consideration of c €0.89 billion.  The proceeds will be used for general corporate purposes.

•


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## Brendan Burgess (29 Nov 2018)




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## Brendan Burgess (29 Nov 2018)

This is really a disgrace.

permanent tsb which is struggling for profitability is being forced to sell 6,272 profitable loans.

To make it worse it is getting €890m for a portfolio with a gross value of €1.3 billion - so a haircut of 32%

All to meet the ECB/CB's stupid definition of "non performing loan"

As the graphic says



Well why should they not produce a steady, consistent payment flow/yield for the taxpayer owned permanent tsb.

Brendan


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## Brendan Burgess (29 Nov 2018)

And customers will lose out too.

Many of these borrowers would, in time, have recovered completely and would have been able to take out a remortgage to trade up. Some would be on trackers and would be able to move their trackers to a new home.

Those on split mortgages may find Pepper less flexible than ptsb when reviewing the split after three years, despite: 
_
PTSB has received confirmation from Pepper Ireland that post-transfer, when an
arrangement is up for review, Pepper Ireland will engage with customers to review their individual situations, will work with them to understand if their circumstances have changed (i.e. improved or dis-improved) and, where possible, identify the best long term sustainable solution in a way that is right for their situation. _


Brendan


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## dublinaam (1 Dec 2018)

Brendan,

Banks have for many years securitised portfolio of loans. This frees up balance sheet to allow more lending. PTSB was a frequent issuer for years securitising performing loans.


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## Brendan Burgess (1 Dec 2018)

Hi Dublin

Banks have securitised loans in the past and will continue to do so.

This is completely different. 

This is the complete sale of the loans. They have no further interest in them. 

They have sold them at a 30% discount - most securitisations are at par, I assume. 

Brendan


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## RedOnion (1 Dec 2018)

Yes, securitisation is common. But this is different - PTSB has lost control of the loans. They have sold them to an SPV, which has in turn securitised them. Although arranged by PTSB, they are losing control completely to satisfy EBA requirements.


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## GlenML (2 Dec 2018)

Brendan Burgess said:


> And customers will lose out too.
> 
> Many of these borrowers would, in time, have recovered completely and would have been able to take out a remortgage to trade up. Some would be on trackers and would be able to move their trackers to a new home.
> 
> ...



Hi Brendan ..

When you say less flexible what do.you mean..I have split but fully compliant and always have been..worried now about what pepper can do when up for review (ie interest rates and term)..even though agreement with TSB clearly states split in place until end of mortgage and full payment to be made then...
In fact my situation will vastly improve in January and was considering getting rid of split and paying full amount again..which I'd imagine would be better for TSB as they would get full repayment of loan.and all interest due..including all our payments over the last 14 years on top...we where only about 8000 in arrears when split put in place and that was recapitalized at the time so TSB will have lost nothing by the end of our term..but now they've sold us off at a loss.
Wish I could remortgage but imagine being in a split will hinder that but was hoping to after paying full amount.
Considering initiating review before hand over so pepper have to hold up decision for 3 years after transfer..or fixing rate on main bulk for 5 years so they can't change that either until it's up.. 
Really worried and confused about the future now..we where at the end of this chapter about to get rid of split and move on with our lives and make plans again..we are sick at the timing of this and the utter disrespect and dishonesty of TSB towards anyone who complied fully with their long term solution that they offered us .

Any advice on what to do next.??
Regards
Glen.


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## Brendan Burgess (2 Dec 2018)

Hi Glen

If you are able to return to paying your mortgage in full, then you have very little to worry about.  By paying your mortgage in full, I mean moving the full amount from the warehouse to the main loan so that it becomes a full capital and interest loan again. 

You should do so as soon as possible and then the clock will start on restoring your ICB record. 

If Pepper jacks up the interest rates then there is a fairly good chance that you could switch to another lender.  BoI has been giving mortgages to recent bankrupts so I presume that they would be willing to lend to you.

