Bond proposal would reduce Nama risk to State

nesf

http://www.irishtimes.com/newspaper/frontpage/2009/0909/1224254135854.html?digest=1


It looks like the final legislation is going to be quite different to the draft legislation and will include features to share risk with the banks. Subordinated bonds look like a decent idea.

Économiste Monétaire

If these are subordinated tranches of ABS issued by NAMA, I doubt they can be used in ECB repos; that's about the only way (I'm aware of) to structure this (repayment based on the performance of underlying assets). Maybe they're considering perpetual subordinated debt, callable after 7-10 years? Covered bonds based on the most risky parts of NAMA's portfolio? Anything other than liquidity class I and II (central government and local/state & agency issued), that isn't on a fixed coupon, is given a pretty big discount by the central bank in refinancing operations—a problem for banks now reliant on the central bank as a significant source of funding.

First I heard NAMA bonds would pay a 1.5% coupon that resets to EURIBOR (of whatever maturity) plus some premium. Anyone here work in fixed-income? It seems very odd for a government to issue subordinated debt; is there even a reasonable probability of a credit event where seniority matters? I like the idea of risk sharing, maybe NAMA set up à la the GSE's in America, with senior debt fully guaranteed by the state and subordinated left up to the future of the property market.

blucey

nesf wrote: »

http://www.irishtimes.com/newspaper/frontpage/2009/0909/1224254135854.html?digest=1


It looks like the final legislation is going to be quite different to the draft legislation and will include features to share risk with the banks. Subordinated bonds look like a decent idea.

except that this isnt anything close to PH's idea. Which was to give shares in NAMA to shareholders, aligning the interests of both. AKA risk sharing. This is smoke and mirrors, not risk sharing.

blucey

Économiste Monétaire wrote: »

If these are subordinated tranches of ABS issued by NAMA, I doubt they can be used in ECB repos; that's about the only way (I'm aware of) to structure this (repayment based on the performance of underlying assets). Maybe they're considering perpetual subordinated debt, callable after 7-10 years? Covered bonds based on the most risky parts of NAMA's portfolio? Anything other than liquidity class I and II (central government and local/state & agency issued), that isn't on a fixed coupon, is given a pretty big discount by the central bank in refinancing operations—a problem for banks now reliant on the central bank as a significant source of funding.

First I heard NAMA bonds would pay a 1.5% coupon that resets to EURIBOR (of whatever maturity) plus some premium. Anyone here work in fixed-income? It seems very odd for a government to issue subordinated debt; is there even a reasonable probability of a credit event where seniority matters? I like the idea of risk sharing, maybe NAMA set up à la the GSE's in America, with senior debt fully guaranteed by the state and subordinated left up to the future of the property market.

this will be called sub-debt, and we will be told that its payable only if the NAMAlama makes a profit. Then in 5 years we will be told that we have to pay tje coupon as to do otherwise would be a default....

Lots of discussion on this on irisheconomy.ie

Économiste Monétaire

blucey wrote: »

Then in 5 years we will be told that we have to pay tje coupon as to do otherwise would be a default....

That's the problem I see. If these isn't a willingness on the part of the government to actually let a credit event occur, why bother paying the premium of subordinated over senior debt? It wouldn't make a pretty headline: 'Irish government refuses to make government debt payments'.

nesf

Économiste Monétaire wrote: »

That's the problem I see. If these isn't a willingness on the part of the government to actually let a credit event occur, why bother paying the premium of subordinated over senior debt? It wouldn't make a pretty headline: 'Irish government refuses to make government debt payments'.

What about if they separate it so that the NAMA entity is what's responsible for these bonds and not the Government? Make it an independent entity which has sole responsibility over the bonds issued.

Économiste Monétaire

nesf wrote: »

What about if they separate it so that the NAMA entity is what's responsible for these bonds and not the Government? Make it an independent entity which has sole responsibility over the bonds issued.

