# The Bonds issued by NAMA will pay 1.5%?



## Brendan Burgess (1 Sep 2009)

From the Dail Debate yesterday. I had assumed that I had misheard it.



> *Deputy Brian Lenihan:* The assumption in the Deputy’s question is correct in that taxpayers are not being asked to pay for the NAMA bonds because the Government will issue paper at 1.5% interest - this is the figure we anticipate - which can be presented by the banks on world markets or to the ECB. If the bank holds the bond, the State will have to pay interest at 1.5% which is a much lower rate than applies to our current borrowings.



Am I missing something here?

If AIB has €20 billion of bonds paying 1.5% interest by the Irish Government, surely they will have to be marked down to market value which would be around half of that. 

The government is paying 4.5% for its 10 year bonds at the moment. Surely the NAMA bonds will be a debased currency.

Brendan


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## Duke of Marmalade (1 Sep 2009)

Brendan said:


> From the Dail Debate yesterday. I had assumed that I had misheard it.
> 
> 
> 
> ...


It has been known for some time that the rate would be 1.5% and initially I too had your query. What I think is happening is that these bonds will carry a variable rate : ECB +50bp. In accounting terms that is the correct variable rate to justify face vaue and it also means they are suitable for repo at par with the ECB. But I agree with you, they would scarcely command par at market prices. This facility which clearly needed ECB blessing is indeed a very attractive feature from the taxpayers' perspective.  But the bit that still perplexes me is surely the other side of that coin is that bank margins will be under severe pressure.


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## Brendan Burgess (1 Sep 2009)

ECB + .5% makes a lot more sense than 1.5%.

But they will still not trade at par though. If AIB needs to sell their bonds, no one would pay par value for them. 

Thanks Duke.


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## Duke of Marmalade (11 Sep 2009)

This aspect is not getting sufficient coverage IMHO. (BTW I note BLe on RTE yesterday saying it was ECB + 50bp. Other commentators say it is Euribor.)

John Gormley answered a few of my question this morning on RTE. He was making a very big play of the cheap funding. And when it came to the key outstanding question - how much will the government own of the banks post NAMA he explained that the more we own (through recapitalisation) the more we have to raise the money at conventional rates, in other words we can only use these 1.5%ers to buy NAMA assets, we cannot use it to buy equity. Nor indeed can we use them to fund the budget deficit.

Let's open a book for signing in the Mansion House so that the people of Ireland can send a big thank you to the ECB.


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## Kine (11 Sep 2009)

Just so I have this clear in my head:

The governemnt are borrowing at ECB +.5% to pay for NAMA?


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## Brendan Burgess (11 Sep 2009)

Effectively, yes.

Technically, NAMA will be borrowing the money through bonds.

Brendan


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## Kine (11 Sep 2009)

Reminds me of the adds "I don't know what a tracker mortgage is!".

Thanks, for the short term that'll be quite a nice rate.


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## goosebump (11 Sep 2009)

Duke of Marmalade said:


> This aspect is not getting sufficient coverage IMHO. (BTW I note BLe on RTE yesterday saying it was ECB + 50bp. Other commentators say it is Euribor.)
> 
> John Gormley answered a few of my question this morning on RTE. He was making a very big play of the cheap funding. And when it came to the key outstanding question - how much will the government own of the banks post NAMA he explained that the more we own (through recapitalisation) the more we have to raise the money at conventional rates, in other words we can only use these 1.5%ers to buy NAMA assets, we cannot use it to buy equity. Nor indeed can we use them to fund the budget deficit.
> 
> Let's open a book for signing in the Mansion House so that the people of Ireland can send a big thank you to the ECB.



Can I clarify this?

If we use NAMA and pay long term economic value for assets, we can do the entire recapitalisation at 1.5%.

If we nationalise and swap out the bad loans at market value, and take equity for the balance required for the recap, the balance of the recapitalisation will cost 4.5%

Correct?


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## Duke of Marmalade (11 Sep 2009)

goosebump said:


> Correct?


Hmmm, kinda.

But note that the ECB issued a warning about not abusing this LTEV concept. So they are wise to what you are referring to and will be keeping a close eye to ensure the government doesn't overstep the mark.