Brendan


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## GlenML (2 Dec 2018)

Hi Brendan
Thanks for your reply..


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## Andy836 (3 Dec 2018)

PTSB are keeping 5% interest. The junior notes being issued.
Of course it was done at a discount. Most of these are split mortgages so there's a portion not accruing any cash flows (interest or principal repayments).


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## Brendan Burgess (3 Dec 2018)

Hi Andy 

Hard to know what the discount should be: 

On the negative side 

2/3rds are split mortgages 

About half of them are cheap trackers i.e. interest rate of c. 1% 
On the positive side

They are all performing in line with their restructure 

The split mortgages have a review every three years and most could have a substantial amount moved from the warehouse into the active loan 

Half of them have variable rates of up to 4.5% 
Even a split mortgage where the active half is paying 4.5% has an interest yield of 2.25%. 

ptsb had already made a provision of 30% against these mortgages which seems plenty. 

If they had treated them the way the Central Bank wanted them to, they would have had to provide a further €300k or so. 

Brendan


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## Andy836 (3 Dec 2018)

Brendan,

The securitization prospectus is available on the CBI website.
[broken link removed]

*While these may be classed as "performing", in reality that is only because they have been so favorably restructured. *

30% may sound like a high provision, but when you look at the underlying assets (the loans) it actually seems light.

Of the €1.5bn total pool, there's €467mm warehoused while the balloon portion of the part capital & interest is €293mm.
Both the warehoused portion and the balloon repayment portions are larger than their corresponding "performing" portions.

The WAC on the split mortgage pool (€907mm in total) is only 1.55% while the WAC on the Part capital & interest (€442mm in total) is only 2.4%.
So the effective total pool coupon is only 1.83%.
59% (€791mm) of the total pool by Euro value has an indexed LTV >75%.
26% (€325mm) of the total pool by Euro value has an indexed LTV >100%.
56% of the total pool is subject to treatment (either warehoused €467mm or balloon repayment €293mm). That compares with only a 30% provision.
So you only really have 43% (€584mm) of the total pool balance that could be considered as performing in the traditional sense of the word.

Overall, the coupon is too light, there is too much with an LTV >100% (do you even want >75% to a Borrower with a bad credit history?), there is a huge portion which is put on the long finger which extends the duration of the notes.


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## Brendan Burgess (4 Dec 2018)

Hi Andy
That is very interesting. Thanks for the link and I will study it later. 

In summary the nominal value is €1.4 billion and they sold it for €0.9 billion. This coincides with the written down value. 

Are you suggesting that it's not worth €0.9m? 

So ptsb got a good price for it? 

Are you allowing for the fact that the split mortgages all have a three year review clause in them?   

ptsb has been too busy to review any of these mortgages, but Pepper will be adequately resourced to do so. 

I am not sure of the relevance of the balloon payment on the capital and interest mortgages?  They are charging interest on these mortgages.  So on the maturity date, the borrower will either repay the loan or, even better, keep it going and the new owner will continue to collect interest. 

Brendan


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## Andy836 (4 Dec 2018)

I don't see much value in the split mortgages. Or at least I don't seem the same value in them as you do.

The warehoused portion would (in my mind anyway) be valued in two parts. Effectively a zero coupon bond through the final maturity date with some sort of incremental option value for potential early repayment/trigger to full P&I. 
Starting with the base value - assuming none of it moves to P&I or early repayment. To get a 4% effective yield on a 20 year zero coupon bond requires a purchase price of 45.6 (so a discount to par of 54.4%). I wouldn't place much value in the option value of the 3 tear review trigger/early repayment as these credits are obviously the worst of the bunch as they're not even servicing the interest on the warehoused portion (so they're less credit worthy than the part principal & interest loans). I don't see why Pepper will be any more active or aggressive in managing these credits than PTSB - they will be as aware of the legal hurdles as everyone else.

