The Bonds issued by NAMA will pay 1.5%?

goosebump said:

That says 6 month 'rollover'.

Can anyone explain the difference between rollover and maturity?

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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.

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.

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

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.

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

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?

shanegl said:

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

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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

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.

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.

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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?!!

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

Brendan said:

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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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.

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...