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## goosebump (11 Sep 2009)

Duke of Marmalade said:


> Hmmm, kinda.
> 
> But note that the ECB issued a warning about not abusing this LTEV concept. So they are wise to what you are referring to and will be keeping a close eye to ensure the government doesn't overstep the mark.




Just did the math on this based on recap of €30bn with NAMA using 'market value' of loands + €30bn with equity.

A .03 premium on 30bn worth of 10 year guilts = €9bn = cost or 'market value' proposition, or am I missing something?


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## Duke of Marmalade (11 Sep 2009)

goosebump said:


> Just did the math on this based on recap of €30bn with NAMA using 'market value' of loands + €30bn with equity.
> 
> A .03 premium on 30bn worth of 10 year guilts = €9bn = cost or 'market value' proposition, or am I missing something?


 
Not quite that good. About half the difference is because of the steep yield curve and might be expected to be given back over time. But the other half seems to be that we are being spared current high default spreads on Irish medium term bonds.

We will know fairly quickly how good the deal is since these will be traded on the market and anytning below par means we have got a good deal.


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## goosebump (11 Sep 2009)

Duke of Marmalade said:


> Not quite that good. About half the difference is because of the steep yield curve and might be expected to be given back over time. But the other half seems to be that we are being spared current high default spreads on Irish medium term bonds.



Can you explain in more detail?


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## z109 (12 Sep 2009)

Because the NAMA bonds will be floating rate and will reset periodically (probably every six months if six month euribor is being used as the reference rate?), rises in euribor will increase the cost of the NAMA bonds (the amount payable on the coupon). As ten year swap rates for euribor are about 4.4%, this is what DoM means by the yield curve being steep - interest rates are currently low and rise into the future.

Unless there is some mechanism of paying the bonds back early (they are callable), NAMA will pay the full cost of floating rates over the expected ten year term (through resetting every six months).

@goosebump, there is nothing to stop the government recapitalising the banks using the same sort of bonds in the event they are nationalised. The ECB has given explicit approval for this and for nationalised banks buying sovereign debt, so there is no funding issue there either. Effectively, the ECB have said that they don't care whether banks are privately or state owned, just that there are no market distortions as a result of these operations - governments must not overpay for loans, state owned banks must not buy sovereign bonds at lower than market rates (I suspect this last one is a bit of a kicker...).

@Kine, yes this is the problem. The government is borrowing short to lend long. The rates are attractive now, but over the ten years they'll average 4% so unless NAMA starts paying them back, there won't be a saving. Indeed, there could be problems if rate resets conincide with a rocketing of euribor. This has happened a number of times in the last ten years (not just with the financial crisis). As far as black swans go, this is a white one. It is not just a possibility, it is likely to happen.

As regards asset sales to pay back bonds, the purpose of NAMA is to overpay for assets and set a floor under the market for land, commercial property and new houses. It is not designed, as far as I can see, to sell stuff without some sort of firesale taking place. Therefore its medium-term goal of not causing firesales seems to be somewhat at conflict with its short-term goal of taking advantage of current low interest rates.

For more on borrowing short to buy illiquid long-term assets, look up Long-Term Capital Management (LTCM).


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## Duke of Marmalade (12 Sep 2009)

yoganmahew said:


> @goosebump, there is nothing to stop the government recapitalising the banks using the same sort of bonds in the event they are nationalised.


_Yog_, leave nationalisation aside.  John Gormley said that one of the downsides in paying too little for the toxics was that the difference would have to be paid for anyway in the recapitalisation.  Except funds for recap would have to be raised "conventionally" i.e. not with these "cheap" 1.5%ers.   Is he correct in that.

Also do you agree that there is verylittle if any credit spread in the 1.5%?

BLe says ECB +0.5% which seems better than Euribor.


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## z109 (12 Sep 2009)

Duke of Marmalade said:


> _Yog_, leave nationalisation aside.  John Gormley said that one of the downsides in paying too little for the toxics was that the difference would have to be paid for anyway in the recapitalisation.  Except funds for recap would have to be raised "conventionally" i.e. not with these "cheap" 1.5%ers.   Is he correct in that.


No, I don't believe he is incorrect.

If it was the case that the state could not issue bonds from the treasury to another part of the state, then NAMA would not be able to issue bonds in the first place.

The ECB gives its opinion of NAMA (31 August) here:
http://www.ecb.int/ecb/legal/pdf/opinion_con_2009_68_f_sign.pdf

It doesn't mention this.