Yeah, that's kinda similar to what I meant here,

Économiste Monétaire wrote: »

I like the idea of risk sharing, maybe NAMA set up à la the GSE's in America, with senior debt fully guaranteed by the state and subordinated left up to the future of the property market.

You could work Honohan's equity sharing idea into this; I think the plan is for the banks to still run the day-to-day managing of the loans, so there's a nice incentive in this. There would be issues with greater risk premium attached to NAMA bonds if there's no guarantee by the State, but this could be offset by the performing side of NAMA (Alan Ahearne alluded to the figures in an IT piece recently). I don't know if this could be funded solely by an independent agency, though, the mix of government bonds and NAMA performance-linked debt might be the only viable alternative to the draft legislation.

nesf

Économiste Monétaire wrote: »

Yeah, that's kinda similar to what I meant here,

You could work Honohan's equity sharing idea into this; I think the plan is for the banks to still run the day-to-day managing of the loans, so there's a nice incentive in this. There would be issues with greater risk premium attached to NAMA bonds if there's no guarantee by the State, but this could be offset by the performing side of NAMA (Alan Ahearne alluded to the figures in an IT piece recently). I don't know if this could be funded solely by an independent agency, though, the mix of government bonds and NAMA performance-linked debt might be the only viable alternative to the draft legislation.

Well, I think some form of Government guaranteed debt is needed to avoid screwing up the Tier 1 capital ratios of the major banks, though I haven't bothered to work it out being lazy.

Économiste Monétaire

NAMA supplementary document released today:
http://www.finance.gov.ie/documents/speeches2009/sfbl034supp.pdf

Économiste Monétaire

Via Karl Whelan; the MoF has said 'NAMA bonds' will reset (or be redeemable) every six-months to ECB minimum bid rate + 0.5%—a real rate of 7.4%. (I wonder if that's the headline rate or the weighted average rate.) If commodity prices spike next year (or some other shock to cause the MUICP to go vertical), borrowing on a six-month basis at 5-6% is a great result for the taxpayer! :pac: (He probably meant that to be an average yearly rate.)

Also, there's nothing, as far as I can see, on the details of the subordinated bonds. Based on the MoF's speech yesterday, the details are in part 3 of the legislation. Some more information on this part would be nice, even if the 5% figure is disappointing.

nesf

Économiste Monétaire wrote: »

Via Karl Whelan; the MoF has said 'NAMA bonds' will reset (or be redeemable) every six-months to ECB minimum bid rate + 0.5%—a real rate of 7.4%. (I wonder if that's the headline rate or the weighted average rate.) If commodity prices spike next year (or some other shock to cause the MUICP to go vertical), borrowing on a six-month basis at 5-6% is a great result for the taxpayer! :pac: (He probably meant that to be an average yearly rate.)

Also, there's nothing, as far as I can see, on the details of the subordinated bonds. Based on the MoF's speech yesterday, the details are in part 3 of the legislation. Some more information on this part would be nice, even if the 5% figure is disappointing.

Karl Wheelan admits that he's speculating though, from what I can read. If they are in the format he thinks they are in they're a terrible deal for the taxpayer.

Économiste Monétaire

nesf wrote: »

Karl Wheelan admits that he's speculating though, from what I can read. If they are in the format he thinks they are in they're a terrible deal for the taxpayer.

Indeed ; it's unfortunate that all we can do is speculate on such a basic question. It really shouldn't be too much to ask for the DoF to add a line on the financing of NAMA in that 100+ page supplementary document... I don't think the plan is as bad as some people are making out, but more of the financing being based on the end result would be better for the taxpayer. Say, 40bn in government bonds and 14bn NAMA sub debt (assuming this is Ronseal in the event of a loss), i.e. around 25% rather than the 5% proposed.

The Economist (> Time Magazine) has a piece on NAMA this week:
http://www.economist.com/businessfinance/displaystory.cfm?story_id=14462411

Is there an aggregate discount figure available that excludes the Anglo loans? I couldn't find one.