The Bonds issued by NAMA will pay 1.5%?

Brendan Burgess

Founder
Messages
53,409
From the Dail Debate yesterday. I had assumed that I had misheard it.


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
 
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.
 
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.
 
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.
 
Just so I have this clear in my head:

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

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?
 
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.
Click to expand...


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?
 
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?
Click to expand...

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.
 
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.
Click to expand...

Can you explain in more detail?
 
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).
 
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.
Click to expand...
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.
 
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%?
Click to expand...
Not sure what you mean? You mean currently?

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

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?


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.
 
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?
Click to expand...
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.
 
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?
Click to expand...
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.
 
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.
 
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.
 
You must log in or register to reply here.
Menu
Log in
Register