Previous ECB monthly bulletins have talked about what nationalised banks can and can't do. They can operate as banks in all respects, but not distort the market. And aid given to them must be on commercial terms. That is all.



> Also do you agree that there is verylittle if any credit spread in the 1.5%?


Not sure what you mean? You mean currently?



> BLe says ECB +0.5% which seems better than Euribor.


I've heard a lot about ECB + 0.5%, but only seen euribor written down. I have yet to see anything credible that writes down ECB + 0.5%. This was something I posited as an option a few months ago and I would be much happier with this as a form of funding, as it is a more level measure. It still doesn't get around that fact that if NAMA does not dispose of assets and pay back bonds, there is little difference over the life of a NAMA bond between it and a ten year fixed.


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## goosebump (13 Sep 2009)

yoganmahew said:


> Because the NAMA bonds will be floating rate and will reset periodically (probably every six months if six month euribor is being used as the reference rate?), rises in euribor will increase the cost of the NAMA bonds (the amount payable on the coupon). As ten year swap rates for euribor are about 4.4%, this is what DoM means by the yield curve being steep - interest rates are currently low and rise into the future.



OK, I get what you are saying. TBH, I thought the 1.5% was fixed, but I guess that was wishful thinking.

However, isn't it true to say that a rate fixed at .5% over either ECB or Euribor is generally going to be better than the coupon we offer on Government Debt, particularly in light of our fiscal position over the medium term?



yoganmahew said:


> @goosebump, there is nothing to stop the government recapitalising the banks using the same sort of bonds in the event they are nationalised. The ECB has given explicit approval for this and for nationalised banks buying sovereign debt, so there is no funding issue there either.



I know. I was talking about the difference between valuing the assets at market value rather than long term economic value, not how we deal with the shareholders.


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## z109 (13 Sep 2009)

goosebump said:


> However, isn't it true to say that a rate fixed at .5% over either ECB or Euribor is generally going to be better than the coupon we offer on Government Debt, particularly in light of our fiscal position over the medium term?


Yes. 

I am a little concerned about fixing on euribor (SVR), but less so on a tracker!

But the concerns remain about a rollover crisis. We could see interest rates reach 6-7% if the inflationistas are correct. I have no doubt that the ECB will raise interest rates should inflation rise. This would lead to a spike in coupon payments and would probably involve default on a significant number of the loans that are now performing for NAMA, so costs of NAMA would increase while income decreased. So, we are left with another government cash squeeze at a time when money is expensive.

Alternatively, the ECB could start to remove alternative liquidity measures rather than raising rates, indeed, they said recently this was their preferred exit strategy in light of continuing low inflation expectations. So if wage demans stay low, but economic activity recovers and credit expansion increases (M3 starts to rise) in the wider eurozone, unlimited repo will come to an end. This would leave the banks facing a cash squeeze as, as you and others have pointed out, the market value of the NAMA bonds is less than the ECB repo value. 

The banks probably have figured this out, so they will probably be conservative in lending against the NAMA bonds. Or not. In which case, we'll face another crisis in a couple of years.

So  a spike in repayments causing another deficit spike or another cash squeeze on the banks are two possible risks of the low coupon.


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## Duke of Marmalade (13 Sep 2009)

_Yog_, your reply to me focuses on the nationalisation aspect. Ignore nationalisation which confuses matters somewhat.

Is it not true that, in the words of the ECB, 1.5%ers can only be used to buy *eligible* assets? So let's say 60Bn is the just the right figure to avoid any subsequent recapitalisation. If instead 50Bn is paid for NAMA assets then there is a 10Bn hole which needs filling by recap. The 10Bn would have to be "conventionally" sourced. This is Gormley's point, makes sense to me.


> Not sure what you mean _(about credit spreads_)? You mean currently?


I suppose the more correct term is default spreads. Conventional Irish sovereign funding carries a considerable default spread over, for example, German rates. ECB + 50bp would seem to carry a much lower default spread.


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## z109 (13 Sep 2009)

NAMA bonds are a payment method. There is no restriction on assets to be purchased, only a restriction on price (i.e. the state must not "overpay"). Equity shares are assets. The state can use NAMA bonds to buy equity shares at market price.

I don't see a hole in the logic?