My reason for posting that info was in response to one of your initial posts above where you seemed to suggest PTSB were making a mistake for selling these loans at a 32% discount. A fully performing, never defaulted, acceptable LTV, mortgage loan is worth about par or slightly above par depending on the interest rate. These loans have a history of default, are unable to service the debt, many have elevate LTVs while many have LTVs >100%. There is no way they would be value close to par.


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## Brendan Burgess (5 Dec 2018)

Hi Andy

I am not sure that we are in much disagreement here.

My main point is:



Brendan Burgess said:


> ptsb had already made a provision of 30% against these mortgages which seems plenty.
> 
> If they had treated them the way the Central Bank wanted them to, they would have had to provide a further €300k or so.



So I think that 30% is enough.  You say:



Andy836 said:


> 30% may sound like a high provision, but when you look at the underlying assets (the loans) it actually seems light.



The Central Bank classified the entire split mortgages as NPLs because they did not provide in full for the warehoused amount. In my view, this was wrong and forced ptsb to sell them.

I have uploaded the relevant extracts from the prospectus.

Brendan


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## Brendan Burgess (5 Dec 2018)

So let's first look at the split mortgages



Now let's look at the interest rate on them.



They are getting 1.55% on €435k or an average rate on the main portion of 3.5%. 
That seems about right. 22% are cheap trackers. 

Now let's look at the Loan to Value of these mortgages.  There are two tables in the prospectus. I don't understand the difference, so I will take the worst of them. 



So 28 % is over 100% LTV. 

The have warehoused 50% of the mortgages.  In general, the maximum warehouse was the negative equity, but ptsb may have been more generous that that. 

So most of these borrowers now have main mortgages worth a lot less than the values of their properties.  The 22% on trackers are clearing down the capital on their main balances at a rapid rate. 

I appreciate that these are not prime borrowers because they have had to have their mortgages rescheduled in the past.  But none is in arrears at present.  They have a very valuable restructuring which they could lose if they went into arrears. I suspect that further defaults on these will be low.

So how much should the provision be? 

As you pointed out, they should not be valued at par. 



> Starting with the base value - assuming none of it moves to P&I or early repayment. To get a 4% effective yield on a 20 year zero coupon bond requires a purchase price of 45.6 (so a discount to par of 54.4%). I wouldn't place much value in the option value of the 3 year review trigger/early repayment as these credits are obviously the worst of the bunch as they're not even servicing the interest on the warehoused portion (so they're less credit worthy than the part principal & interest loans). I don't see why Pepper will be any more active or aggressive in managing these credits than PTSB - they will be as aware of the legal hurdles as everyone else.



So the €466k in the warehouse should be discounted by 54% or €251k. 

Not sure why you want a 4% yield on these?  Is that the typical yield on securitised performing mortgages? I doubt it. 

I would place a fair bit of value on the review option.  These people now have performing loans. But their ICB record is shot. Most people want to clean up their ICB record. A lot of these people will want to move.  Clearly if you have an interest free loan of half your mortgage, you will be slow to volunteer moving it to the main account.  But Pepper is well managed compared to ptsb and I suspect that they will begin the process of activating these warehouses over the next few years. 

So, in my view, a €251k provision is conservative.  

Brendan


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## Brendan Burgess (5 Dec 2018)

Now let's look at the Capital and Interest

The first thing to realise about these is that they are being charged the full interest on the entire loan.  They are just paying back the capital at a slower rate than originally planned.  As I have pointed out to the Central Bank and bankers on many occasions, the ideal loan from a lender's point of view is one

at market mortgage rates (i.e. not a cheap tracker) 

At a low Loan to Value 

Interest only
A lender should not want the capital repaid on a safe, profitable loan.

Despite the fact that half of these are trackers, the average interest rate is 2.42% and this is being paid in full. 

Do these restructures have a 3 year review clause? Of course, ptsb should not initiate a review for the non-trackers, as they are extremely profitable. They should initiate a review for the trackers although these tracker holders themselves should be proactive in returning to full capital and interest to start repairing their ICB record.



