The Bonds issued by NAMA will pay 1.5%?

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 ?
 
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
 
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).
 
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 ?
 
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 ?
Click to expand...
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.
 
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.
 
Last edited:
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.
 
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 !
 

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.
 
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.
Click to expand...
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 ...
 
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.
Click to expand...


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

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

There is too much confusion out there to even comment. I heard Lenihan say Euribor+50 this morning
 
Sunny said:
There is too much confusion out there to even comment. I heard Lenihan say Euribor+50 this morning
Click to expand...
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?
 
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?
Click to expand...

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 !)
 
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.
 
You must log in or register to reply here.
Menu
Log in
Register