The ECB gives some detail here on what can be legitimately purchased and how it should be accounted for:
http://www.ecb.int/pub/pdf/other/mb200907_pp63-74en.pdf
(See general principles P.4-5 (internal - 66-67)).

ECB + 50 doesn't seem to carry a default spread at all.


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## darag (13 Sep 2009)

I think the "ECB +0.5%" must be a misunderstanding.  I've never heard of such government bonds but I can't say I'm an expert.  I'd imagine that the reference rate will almost certainly be EURIBOR.

There is a good reason why governments, if they issue floating rate bonds at all, only issue short term bonds or issue a small percentage of their debt in this form because of the risks similar to those that yoganmahew has pointed out.  An increase in inflation hits you with the double whammy of an increase in the costs of running the country AND an increase in the cost of debt servicing.

If the government goes ahead with this plan then a significant percentage of the national debt (nearly half initially?) will be in the form of floating rating medium/long term bonds.  This is an extremely risky strategy.  It is almost guaranteed to blow up at some stage in the next 10 years.


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## ipxl (16 Sep 2009)

I've listened carefully to Brian Lenihan's explanation of how the NAMA bonds would be constructed in order to maximise the incentive for the banks to lend out money. This interview happened last week.

Kudos to Eamonn Keane for posing the question on the maturity of the bonds. It's a piece of the NAMA jigsaw that I find the most puzzling.

Brian Lenihan assured Eamonn Keane and the listeners that the maturity period on the bonds would be much longer terms than 18 months and that the government had fixed them at 1.5% coupon. That's as I understand from  listening to the podcast below, specifically from 10min 50 secs in to the piece.
[broken link removed]

Is this for real ? Even if we accept that the NAMA bonds coupons are not 1.5% fixed (as has been the assumption by most on this dicussion thread) then how does this square with the bonds maturity period being significantly longer than 18months as so emphatically assured by the Minister in the interview above ? Can ECB perform repo financing to the banks using longer dated bonds @ ECB (or Euribor) + 0.5%)?

How does this square with their strict guidelines on eligible collateral ?

Is there something I am missing here ?


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## Sunny (16 Sep 2009)

There is still valid questions over the interest rate to be paid on these bonds. There seems to be a lot of confusion out there and it hasn't got much media coverage. I don't get this floating 1.5% thing.  

The maturity date of the bonds is less important for repos. The ECB will accept bonds in various maturity buckets at their refinancing rate. The haircut they take just increases the longer the maturity.


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## ipxl (16 Sep 2009)

Sunny said:


> There is still valid questions over the interest rate to be paid on these bonds. There seems to be a lot of confusion out there and it hasn't got much media coverage. I don't get this floating 1.5% thing.
> 
> The maturity date of the bonds is less important for repos. The ECB will accept bonds in various maturity buckets at their refinancing rate. The haircut they take just increases the longer the maturity.



If the maturity dates are as more than just suggested by Brian Lenihan then I imagine the haircut applied by ECB becomes more significant to the overall mechanics of the NAMA transfers.

Dating the bonds longer term would tend to reduce the interest rate risks but if the bonds are taken significantly below par doesn't that weaken the "cheap financing" argument put forward by the NAMA-as-is proponents?

--Ian


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## Duke of Marmalade (16 Sep 2009)

ipxl said:


> Brian Lenihan assured Eamonn Keane and the listeners that the maturity period on the bonds would be much longer terms than 18 months and that the government had fixed them at 1.5% coupon. Is this for real ? Even if we accept that the NAMA bonds coupons are not 1.5% fixed (as has been the assumption by most on this dicussion thread) then how does this square with the bonds maturity period being significantly longer than 18months as so emphatically assured by the Minister in the interview above ? Can ECB perform repo financing to the banks using longer dated bonds @ ECB (or Euribor) + 0.5%)?


Think tracker mortgages. These are say 20 year loans but the interest rate is nothing like the 20 year fixed rate. It is the short term ECB rate + Xbp. A 20 year tracker mortgage which is not impaired is valued at par in a bank's balance sheet even though the interest rate is way below the fixed rate that should be charged on a 20 year mortgage.

Same for NAMA bonds. It is interesting that the Minister in that podcast confirmed that the bonds would be medium term. I know from other e-debates that very learned professors are assuming that they will be very short term and that they will face massive refinancing problems when they roll-over.