So how risky are they?  Only 22% are over 100% LTV



Half of these are on cheap trackers.  They are paying off the capital quickly, so the LTVs on these are improving quickly.  

The others think that they have a good deal in that they are paying less capital than they would otherwise have expected.

I suspect the motivation to keep up repayments on these is quite high.

So what should the provision be? 



Say 50% of the loans over 150% - €6m
25% of the loans between 100% and 150% - €20m
So a total of €30m

That is too low - let's say €100m in total. 



Brendan


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## Brendan Burgess (5 Dec 2018)

So now pulling these two together.



So, it seems that the provision made is adequate. 

The Central Bank requirement that they treat all split mortgages as NPLs was excessive and forced ptsb to sell loans which it did not want to sell. 

Brendan


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## Andy836 (5 Dec 2018)

Ok, so we seem to be on the same page that the price is fair.

So why would PTSB sell them? They're getting close to what they think they're worth but, like all of these disposals, the main drivers would be cleaning up their balance sheet while also incrementally improving their capital ratios.

There's no getting around it, these are all NPLs and they'll all carry higher capital requirements than regular home loans. Hence PTSB believe the transaction will improve their CET1 (transitional) by 30bps - Davy's puts the fully loaded CET1 improvement at ~20bps. That's a win for PTSB.


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## Brendan Burgess (5 Dec 2018)

These are only NPLs in the technical sense of the word.  The Central Bank rules say that split mortgages which do not make 100% provision for their warehouse are NPLs. 

I don't think that ptsb wants to sell these. They are forced to sell them. They have plenty of capital, haven't they? 

The last thing that they should be doing is selling profitable loans, whose profitability will increase over time. 

Brendan


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## Andy836 (5 Dec 2018)

They don't. If they had excess capital they could have done what AIB did and fully provide for the warehoused portion and structure it in such a way (two separate loan docs maybe) that they were no longer NPLs.

At of June 2018 PTSB's CET1 (fully loaded) was 13.4% (minimum is 9.825% I think). That seems like they've got loads of headroom but their CET1 (FL) was 16% at Dec 2017. A big 3% fall in only 6 months.
PTSB's RWAs are increasing rapidly now as their risk modeling is being refined due to the ECB’s Targeted Review of Internal Models (TRIM). This added close to €600mm in RWAs in H1 2018 with a further €1.7bn expected to be added as TRIM progresses

So at H1 2018 you've got CET1 (FL) of €1,506mm versus €11,211 in RWAs = CET1(FL) ratio 13.4%.
Add €1,700mm in additional expected TRIM related RWAs brings you to €12,911mm RWAs versus CET1(FL) of €1,506 = CET1(FL) ratio of 11.7%.

Assume they took the €300mm provision on the Warehoused portion of these loans. This reduces RWAs by €300mm but also reduces capital by €300mm.
So you've now got €12,611mm in RWAs versus €1,206mm in CET1(FL) = CET1(FL) ratio of 9.56% which is barely above the minimum threshold. Undershoot on their TRIM expectations and well, there's a possible breach of the minimum threshold.

Edit to clarify - I'm not a professional Bank analyst so the above could be completely wrong


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## Brendan Burgess (11 Dec 2018)

Andy836 said:


> Assume they took the €300mm provision on the Warehoused portion of these loans. This reduces RWAs by €300mm but also reduces capital by €300mm.



Hi Andy 

That is my point. They have already provided €400m against €1.3 billion of loans. They should not need to make a further €300m provision which is what the Central Bank wanted them to do.  The only way they could avoid this was to sell the mortgages. 

Brendan


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## Andy836 (11 Dec 2018)

Of course they need to take the extra €300mm (if that's the figure). The warehoused portion needs to be completely written off for the loans not to be considered NPLs.
Otherwise they are attributing a book value to a zero interest home loan to a Borrower with impaired credit.
The house might be worth more than the debt in most cases but that doesn't change the fact the loans are not performing.