BLe also makes another excellent point about these 1.5%ers in the podcast. These are such poor performing assets from the banks' point of view that there will be a great incentive for the banks to replace them with high performing assets i.e. to lend into the real economy.

IMHO these NAMA 1.5%ers are one of the great coups in this proposal, albeit the Minister somewhat overstates their benefit (they can be expected to rise in cost over time).


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## ipxl (16 Sep 2009)

Duke - that is fairly convincing.
However, how does the haircut applied to reflect the medium term maturity of the bonds apply ?
You are saying the bonds can be valued at par - is this the case , generally ?


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## Duke of Marmalade (16 Sep 2009)

ipxl said:


> However, how does the haircut applied to reflect the medium term maturity of the bonds apply ?
> You are saying the bonds can be valued at par - is this the case , generally ?


Ask me the "haircut" question again in a different way, I don't quite understand what you are asking.

The main reason long term bonds are valued at other than par is that their coupon rate gets out of kilter with the current market. As market yields rise a fixed coupon bond falls and vice versa.

Because NAMA bonds are variable rate their coupons will rise and fall with the market and so there should be no market fluctuations in their value on this score.

Of course, and here I am very interested to see how the market values these, there is a long term default risk. Is 50bp enough to compensate for this? I don't think so and so I expect these will trade below par but still be valued at par in bank balance sheets - that's the beauty of this trick.


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## ipxl (16 Sep 2009)

I understand that a variable coupon would mitigate the market fluctuation risk and how this would imply it was OK to value at par.

My original query was based on a concern which I first saw raised on the irisheconomy.ie site where the eminent profs, etc expressed concerns about these bonds being short dated. My lack of understanding is how frequent the coupon is redeemed by ECB over the maturity term of the loan. I can see that short term bonds would involve the premium + coupon becoming repayable more frequently which would be very unpleasant indeed.


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## ipxl (16 Sep 2009)

No details worth remarking on the bonds and how they will be structured in todays speech.

I still think there is something fishy about these bonds.

Call me cynical - I am just reflecting the same unease I get from looking at the analysis of the NAMA 
"details" as being discussed on the IrishEconomy.ie blog.


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## ipxl (17 Sep 2009)

I forgot to put that fish in to fridge last night and had some rather foul seafood this morning - feeling extremely queasy.

Apparently Brian Lenihan has confirmed on Morning Ireland this morning that the bonds will be Euribor + 50 basis points @ 6 months maturity.
The rollover and interest rate risk on this is pretty terrifying.
Why did he avoid giving this detail yesterday ? and please, please listen again to
what he told Eamonn Keane in the linked podcast regarding the bonds being dated much more than 18months !


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## Sunny (17 Sep 2009)

ipxl said:


> I forgot to put that fish in to fridge last night and had some rather foul seafood this morning - feeling extremely queasy.
> 
> Apparently Brian Lenihan has confirmed on Morning Ireland this morning that the bonds will be Euribor + 50 basis points @ 6 months maturity.
> The rollover and interest rate risk on this is pretty terrifying.
> ...


 
Thats just the coupon period i.e. interest of euribor+50bps will be paid every six months. Doesn't mean the bonds have a maturity of six months so I don't understand by what you mean when you say the interest rate and rollover risk is terrifying.


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## ipxl (17 Sep 2009)

Sunny said:


> Thats just the coupon period i.e. interest of euribor+50bps will be paid every six months. Doesn't mean the bonds have a maturity of six months so I don't understand by what you mean when you say the interest rate and rollover risk is terrifying.


My apologies if this is the case - my cramp is easing (but only slightly).
No details of the maturity of the bonds from the Minister yet, so ...


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## goosebump (17 Sep 2009)

Sunny said:


> Thats just the coupon period i.e. interest of euribor+50bps will be paid every six months. Doesn't mean the bonds have a maturity of six months so I don't understand by what you mean when you say the interest rate and rollover risk is terrifying.




I thought I heard him say 6 month maturity, but I could be wrong.


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## goosebump (17 Sep 2009)

Duke of Marmalade said:


> I know from other e-debates that very learned professors are assuming that they will be very short term and that they will face massive refinancing problems when they roll-over.



Even if that were the case, surely the rollovers can be refinanced with income from the NAMA assets rather than conventional Government borrowing?


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## Sunny (17 Sep 2009)

goosebump said:


> I thought I heard him say 6 month maturity, but I could be wrong.


 
I would be amazed but I haven't seen the details so I am open to correction.


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## z109 (17 Sep 2009)

It does appear that he said six month maturity:
http://www.irisheconomy.ie/index.php/2009/09/17/nama-bond-yield-formula-finally-revealed/

If so, this is as bad as was predicted. The Irish state, not content with letting its banks operate as hedge funds, has now set up one itself. If borrowing short to lend long got us into this trouble, surely it must be able to get us out of it. Dig, Banana Republic, dig. LTCM how're'ya...

edit: the point is not how likely it is that something will go wrong, it is the consequences of it going wrong. The criticism of the bell-curve is not that it covers the costs of 95% likelihood, but that it ignores the costs of the other 5%. Given that we have had two severe credit crunches in the last ten years (post 9/11 and for most of the last two years), the chances of a 1 in 20 over the next ten year (i.e. 20 refinancings) can't be discounted.

At the moment, it still appears that the level is set at ECB + 0.5%. No doubt the information that it is six-month euribor will drip out...


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## Sunny (17 Sep 2009)

yoganmahew said:


> It does appear that he said six month maturity:
> http://www.irisheconomy.ie/index.php/2009/09/17/nama-bond-yield-formula-finally-revealed/
> 
> If so, this is as bad as was predicted. The Irish state, not content with letting its banks operate as hedge funds, has now set up one itself. If borrowing short to lend long got us into this trouble, surely it must be able to get us out of it. Dig, Banana Republic, dig. LTCM how're'ya...
> ...


 
There is too much confusion out there to even comment. I heard Lenihan say Euribor+50 this morning


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## z109 (17 Sep 2009)

Sunny said:


> There is too much confusion out there to even comment. I heard Lenihan say Euribor+50 this morning


Great. So we don't just have interest rate risk, we have credit dislocation risk. Want to bet they issue them all in one big lump so they all reset on the same day?


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## ipxl (17 Sep 2009)

yoganmahew said:


> Great. So we don't just have interest rate risk, we have credit dislocation risk. Want to bet they issue them all in one big lump so they all reset on the same day?



Guys :

Could you explain the nuances (as far as risk are concerned) and differences between ECB + 50bps versus Euribor + 50bps  for some of use mere mortals who don't follow bonds/gilts on a daily basis (but probably ought to from now on !)


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## shanegl (17 Sep 2009)

Euribor is the rate banks are lending to each other at. ECB rate is as the ECB decides.

During the peak of the credit crunch Euribor spiked way above the ECB set rates as banks became very risk averse.


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## goosebump (17 Sep 2009)

yoganmahew said:


> It does appear that he said six month maturity:
> http://www.irisheconomy.ie/index.php/2009/09/17/nama-bond-yield-formula-finally-revealed/



That says 6 month 'rollover'.

Can anyone explain the difference between rollover and maturity?


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## z109 (17 Sep 2009)

goosebump said:


> That says 6 month 'rollover'.
> 
> Can anyone explain the difference between rollover and maturity?


Sorry, I was using the wrong term. Indeed, rollover is probably wrong too, unless the banks can refuse to take the bonds on the new coupon (a rollover implies that a sale takes place according to the original contract, but at a different price - like a planned contract extension). I am guessing that 'reset' is the correct term, that is, the bonds have a maturity of ten years, the interest rate is fixed at euribor + 0.5% for six months and resets to six-month euribor at the end of the six months.

Not an expert, though, so these are amateurish musings.


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## Sunny (17 Sep 2009)

yoganmahew said:


> Sorry, I was using the wrong term. Indeed, rollover is probably wrong too, unless the banks can refuse to take the bonds on the new coupon (a rollover implies that a sale takes place according to the original contract, but at a different price - like a planned contract extension). I am guessing that 'reset' is the correct term, that is, the bonds have a maturity of ten years, the interest rate is fixed at euribor + 0.5% for six months and resets to six-month euribor at the end of the six months.
> 
> Not an expert, though, so these are amateurish musings.


 
That would be my reading of it. I can't see why they would give the banks €54 billion of 6 month bonds.