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## Brendan Burgess (11 Dec 2018)

Andy836 said:


> he warehoused portion needs to be completely written off for the loans not to be considered NPLs.



But that is the point at issue. 
Of course a provision should be made. But I thought you and I had agreed that the existing provision is about right.

To write off a further €300m is crazy.

Brendan


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## Delboy (11 Dec 2018)

Andy836 said:


> PTSB are keeping 5% interest. The junior notes being issued.
> Of course it was done at a discount. Most of these are split mortgages so there's a portion not accruing any cash flows (interest or principal repayments).


And that 5% allows the newly established fund to avoid paying any tax as Pearse Doherty so excellently pursued the point at the Finance Committee last week. The aeticle includes the relevant clip from the committee

https://www.thejournal.ie/taoiseach...tgage-vehicle-not-to-pay-tax-4389095-Dec2018/


> Last week, PTSB bank bosses confirmed that the ‘special purpose vehicle’ which more than 6,000 of its mortgages have been transferred to will be exempt from tax.


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## Andy836 (11 Dec 2018)

Brendan Burgess said:


> But that is the point at issue.
> Of course a provision should be made. But I thought you and I had agreed that the existing provision is about right.
> 
> To write off a further €300m is crazy.
> ...



To write off an extra €300mm would be "prudent" in the jesuitical sense. Yes, the requirement is largely driven by accounting practices and regulatory definitions but either a loan is an NPL or it is not. 

Just because you think there is hope value in the warehoused portion, does not mean the loan is now somehow performing. It is not performing. The same way part P&I and part interest loans are also not performing. 

But the key point is, PTSB needs to reduce its NPLs. Whether you, I or anyone else likes it or not, that is the directive they've been given by the CBI & ECB. It only has two options, write-off the balance or sell the loan. They can't afford to write off the balance.


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## Andy836 (11 Dec 2018)

Delboy said:


> And that 5% allows the newly established fund to avoid paying any tax as Pearse Doherty so excellently pursued the point at the Finance Committee last week. The article includes the relevant clip from the committee
> 
> https://www.thejournal.ie/taoiseach...tgage-vehicle-not-to-pay-tax-4389095-Dec2018/



Excuse me while I get my financial information from a source other than Pearse Doherty. I like him & generally he means well, but he doesn't know what he's talking about. 

The 5% risk retention rule for securitizations has been in place in Europe since 2011. It has nothing to do with tax, it was introduced to insure originators, sponsors etc all had skin in the game.

Come back to me when he explains what "profits" he's talking about. "Gross interest" paid on debt is not "profit".


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## RedOnion (11 Dec 2018)

Andy836 said:


> It has nothing to do with tax,


Correct, but it this instance it seems to also have allowed a loophole to be exposed.


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## Andy836 (11 Dec 2018)

RedOnion said:


> Correct, but it this instance it seems to also have allowed a loophole to be exposed.



Well calling it a "loophole" is debatable. Why would a gross interest payment be taxed? It is not "profit", it is effectively a revenue payment. 

If you started taxing interest paid to noteholders in securitizations then they would cease to be viable structures for perfectly reasonable transactions.


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## Brendan Burgess (12 Dec 2018)

Andy836 said:


> either a loan is an NPL or it is not.



Hi Andy

No, it is not a binary decision at all. 

These are profitable loans and ptsb was forced to sell them because the ECB/CBI has a stupid definition. 

Using the term "hope value" underestimates the value of these. They are loans secured on properties. In most cases they are in positive equity. In probably all cases they will be in positive equity in the near to medium term future. And, in most cases, the borrowers' finances will improve and they will be able to move money from the "hope value" warehouse to the main loan.

You are saying that they are worth nothing. I am saying that they are worth at least what they are on the books and that ptsb should not have been forced to sell them.

Brendan


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