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## shanegl (17 Sep 2009)

yoganmahew said:


> Sorry, I was using the wrong term. Indeed, rollover is probably wrong too, unless the banks can refuse to take the bonds on the new coupon (a rollover implies that a sale takes place according to the original contract, but at a different price - like a planned contract extension). I am guessing that 'reset' is the correct term, that is, the bonds have a maturity of ten years, the interest rate is fixed at euribor + 0.5% for six months and resets to six-month euribor at the end of the six months.
> 
> Not an expert, though, so these are amateurish musings.



I think you're spot on. It appears these bonds are FRNs.


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## z109 (17 Sep 2009)

There's also a discussion on this going on on irisheconomy:
http://www.irisheconomy.ie/index.php/2009/09/17/nama-bond-yield-formula-finally-revealed/

Confusion reigns there aswell. It does appear that we are none the wiser as to what the NAMA bonds are. Could it be the details are not finalised and are ever changing?


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## ipxl (18 Sep 2009)

shanegl said:


> I think you're spot on. It appears these bonds are FRNs.



Weren't NAMA supposed to be headhunting/recruiting folks with expertise in financial derivative products and strategies ?

 I suppose the structure of these bonds is crucial to how the NAMA debt is managed throughout the lifetime of the NAMA lifecycle.

Ok. From my completely non-financial product expertise standpoint this looks like an interest rate hedging strategy.

Someone with far more knowledge than mine without a doubt put forward this critique of the strategy being used (see link below).

Is he assuming here the same kind of FRN bonds being used ?

I'm still in the cynical camp as to whether the interest rate risk is adequately covered in the NAMA proposal. Then again, I think there still is an information vacuum as to what precisely the bonds maturity profile/coupon/fixed/floater/reset periods are.

Also, I admit that I am learning financial economics on the hoof (which puts me in good company of other esteemed politicians and the like  !)

Link to IrishEconomy comment on NAMA bond structure


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## Sunny (18 Sep 2009)

I still haven't seen the details. However, I would imagine that NAMA will try and hedge the interest rate risk by matching their assets and their liabilities as much as possible. Their assets are loans that more than likely paying a floating rate of interest. Therefore the liabilities (bonds) will almost certainly have a floating rate of interest. This eliminates much of the interest rate risk. They can also use dervatives as well.

One complicating factor could be the inclusion of derivative transactions that banks have done with developers and property owners to protect the developers from interest rate risk. There has been very little said about these.


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## ipxl (18 Sep 2009)

Sunny said:


> One complicating factor could be the inclusion of derivative transactions that banks have done with developers and property owners to protect the developers from interest rate risk. There has been very little said about these.



Holy cow. The NAMA story might be unravelling more like an Ian Fleming (not Sean Fleming) novel with these Bonds (not James Bond) as a huge part of the intrigue. 

I'd imagine that big player developers with longer term projects would have included such provisions in there contractual arrangements with the banks.
I'd imagine it would be a legal quagmire trying to unroll arrangements such as those. If it turns out that a significant number of the "performing" loans include such interest rate protection bonds/derivatives then is there any opportunity for NAMA to offload these obligations back onto the banks?!!


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## Brendan Burgess (18 Sep 2009)

Folks

Could anyone summarise this very important issue? 

*What do we definitely know about these bonds?

What do we no know? 


What other options are there for financing the purchase of these loans? 


Pro of these bonds

Cons of these bonds
*


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## paddy26 (18 Sep 2009)

Brendan said:


> Folks
> 
> Could anyone summarise this very important issue?
> 
> ...


 
I think a certain pro is that they are .5% above ECB base rate. As most of the loans in Nama are probably EURIBOR/ LIBOR plus say 2% at least (more in the case of Anglo) then the margin should ensure NAMA interest payments are being met.  

As 50% of the loan are deemed to be performing (as per Pat McArdle) then it would imply that a notional amount of €1m will cost name €15k in margin per annum (at current ECB base) whereas the 50% of the performing loans will bring in circa €12k. 

I know this is pretty simplistic but if this is the case the interest rate is irrelavant as the margin being paid on the loans will cover the non performing element.


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## z109 (19 Sep 2009)

Brendan, the problem is that we 'know' contradictory things about the bonds. We have heard both that they will be six-month maturity and that they will rollover at six months and that they will reset at six months. We have heard they will reference both ECB and euribor. And this is just based on what Mr. Lenihan has said.

'Know' has become very bendy...


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